‘Choosing Costain’

Costain Group PLC Annual Report 2009 Costain is an international engineering and group with a reputation for technical excellence founded on more than 140 years of experience. The Costain name has been at the forefront of many world-famous projects including the , the Dry Dock and the . In this Annual Report, we highlight the 2009 performance and financial results from our operations and provide a summary of our Corporate Responsibility programme which is at the core of the Company’s culture. We have also detailed the next stage of our strategy – ‘Choosing Costain’ – which sets out the plan for the further development of the .

Our Annual Report 2009 is available in both printed form and on the new Investors section of the Costain website at www.costain.com. Effective communication with our shareholders is vital to our wellbeing and we would welcome feedback on either or both versions of the Annual Report.

www.costain.com This section underlines why Costain 02 About Costain Contents is a leading brand and why people 02 A leading brand are ‘Choosing Costain’. 04 ‘Choosing Costain’ 04 No card, no job 06 Premier league 08 Commitment to the community 11 Solving the waste issue 12 Keeping the lights on About Costain About This section highlights our approach 14 Corporate Responsibility to Corporate Responsibility and 14 Responsibility at the core explains why we see it as very 16 Delivering responsibly important to our business. We 18 Health and Safety highlight our Corporate Responsibility 20 Our People framework, how our performance is 22 In the Community assessed and the progress we have 24 Environmental made during the year. 26 Marketplace Corporate Responsibility Corporate This section demonstrates 28 Business & Operational review how we delivered our strategy 29 Our performance in 2009 in 2009. We explain how our 30 Chairman’s statement business is organised, how it 32 Chief Executive’s review has developed over the year, and 35 Our values and Our markets provide details of our financial 36 Business & Operational review performance. We also review our 36 Environment priorities, Principal risks and Key 37 Infrastructure 38 Community Performance Indicators. 38 Energy & Process 39 Land Development 40 Principal risks 43 Key Performance Indicators 44 Financial review Business & Operational review Operational & Business This section explains our Corporate 46 Governance Governance and decision-making 46 Board of Directors processes. We describe the Board 49 Corporate Governance statement (including of Directors and its Committees, Internal controls and Risk management) and our accountability and audit 57 Directors’ report procedures. 63 Directors’ remuneration report 70 Statement of Directors’ responsibilities 71 Independent Auditors’ Report to the members of Costain Group PLC Governance This section contains the detailed 72 Financial statements financial statements and other 72 Consolidated income statement information that our stakeholders 73 Consolidated statement of find useful, including detailed notes, comprehensive income and expense the financial calendar and 74 Consolidated statement of financial position shareholder services. 75 Company statement of financial position 76 Consolidated and Company statements of changes in equity 77 Consolidated cash flow statement 78 Company cash flow statement 79 Notes to the financial statements 112 Five-year financial summary IBC Financial calendar and other shareholder information Financial statements Financial

Costain Group PLC Annual Report 2009 / www.costain.com 01 A leading brand

In2009,theCostainnamewasconfirmedasoneof theleadingbrandsinBritain.TwooftheUK’smost respectedindustrymagazines,ConstructionNews andNewCivilEngineer,votedCostainthebest contractor and the Company was also featured as oneofthenation’sTop100‘MostAdmired’companies inaManagementTodaymagazinesurvey. Costain voted Top 100 company

7 December 2009

The construction/engineering company Costain was placed 88th in Britain’s ‘Most Admired’ league table, climbing up from last year’s 190th position.The table, comprising 236 top names including Rolls-Royce, Royal Dutch Shell, BP and GlaxoSmithKline, was compiled by Management Today magazine in conjunction with the Birmingham City Business School. Top management in the largest public companies around Britain were asked to evaluate their peers and their views form the basis of this highly respected survey. Analysts at leading City investment firms were also polled. Costain was the highest climbing construction company.

02CostainGroupPLCAnnualReport2009/www.costain.com About Costain

24 June 2009 Corporate Responsibility The Costain Group won the Supreme Award at the 2009 Quality Awards in June. The Supreme Award is given to the construction company which records the best overall Awards performance and Costain was -listed six times and won in two categories – Training and Corporate Social Responsibility. Business & Operational review Costain Group retains Major

Contractor Award Governance

24 August 2009

Costain has been named Major Contractor of the Year by magazine for 2009. The previous year Costain also beat all rivals to take the prestigious Award. Financial statements

CostainGroupPLCAnnualReport2009/www.costain.com03 ‘‘ChoosingChoosing CCostain’ostain’ No card, no job.

Costain’s total commitment to Health and Safety is one of the major reasons why the Company continues to be ‘the contractor of choice’ for many of the country’s major organisations. Health and Safety is the number one priority in our business and Costain is committed to operating a fully competent workforce on all its sites and offices. We have continued to lead the way in Health and Safety by underlining our high standards across the board through the introduction of a ‘No card, no job’ policy for 2010. All staff, whether employed by Costain or by our supply chain partners, must be able to demonstrate competence in appropriate management, supervisory or technical skills and Health and Safety matters. The card system provides the mechanism for verifying competence and, as such, all members of our workforce are required to hold the appropriate card.

www.costain.com

04 Costain Group PLC Annual Report 2009 / www.costain.com About Costain About Corporate Responsibility Corporate Business & Operational review Operational & Business Governance Financial statements Financial

Costain Group PLC Annual Report 2009 / www.costain.com 05 ‘Choosing Costain’ Pictured (left to right) are: Andrew Bull Andrew joined Costain as a graduate engineer in 1994 on the Cardiff Bay Barrage. Through company training schemes, he secured Chartered status in Premier five years. Career highlights include working with 4Delivery-Southern Water on a programme of award-winning innovative treatment plants. Most recently Project Commercial Director on the Brighton league. and Hove waste water treatment works project. Claire Carr Claire Carr is a Chartered Civil Engineer who joined Some of Britain’s most talented business people choose Costain in 2003 and has worked predominantly within Costain because of the Company’s reputation, together with the rail sector. Her career with Costain began at the its training and development programmes which are vital if St Pancras Station Redevelopment, where as a tomorrow’s leaders are to be groomed for success. In 2009, Deputy Delivery Manager, she was listed in the ‘Top seven of the Group’s top young executives travelled the 35 Managers under 35’ by newspaper. She is currently the Project Delivery Manager for the country presenting to colleagues on the future direction of Farringdon Station Redevelopment. Costain. This initiative underlined Costain’s pool of talent and the Company’s commitment to developing its people resource. Isabel Coman Isabel Coman is a Project Manager with Costain. She is currently leading the bid for the first main packages of work, which form a major section of the underground tunnels through central , for Costain and its joint venture partners. She was ‘Costain Manager of the Year 2009’ for her work as Project Manager on the complex www.costain.com King’s Cross Eastern Range contract.

06 Costain Group PLC Annual Report 2009 / www.costain.com About Costain About Corporate Responsibility Corporate Business & Operational review Operational & Business

Ritchie Burcombe Catherine Warbrick Ritchie joined Costain in 2000. He has Catherine joined Costain in 2006. In January significant experience in the highways, marine, 2009, Catherine was appointed as Corporate rail and water sectors. In addition, Ritchie has a Responsibility (CR) Manager for the Costain high level of technical capability and is currently Group, responsible for driving and delivering responsible for the delivery of the St Germans the Group’s CR strategy. Career highlights pumping station project, a highly complex civil include Costain receiving a Silver banding engineering project of national significance in in Business in the Community’s CR Index. East Anglia. Ritchie is a Fellow of the Institution Before joining Costain, Catherine gained more of Civil Engineers. than six years’ experience in environmental management. Governance Rob Phillips Rob joined Costain in 1997. He progressed Frank Millar through the Costain Graduate programme Frank Millar is a Chartered Engineer and working within the highways sector. He was joined Costain in 2005 as the Operations appointed as the Project Manager and Director for the Oil, Gas & Process division. then Director for the Dartford Improvement Frank has worked extensively on enhancing Scheme in 2006. He then played a major part project delivery within the division, notably in Costain’s successful move into highways by strengthening project management maintenance. He is currently Project Director, capability. leading the construction of the Evaporator D project for Sellafield Ltd. Financial statements Financial

Costain Group PLC Annual Report 2009 / www.costain.com 07 ‘‘ChoosingChoosing CCostain’ostain’ Commitment to the community.

Costain joined Business in the Community (BITC) in 2007, plays in creating wealth, building confidence and addressing to strengthen our commitment to Corporate Responsibility social and environmental need. HRH The Prince of Wales, (CR). BITC is the largest and one of the oldest national President of BITC, is pictured with Charles Sweeney, business-led coalitions dedicated to CR, working with Managing Director – Energy & Process, Costain, at organisations to inspire, engage, support and challenge The Prince’s Seeing is Believing Report Back event 2010. companies on responsible business. With a membership The Prince’s Seeing is Believing is BITC’s most effective of over 850 companies, BITC chooses to partner with programme for engaging business in society, inviting senior members who recognise the relationship between business leaders to see for themselves how business can responsible business practice and the role this play a role in tackling Britain’s most pressing social issues.

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08 Costain Group PLC Annual Report 2009 / www.costain.com About Costain About Corporate Responsibility Corporate Business & Operational review Operational & Business Governance Financial statements Financial

Costain Group PLC Annual Report 2009 / www.costain.com 09 10 Costain Group PLC Annual Report 2009 / www.costain.com About Costain About Corporate Responsibility Corporate

‘‘ChoosingChoosing CCostain’ostain’ Solving the waste issue. review Operational & Business

Following challenging European Union directive targets to reduce the amounts of hazardous and non-hazardous waste being sent to landfill, the UK has to find a different solution to its waste disposal problem. Costain has been chosen as the design and construction contractor for the Greater Waste Disposal Authority’s (GMWDA’s) PFI Waste and Recycling Contract, which is the largest municipal waste contract in western Europe. The project, which is valued at £397 million, will treat

1.2 million tonnes of municipal waste that GMWDA Governance handles annually and serve a resident population of over two million people providing waste disposal services to approximately 958,000 households in the north west and handling approximately five per cent of the UK’s national municipal waste.

Pictured (left to right) are: Peter Heginbotham, Chairman of Viridor Laing (Greater Manchester) Ltd – the joint venture responsible for the Greater Manchester Waste PFI Contract – with John Boyd, Costain Project Director. Financial statements Financial www.costain.com

Costain Group PLC Annual Report 2009 / www.costain.com 11 ‘‘ChoosingChoosing CCostain’ostain’ Keeping the lights on.

Britain faces stark choices if the nation is going to avert a major energy crisis in the decades to come. As some of the country’s existing generating capacity is retired, there is a requirement for investment in a balanced portfolio of energy sources to meet the UK’s future demand and hence secure future prosperity. The Costain Group is working with various utilities to deliver energy solutions based on renewables, new nuclear and clean coal technology, including Carbon Capture and Storage (CCS). Costain is also delivering gas storage assets, vital to combat the price volatility seen in recent years.

www.costain.com

12 Costain Group PLC Annual Report 2009 / www.costain.com About Costain About Corporate Responsibility Corporate Business & Operational review Operational & Business Governance Financial statements Financial

Costain Group PLC Annual Report 2009 / www.costain.com 13 Responsibility at the core

“Our Corporate Responsibility (CR) “The Costain Group is well placed programmeiscoretotheCompany tosupplysolutionstomanyofthe in terms of culture, operations problemswhichfacesocietysuch and overall performance. In this as waste in our environment. These Annual Report, we have included solutions will benefit many and adetailedsummaryofourCR also further enhance Costain as progress in addition to the Business asuccessfulbusiness.” &Operationalreviewandfinancial results. It is our firm belief that we cannot build strong foundations for a future Costain without ensuring David Allvey Chairman allourCRcomponentsareinplace andfunctioningatahighlevel. “WehavemeasuredourCRsuccess using third party assessment. Business in the Community (BITC) isahighlyrespectedbodyandone Andrew Wyllie Chief Executive whichtacklestheissuesofcreating wealth, building confidence and addressing social and environmental need.Webelievetheseareasarevery important to all corporate concerns and we focus on improvements in each to enable us to improve further our standing as a member of the community and a pursuer of business excellence.

14 CostainGroupPLCAnnualReport2009/www.costain.com Boris Johnson, Mayor of London, with Costain About Stephen Wells, Costain Group Strategy and Business Development Director (left) at the Confederation of British Industry (CBI) London Summer Lunch 2009. Corporate Responsibility Corporate Business & Operational review Operational & Business Governance Financial statements Financial

Costain Group PLC Annual Report 2009 / www.costain.com 15 Delivering responsibly Costain has been a member of Business in the Community (BITC), since 2007. BITC works with companies who make a commitment to: • Inspire, innovate and lead by sharing learning about and experience of responsible business • Impact on key social issues through collaborative action in areas of greatest need • Integrate, manage and measure responsible business practice

BITC’s approach to responsible business provides a clear framework to address new challenges, improve business performance and benefit society. Responsibility lies at the very Our approach Our commitment to CR means delivering projects and services heartofourCompanyvalues. that meet our customers’ and society’s needs while managing the social and environmental impacts of our business. We Inour2008AnnualReport, recognise that by working with our customers, supply chain, we highlighted our Corporate employees and other stakeholders we can make a greater Responsibility (CR) strategy and contribution. The Board is responsible and the Executive Board of Costain emphasisedourbeliefthatitis is accountable for all aspects of CR, including setting policy and intrinsic to business success. strategy. The CR committee, chaired by Stephen Wells, Executive Board Director, is responsible for steering our approach and reporting to the Executive Board.

In this Annual Report, we CR is integral to our risk management processes. The identification of the positive and negative impacts on society and provideasummaryofour2009 the environment, and the level of influence we have on the wider performance, demonstrating market, inform our strategy. howwecontinuetoembraceCR Using the BITC framework and through stakeholder engagement and highlighting the real business we have identified key areas of responsibility: benefits we have delivered. • Health and Safety • Our People • In the Community • Environmental Delivering real business benefits by operating responsibly we have: • Marketplace • Improved our safety performance by 45% over the last seven years • Promoted 109 people in the business due to continued investment in their development and recognition of their potential in 2009 • Continued to respect and support local communities, achieving a Group average Considerate Constructors Scheme score of 34.7 (out of 40), 9% above the overall scheme average in 2009 • Increased the percentage of total waste generated that we divert from landfill to 67% in 2009

Formoreinformation... www.costain.com/responsibility

16 CostainGroupPLCAnnualReport2009/www.costain.com Key responsibilities

These are the five areas ooff responsibility which are kkeyey to the future success of the Group.Group. In the following pages we provideprovide the summary of our commitment,mitment, approach and performance.ce. About Costain About Corporate Responsibility Corporate Business & Operational review Operational & Business Benchmarking our performance Listening to our stakeholders We benchmark ourselves against our peers and other companies We have a wide range of stakeholders including customers, joint in the wider marketplace, by participating in BITC’s Corporate venture partners, supply chain partners, employees, investors, Responsibility (CR) Index assessment. The CR Index illustrates regulators, Government, community and environmental groups how companies integrate responsible business at a strategic and other interested parties. and operational level. Highlighted throughout this Report are a number of platforms, In 2009, we received the results of our 2008 CR Index through which we consult with our stakeholders. We use this assessment. We achieved further improvement in our CR rating wide-ranging consultation as part of our strategic planning. and are currently banded as Silver with a score of 88%, a 4.4% increase on our 2007 assessment. This places us 5% above From the responses to our first survey, we understand that 100% the Index average and 15% above the average for our sector. of respondents agree with our CR approach, 91% believe that we In June 2010, we will receive the results of our fourth CR Index are demonstrating a good level of performance and 64% a good Governance assessment, which will be made available on our website level in reporting. This feedback is essential and contributes to www.costain.com/responsibility. the development of our strategy. In response, we have increased the level of reporting in our Annual Report and on our website. In 2010, we will focus on improving the response rate to our survey. BITC CR Index performance (%) To feed back any comments you have on our approach, 94.0 please visit our website and complete a short on-line survey 88.0 91.0 83.6 at: www.costain.com/responsibility or email us at [email protected]. 62.0 Financial statements Financial 2006 2007 2008 Target 2009 Target 2010

Our performance improved by 26% from 2006 to 2008.

Costain Group PLC Annual Report 2009 / www.costain.com 17 Our approach Health and Safety We have a robust Safety, Health and Environmental (SHE) Management System, accredited to BS OHSAS 18001. We strive to meet and exceed all Health and Safety legislation, codes of practice and guidelines and are dedicated to promoting best practice across the business. We will achieve our commitment by:

• Demonstrating leadership and commitment to Health and Safety • Engaging with our stakeholders • Ensuring the competency of our workforce • Measuring and continually improving our performance through identifying and targeting key Health and Safety challenges Performance RoSPA Awards Our strong Health and Safety culture and performance has again been highlighted this year by the receipt of 71 Royal Society for Our commitment the Prevention of Accidents (RoSPA) Awards: Health and Safety is the • Major Award – RoSPA International Dilmun Environmental Award, commended number one priority in our • Order of Distinction • President’s Award business. We continue to focus • 7 x Gold Medal Awards on promoting a positive safety • 57 x Gold Awards • 3 x Silver Awards culture, aiming to ensure that • 1 x Bronze Award our employees, customers, Accident Frequency Rate 2009 has seen a reduction and improvement in our Accident suppliers and the public are safe Frequency Rate (AFR) from 0.17 to 0.16. The Group AFR has and environmentally aware. significantly reduced by 45% over the last seven years.

Annual Accident Frequency Rate (AFR) (no. of reportable accidents per 100,000 work hours) 0.30 Trendline 0.25 AFR 0.20 0.15

0.10

0.05

2003 2004 2005 2006 2007 2008 2009

Our AFR has reduced by 45% in the last seven years.

18 Costain Group PLC Annual Report 2009 / www.costain.com We will continue to work towards the elimination of all accidents and incidents. Demonstrating leadership in Health and Safety is central to our culture. In 2010, members of the Executive Board will undertake quarterly safety health-checks and inspections on all projects, taking the opportunity to emphasise that Health and Safety is our number one priority. Safety, Health and Environmental training We have continued to invest significantly in training our employees, delivering over 3,000 days of Health and Safety training in 2009.

A major emphasis on competency will be another focus for 2010. We will ensure that all those engaged on behalf of the Group, have About Costain About the correct skills and competency to deliver operations safely. ‘Blue Hat’ scheme To publicise this focus a standard notice board, detailing the In 2009, we introduced a scheme aimed at front line competency of appointed individuals, will be required on all sites. supervisors. We continually look at ways of improving what we do with a view to adopting a ‘zero tolerance’ standard with regard to accidents and incidents. Focusing on Behavioural safety supervisors, who manage people at work on a daily basis, Our focus on behavioural safety, promoting a positive safety we have strengthened our policies and procedures. We culture throughout the Group, continues. In 2008, we provided are placing greater emphasis on training, knowledge and aptitude, which are all evaluated at a new supervisors’ training to our Executive Board and senior management in the induction, whereupon successful completion, the principles of behavioural safety. We have extended this in 2009, supervisors are issued a ‘Blue Hat’. training over 544 employees and members of our supply chain to date. Supply chain Our supply chain is fundamental to the safe delivery of all our projects. We continue to engage actively with our supply chain, Responsibility Corporate through our Partners for Progress initiative, our SHE awareness days and supply chain audits. Working with our supply chain partners we have, to date, audited over 93% of our ‘Top 100’ supply chain partners, strengthening relationships, sharing innovation, best practice and promoting a positive safety culture.

Recognising the success of our supply chain initiatives, we will continue to engage with our stakeholders through our SHE awareness days and by expanding our Partners for Progress Awareness days groups across our sectors. In 2008, we introduced Costain Safety, Health and Environmental awareness days. The events brought together Costain senior management, customer Health and wellbeing representatives and members of our supply chain to During 2009, we continued to offer voluntary wellbeing medicals discuss forthcoming Group and industry initiatives, changes to legislation, and our aspirations for Safety,

to employees. Furthermore, in order to promote a fit and healthy review Operational & Business Health and Environment. The day achieved such positive workforce on our sites, we introduced a mandatory medical feedback that we continued the initiative in 2009, holding regime for our safety critical workers which requires a a further five events across the country. pre-employment medical followed by further medicals at specified regular intervals depending on age.

Following a review of the medicals conducted during 2009, we will be running campaigns to raise awareness of musculoskeletal disorders and noise induced hearing loss during 2010. Governance

For more information... www.costain.com/responsibility Financial statements Financial

Costain Group PLC Annual Report 2009 / www.costain.com 19 Over 1,150 employees attended Group road shows held across the country in October 2009. Andrew Wyllie, Chief Executive, Our People and members of the Executive Board presented on the business strategy and future aspirations, giving the audience an opportunity to ask questions and give direct feed back to the Board. Effective leadership Our leaders promote the Group values by being open and honest, honouring commitment, guiding and inspiring their teams and encouraging two-way dialogue and feed back.

We continue to recognise and develop employees identified as potential future business leaders.

Our leadership programmes include the:

• High Potential Programme (HPP) – an intensive programme of coaching and personal development including business projects, designed to prepare the candidates to achieve their potential as future Directors in Costain. • 2020 Board – a development scheme for identified employees Our commitment who have demonstrated the potential to become future Our goal is to attract, retain members of the Executive Board in ten years time. and develop the best people for We will be running a further HPP programme and a new 2020 the Costain Group by providing Board in 2010. a challenging and stimulating Performance and talent management We identify and motivate our talented people and ensure they working environment, where are recognised and rewarded for their contribution to Costain. In 2008/9, we introduced an enhanced performance people enjoy their jobs, fulfil management system to ensure that Costain attracts, retains, their potential and are recognised motivates and develops the talented people it needs both now for their efforts. and in the future. In addition to annual performance reviews, we have launched a mid-year Career Development Review (CDR) for employees, enabling the Company to ascertain competency, performance, Our approach mobility, ability and aspirations. We will achieve our commitment by demonstrating: The CDR process incorporates a competency scheme in addition to a unique approach to talent management that • Our culture and work ethic requires everyone to participate in succession planning and • Strong, proactive and visible leadership agree an individual’s ‘potential to progress’. In 2009, we saw • Performance and talent management 109 individuals promoted within the business. • Skills development • Recognition and reward Analysis of the data generated by the CDR process, both at local management level and strategically, will focus our Performance talent management, manpower planning and training delivery processes in 2010. We will continue to develop the process Culture and work ethic further by introducing key technical competencies to the system. Our culture and work ethic is driven by our Company values (see page 35) promoting behaviours such as integrity, tolerance, teamwork and inclusion.

As a result of our success, we have experienced significant growth in staff numbers over the last four years. Costain has invested heavily in improving manpower planning and delivering training and management development to encourage our talented people to build their careers within Costain. In 2009, we welcomed 346 new employees to the Group. In addition, we are pleased to note that our voluntary staff turnover rate has reduced by over For more information... 10% in the last four years to 2.9%. www.costain.com/responsibility We continue to promote transferable skills and give individuals the opportunity to experience different roles within the business. In 2009, we saw 254 employees move between sectors and disciplines within the Group.

20 Costain Group PLC Annual Report 2009 / www.costain.com Skills development We encourage people to take ownership of their career and to continuously develop their skills, broaden their knowledge and widen their experience within the business. We are committed to delivering training that enhances performance.

2008 saw the Construction Awards Alliance approve our National Vocational Qualification (NVQ) centre for the management of NVQs. Currently, over 100 candidates are registered on our management NVQ centre.

Building on the success of our first National Skills Academy for Construction in 2008, we have expanded this programme

to include our Brighton and Hove waste water treatment Costain About works project. Academy of excellence The Costain Project Management Academy won the In 2010, we will continue to implement our National Skills Construction News Quality Training Award in 2009. The object of the Academy is to build a model of project Academy model across our sites, as appropriate, and will pilot management excellence, benchmarked against world-class an internal Skills Academy model, focusing on supply chain standards. Since 2008, 55 project management delegates engagement. have participated in the Academy and a further 25 will join in 2010. Diversity and inclusion We ensure that all people activities continue to be inclusive and that we provide fair access to and participation in training, promotions, recognition and reward, behavioural and technical competencies.

We currently employ 2,254 people in the UK, 7% are from BAME (Black, Asian and Minority Ethnic) groups, a 3% increase since Responsibility Corporate we started to monitor in July 2006. Twenty-two and a half percent of our people are women, a 3% increase on 2006.

Diversity profile (%)

Apprentices and trainees 25 Women Across the industry there is a lack of younger talent developing into essential roles, with the necessary technical 20 expertise required to deliver projects to the standards our customers expect. To address this, in 2009, Costain 15 expanded its apprenticeship programme from four to 18 technician apprentices across the Group, who are being 10 BAME supported to achieve their BTEC and NVQ qualifications. 5 Business & Operational review Operational & Business July 2006 July 2007 July 2008 July 2009

Since 2006, we have employed more women and BAME employees.

Recognition and reward We enhance motivation and personal contribution towards the Company’s aims through the recognition of good performance and ensuring our leaders manage both good and poor performance.

Record nominations were received for our third ‘Celebrating Success’ Awards held in February 2009. The Awards recognised the outstanding contributions of individuals within the Company in the areas of: Governance • Contribution to safety • Trainee of the year • Team of the year • Manager of the year • Unsung hero of the year • Contribution to the community • Business development/customer satisfaction • Supply chain partner of the year • Innovation of the year

An annual event, our fourth ‘Celebrating Success’ Awards, took place in February 2010. Once again the Awards attracted record nominations, 1,096 in total. Financial statements Financial

Costain Group PLC Annual Report 2009 / www.costain.com 21 In the Community Charitable donations (£000) 95

69

32 36 6 21 13 2003 2004 2005 2006 2007 2008 2009

We gave over £95,000 to charitable causes in 2009.

Considerate Constructors Scheme As an associate member of the Considerate Constructors Scheme, we are committed to minimising the impact our operations have on the community. We continue to receive consistently high scores on our projects, achieving an Our commitment average score of 34.7 out of 40 in 2009 (the average total score of all sites registered with the Scheme is around Our impact on the local 31 points). In addition, our performance was also recognised by the receipt of 3 Gold Awards, 3 Silver Awards and communities and environment 10 Bronze Awards. in which we work is extremely important. Whilst we strive to Considerate Constructors Scheme performance (Group average scores) minimise the negative aspects, 34.7 such as noise and disruption, we 34.2 want to make a greater positive 33.8 33.2 impact through our contribution 33.0 to the local economy and involvement in local school and 2005 2006 2007 2008 2009 We continue to achieve consistently high standards community group projects. on our projects.

Community projects Our approach Reflecting the Company’s ongoing commitment to supporting We have dedicated Community Relations Managers within the young people, Costain has signed up to the Backing Young Group, who work to develop links with the local community, Britain campaign. A Government campaign encouraging schools, businesses and other stakeholders. companies to provide more opportunities for young people aged 16-24 who are seeking jobs, work experience or to develop Performance their skills: Charitable donations • In 2009, Costain organised over 56 school work experience In 2009, we raised and donated £95,293 to charitable placements through our www.buildingawareness.com causes, including: programme, a 35% increase on 2008 • Costain currently sponsors 75 students at various stages • £12,164 donated to WaterAid of their university careers. Encouragingly, of the 21 sponsored • £6,000 donated to CRASH through our company university students who graduated in 2009, 95% joined Costain Christmas Card campaign • £9,000 donated to Kent Air Ambulance Trust Our sites continue to contribute to the communities in which they operate through active involvement in local community In 2010, we will undertake a review of our charitable giving projects, examples include: policies and enhance procedures to support employees contributing to charities and the local community, for example: the introduction of an employee volunteering policy, where employees can apply for up to two days’ paid leave to undertake voluntary projects.

22 Costain Group PLC Annual Report 2009 / www.costain.com Education Award for Costain Our A40 Penblewin to Slebech Park Improvement project was awarded, along with the Regeneration and Economic Development department at Pembrokeshire County Council, a Careers Wales West Valued Partner Award for their commitment to work with local students and teachers.

“Both Pembrokeshire County Council and Costain have shown unwavering support to our clients in recent years. It is so important that we have partnerships with local organisations like these so that we can continue to provide local people and businesses with careers information, advice and guidance to provide brighter future

“Their commitment has meant that many more lives have Costain About ‘Cooking up Success’ been enriched, whether it is the experience of running your A pair of cooks landed a lucrative £75,000 contract own business to learning more about a new industry and what’s to feed the 250 builders of our Church Village Bypass happening in your community. We are proud to call them our scheme. Akita Duggan and Paula O’Donovan entered partners, which is why we have named them our Careers Wales a competition ‘Cooking up Success’ and beat 150 other applicants to claim the first prize. The competition was West Valued Partners 2009.” (Ray Collier, Chief Executive of organised by Costain, the customer Rhondda Cynon Taf Careers Wales West) County Borough Council, business support agency Venture Wales, and the University of Wales, Cardiff. Akita Local VIP’s visit Newbury project and Paula are based in the Church Village site office and The Parkway project in Newbury, with Costain as main contractor, have established their own business in the fully-fitted catering unit. played host to West Berkshire councillors in November 2009.

David Woodhouse, Costain Project Director, gave a presentation about the logistics of the retail-led mixed use redevelopment project and the way in which Costain was dealing with the problems of ground water and diversion of services. Responsibility Corporate The councillors were shown drawings together with artist’s impressions of the structures that were being erected and a series of aerial photos that showed the progress to date.

The councillors also heard about details of the work and co-operation Costain was undertaking with local schools in the area. Costain also invited one of the outstanding work experience students along – Sophie Cath, from St Bartholomew’s School – to give a first-hand account of her recent stay with the project ‘Friends of Felixstowe’ that has prompted her to seek a career in . When work commenced on the Felixstowe South Reconfiguration Phase One contract, a deep water quay After the presentation, the councillors were taken on a tour of the extension at the Port of Felixstowe – the UK’s largest site. The councillors expressed their gratitude for the tour which container port – Costain embarked upon a community engagement programme. had given them a better understanding of the size and complexity review Operational & Business of the work involved and thanked Costain for their efforts in Not only did the Costain project team strive to minimise minimising disruption to Newbury town centre. disruptions to the port operations planned during the construction, they also pro-actively engaged with the Costain bikers various stakeholder groups within the local community which may have been affected by the works. “The project In October, Costain bikers remembered Britain’s fallen troops team established a clear line of communication with those in a charity bike ride. whom the works may have impacted upon. This included meeting local people through door-to-door visits prior to A group of Energy & Process colleagues joined thousands the commencement of the project, hosting presentation of other motorcyclists in this year’s Ride To The Wall (RTTW) evenings and site visits to explain the works, and regular informative newsletters to keep us updated on the progress,” – a ride to the National Memorial Arboretum near Lichfield, said Susan Robinson, Town Clerk for Felixstowe, pictured Staffordshire. The National Memorial features the names of more far right alongside David Alefs, Costain Project Director than 16,000 service men and women killed on duty or by terrorist (second from right) and Colin Tod of the Felixstowe Museum action since the end of World War II engraved on its walls. (third from right). “Costain were keen to help preserve any items of historical importance and were more than happy to salvage items of interest, such as the old railway buffers which have been installed in the museum grounds” states Governance Mr Tod. “The museum did also have concerns about the piling works taking place at the port due to our proximity to the works, but Costain’s project team have kept us informed throughout the duration of the project.” For more information... Victor Brand, Orwell Housing Association Caretaker www.costain.com/responsibility of Adastral Close, pictured far left with Chloe Purcell, Corporate Affairs Officer for Costain’s customer, Hutchison Ports (UK) Limited, stated: “We chose to approach Costain as the local community did have concerns over the noise and vibrations that would be caused by the piling works. Costain not only detailed what the works involved and kept us informed on the restricted timings of the works, but they also allowed us to utilise their impressive capability as a top contractor to clear a disused area of concrete between the port and the residents’ homes. This area is now going to be improved through the planting of trees, which will have a

positive impact on our local community.” statements Financial

Costain Group PLC Annual Report 2009 / www.costain.com 23 Our approach Environmental Our Environmental Management System (EMS) is accredited to the international standard of environmental management ISO 14001:2004. The Group Environmental Policy Statement outlines our intention to ensure we manage all our work and its impacts effectively, prevent pollution and continuously improve the operation and environmental management of our activities. Performance Waste The Group has pledged its support to the Waste & Resources Action Programme (WRAP) ‘Halving Waste to Landfill’ commitment. We have been successful in demonstrating year-on-year improvement in the amount of waste we divert from landfill. In 2009, we increased our diversion rate by 9%, diverting 67% of the total waste we generated from landfill.

Our commitment Waste diverted from landfill (%) Weprotectthelocalandglobal 70 63 67 environment through effective 58 52 management of our impacts, 47 minimising our negative impacts Target andmaximisingopportunities Actual to enhance the local environment 2007 2008 2009 2010 inwhichwework. Last year we diverted 67% of our waste from landfill. Through our internal waste minimisation campaign ‘SAVE IT’ we will continue to focus on both reducing the waste we generate and increasing the waste we divert from landfill, setting a target to achieve 70% diversion in2010. Climate change Towards the end of 2008, we successfully calculated the Group’s carbon footprint. Throughout the year, we have concentrated on establishing an accurate baseline, from which we haveset targets to minimise our impact on climate change. The scope of our footprint includes carbon dioxide emissions from energy use, business mileage, air travel and bulk fuel purchased. Unfortunately, we are unable to demonstrate an improvement from 2008 to 2009 but we attribute this to improved accuracy in data collection.

Group carbon dioxide emissions (Tonnes CO2)

30,000

25,000 20,000

15,000 Air travel 10,000 Bulk fuel Business mileage 5,000 Energy use

2008 2009

We plan to reduce our emissions by 35% by 2020.

24CostainGroupPLCAnnualReport2009/www.costain.com One area where we can report a reduction is business mileage. Following the identification of high mileage drivers in 2008, we introduced a number of measures to reduce the annual mileage driven by our employees. These measures included the provision of conference calling, web calling and video conferencing facilities and an emphasis on the use of public transport. A scheme has also been introduced for drivers and passengers to encourage car sharing. These measures have enabled Costain to reduce its average business mileage per claimable business mileage driver by 18% in 2009. In reviewing our business mileage performance indicator, we have re-stated our 2008 business mileage reduction from 12% to 6%.

Continuing our support for HRH The Prince of Wales Mayday About Costain About Network, a collaborative movement of businesses committed A programme of improvements to taking action on climate change, we will continue to measure, The A40 Penblewin to Slebech Park Improvement is an Early report and take action to reduce our carbon footprint. Contractor Involvement Project for the Welsh Assembly Government, which will reduce localised congestion and noise impacts whilst improving safety for road users. In 2010, we are looking to achieve a 5% reduction in our The five kilometre highway passes through a National measured 2008 CO2 emissions from energy usage and business Park with the major new bridge structure being built across travel. We have also set ourselves a longer-term target of 35% the Eastern Cleddau River, a designated Special Area of Conservation due to its importance for supporting a range total reduction by 2020 from our 2008 baseline. of fish species, otters and bats. The Costain team has been working successfully with stakeholders to ensure Initially, we are continuing to focus on reducing our overall that construction impacts on water quality and habitats are emissions through the implementation of a number of measures. minimised. As part of the design, a number of underpasses and enlarged culverts will allow bats and other wildlife to Concurrently, we are investigating the purchase of energy from a cross beneath the scheme safely. Fencing will guide ‘green tariff’ to ensure the energy that we consume comes from badgers, otters and other wildlife away from the road and renewable sources. into the safe crossings. Corporate Responsibility Corporate Pollution prevention We are committed to minimising our impact on the environment and reducing our environmental incidents year-on-year. We actively encourage the reporting of all incidents and near misses to ensure that incidents are resolved appropriately and lessons are learnt for the future. Over the past three years, we have received no prosecutions, cautions or notices and there have been no environmental incidents that resulted in irreversible impact on the environment. In the last year, we have seen a reduction in major environmental incidents of 33%. Training and awareness To ensure our people and supply chain partners are aware Reducing carbon emissions

of current legislative requirements, best practice and how they review Operational & Business Costain is currently delivering the refurbishment and can contribute to improving our environmental performance, redevelopment of the Sheffield Children & Adolescent Mental we delivered environmental training to a total of 353 employees Health Unit. The scheme will reduce carbon emissions by in 2009. 28% and reduce costs for the unit by 33%. This has been achieved through the specification of high thermal insulation, natural ventilation and lighting, high efficiency electrical We have produced a four-day environmental training package fittings and the provision of onsite renewable energy in the which we intend to deliver to key staff across the business in form of ground source heat pumps and photo voltaic panels. 2010. This training has been developed to engage the workforce The scheme is making a positive contribution to the wider targets of the NHS to reduce its CO emissions by 26% (from and increase awareness of the challenges and opportunities in 2 a 1990 baseline) by 2020, whilst still providing the community environmental management on the schemes we deliver. with a building that is secure and able to completely sustain and rehabilitate local children. Governance

For more information... www.costain.com/responsibility Financial statements Financial

Costain Group PLC Annual Report 2009 / www.costain.com 25 Our approach Marketplace We achieve success by treating customers and suppliers fairly, with respect and integrity, governed by our ethical business conduct and supply chain management policies. Performance Delivering for our customers and supply chain Our aim is to provide the best quality service to our customers. We are constantly striving to improve our performance. We actively seek feedback from our customers, undertaking regular customer satisfaction surveys across our sectors. In 2009, we averaged a customer satisfaction score of 81%, compared to 80.3% in 2008.

Customer satisfaction score (%)

82.0

Our commitment 81.5

We recognise the importance 81.0 of working in conjunction with our customers, partners 80.5 and suppliers. Together, we 2008 2009 Target 2010 have the potential to make Our supply chain is critical to delivering quality projects. a greater positive impact on Effective engagement and two-way feedback is essential to ensure that we perform as one team. We undertake our communities and the regular performance reviews with our supply chain, discussing environment. We encourage issues such as supervision, competency, communication and teamwork, cost, quality and innovation, and safety and open, honest and respectful environmental performance. communication and the development and maintenance Top 100 supply chain performance (%) of long-lasting and mutually 75 34.7 beneficial relationships. 59 49 52

2007 2008 2009 Target 2010

Our supply chain performance has increased from 49% to 59% since 2007.

26 Costain Group PLC Annual Report 2009 / www.costain.com In 2009, the performance of our ‘Top 100’ supply chain partners averaged 59%. We have set a target to achieve 75% in 2010.

Improving performance and quality and delivering innovation to our customers through early involvement, without compromising any of the excellent Safety, Health and Environmental achievements delivered to date, is a 2010 Group target. Understanding our customers and supply chain To ensure that we deliver for our customers and stakeholders we need to understand their drivers and priorities and the wider sustainability influences that affect business today.

Throughout 2009, we organised a selection of industry About Costain About events, attended by representatives from academia, regulators, Supply chain conference the Confederation of British Industry and senior politicians. In March 2009, our supply chain partners gathered The aim of the events was to facilitate discussion and debate to hear about the future of working with Costain at our supply chain conference. Over 138 supply chain between decision makers on the issues that are important to representatives were joined by 48 of Costain senior UK PLC in the 21st century. management to discuss the theme ‘Securing our Future’. The conference offered a chance for suppliers to find In 2010, we will facilitate a further six events focusing on: Energy out about Costain’s pipeline and for Costain to explain its Supply Chain Management (SCM) strategy in detail. and Power; Rail; Research & Development, Innovation and Among the presenters were: Andrew Wyllie, Chief Technology; Safety, Health and Environment; Waste; and Executive, Alan Kay, Chief Operating Officer, and Patrick Operations and Maintenance of the UK’s assets. Bruce, Commercial Director as well as supply chain partners VVB and Bachy Soletanche. Strengthening relationships In March 2009, we held our second supply chain conference at the University of Warwick, attended by senior representatives of our ‘Top 100’ supply chain partners. We pledged to develop Responsibility Corporate relationships and improve communications by appointing a senior management sponsor to each of our ‘Top 100’ supply chain partners.

Our key focus for 2010 will be to build on the relationships forged in 2009. 2010 will have many challenges which we will tackle and risk manage through engaging with our supply chain.

Each of our ‘Top 100’ supply chain partners is allocated a relationship manager and a senior sponsor at director level Costain tackles energy debate with the CBI to oversee the partnership. We actively target two business- Stephen Wells, Group Strategy and Business Development to-business meetings a year with the ‘Top 100’, to review Director (centre) addressed, as a panel member, the performance, share best practice and drive improvement. Confederation of British Industry’s (CBI) Energy Conference, which debated whether the country has the right mix of energy supplies for the years ahead. Martin review Operational & Business Responsible procurement Lawrence, Managing Director of Energy Sourcing & In 2009, Costain signed up to the Mayor of London’s Green Customer Supply, EDF Energy (right) was also one of Procurement Code in recognition of the need to reduce the the main speakers on the day. environmental impact of our supply chain and to source services The CBI organised conference, which was supported and materials responsibly. by Costain, and sponsored by EDF Energy and The Crown Estate, attracted around 150 energy specialists, To reduce the impact of the products and services we procure, power generating companies, funders, regulators, the we are further developing our Responsible Procurement Policy construction sector and media. They listened as speakers from Government, power companies, plus the financial and associated strategy in 2010, ensuring the way we conduct and energy sectors, gave their opinions on the ideal balance ourselves in the wider marketplace is environmentally sound, of energy sources. In his comments from the platform, ethical and inclusive. Stephen stressed the need to get construction of new nuclear power stations underway. Governance

For more information... www.costain.com/responsibility Financial statements Financial

Costain Group PLC Annual Report 2009 / www.costain.com 27 Business & Operational review

In the pages that follow, we have 28 Business & Operational review 29 Our performance in 2009 highlighted our performance, 30 Chairman’s statement 32 Chief Executive’s review both operational and financial, 35 Our values and Our markets 36 Business & Operational review across all our divisions. We have 36 Environment 37 Infrastructure also produced a special on-line 38 Community 38 Energy & Process Annual Report 2009 which is 39 Land Development 40 Principal risks available on the new Investors 43 Key Performance Indicators section of the Costain website 44 Financial review at www.costain.com. 46 Governance 46 Board of Directors 49 Corporate Governance statement (including Internal controls and Risk management) 57 Directors’ report 63 Directors’ remuneration report 70 Statement of Directors’ responsibilities 71 Independent Auditors’ Report to the members of Costain Group PLC 72 Financial statements 72 Consolidated income statement 73 Consolidated statement of comprehensive income and expense 74 Consolidated statement of financial position 75 Company statement of financial position 76 Consolidated and Company statements of changes in equity 77 Consolidated cash flow statement 78 Company cash flow statement 79 Notes to the financial statements 112 Five-year financial summary IBC Financial calendar and other shareholder information

28 Costain Group PLC Annual Report 2009 / www.costain.com Our performance in 2009

• Revenue of £1,061.1 million (£996.0 million) exceeds Costain About Costain announces a strong £1 billion for first time in 16 years operational performance, a • Profit from operations increased by 14% to £20.8 million (2008: £18.3 million) record year-end order book and • Profit before tax of £18.1 million (2008: £23.1 million) • Strong net cash position of £120.5 million an increased dividend for the (2008: £146.6 million) – average month-end cash balance of £125.3 million year. Further progress has been during the year (2008: £117.4 million) delivered by focusing on blue- • Record year-end forward order book, up 30% at £2.6 billion (2008: £2.0 billion) chip customers with committed – repeat order customers account for 84% – includes circa £900 million of secured work for 2010 long-term investment • In addition, preferred bidder positions at year-end of over £400 million programmes. Responsibility Corporate – increased to over £600 million since year-end • Banking and bonding facilities recently extended to 2013 and increased by 20% to £345 million The Group is also implementing • IAS 19 pension scheme deficit of £75.4 million, the next stage of its strategy – net of deferred tax, a similar level to the half-year (2008: £36.1 million) ‘Choosing Costain’. – defined benefit pension scheme closed to future accrual during the year • Recommended final dividend of 0.55 pence, increasing total payout for the year by 10% to 0.825 pence (2008: 0.75 pence) Year ended 31 December 2009 2008 Revenue* £1,061.1m £996.0m ‘Choosing Costain’

Profit from operations £20.8m £18.3m review Operational & Business • Implementing the next stage of our strategy – Profit before tax £18.1m £23.1m ‘Choosing Costain’ • A commitment to delivering a full-service offering, from Net cash £120.5m £146.6m front-end engineering consultancy and design, through Earnings per share 2.3p 2.9p construction to back-end care and maintenance operations • Focussing on the Infrastructure, Environment, and Full year dividend 0.825p 0.75p Energy & Process markets where we will place emphasis on those blue-chip customers with repeat order * Including share of joint ventures & associates. commitments who are looking for solutions for each phase of the ‘life cycle’ of their assets Governance Financial statements Financial

Costain Group PLC Annual Report 2009 / www.costain.com 29 who have committed long-term investment programmes and who are increasingly looking to work with a select group of Chairman’s preferred specialist service providers. These relationships, which generate a higher volume of repeat business, provide statement an increased level of long-term earnings visibility.

Costain is now in a strong position to take advantage of new opportunities arising from the ongoing structural changes in the sector and we are going to expand further Costain’s market position across the design and engineering, construction, and operations and maintenance spectrum.

We have therefore invested time and effort over the last few months to develop our successful current strategy and are pleased to unveil ‘Choosing Costain’ which, whilst very much an evolution of ‘Being Number One’, is designed to enhance and change the spread of business and earnings profile of Costain over the medium-term.

Our refined strategy is designed to ensure that Costain is the preferred choice of major blue-chip customers looking Overview & Strategy for an increasingly integrated service. Andrew Wyllie, in his I am delighted to report a strong Group performance in 2009. Chief Executive’s review, sets out how ‘Choosing Costain’ Indeed, in view of the very difficult economic environment, this is already being implemented. was an excellent result. Results The successful implementation of our ‘Being Number One’ Revenue for the year was £1,061.1 million (2008: £996.0 million). strategy has underpinned the Group’s progress over the last Profit from operations was £20.8 million (2008: £18.3 million), three years. It has also provided much needed resilience in an increase of 14%. these challenging times. We again finished the year with higher revenues, increased operating profits, a strong cash position, Net financing expense amounted to £2.7 million (2008: income and we have enhanced our banking and bonding facilities, a £4.8 million) which incorporated net interest income of £2.1 million record year-end order book and a growing reputation for delivery. (2008: £5.8 million) and a pension scheme related net interest This is a major achievement and one that stands us in good cost of £4.8 million (2008: £1.0 million). stead for the future. Profit before tax was £18.1 million (2008: £23.1 million), which, Our strategy has been about a lot more than year-on-year as anticipated, reflects the impact of reduced interest rates and performance. ‘Being Number One’ has enabled Costain to the increased IAS 19 pension interest charge. Basic earnings per leverage the changing dynamics of the contracting sector and share was, therefore, 2.3 pence (2008: 2.9 pence). build a portfolio of blue-chip client relationships with customers The Group has no significant borrowings and net cash balances at the year-end totalled £120.5 million (2008: £146.6 million), including the Group’s share of cash held by construction joint venture arrangements of £36.0 million (2008: £34.2 million). The average month-end net cash balance during the year was £125.3 million (2008: £117.4 million).

David Allvey Chairman 30 Costain Group PLC Annual Report 2009 / www.costain.com Our reporting framework Environment Community The Environment division comprises Costain’s operations in The Community division, which is being scaled down, the water, waste and marine sectors. The Group is one of the includes our activities in the health, education and leading asset management contractors in the water sector. retail sectors. Infrastructure Land Development Costain’s Infrastructure division includes our operations in the This division is responsible for the Alcaidesa land and highways, rail and airport markets. Costain now has a leading marina development activity, a 50% joint venture with Costain About position in the maintenance of the UK’s motorway and trunk a subsidiary of Santander Bank. road network. Energy & Process This division includes our operations in hydrocarbons and chemicals, nuclear and power. Costain is currently operating on five nuclear facilities in the UK.

Dividend Board Changes The Board is recommending the payment of a final dividend for The following Board changes were announced during the year. the year of 0.55 pence per share. If approved at the forthcoming Annual General Meeting, the dividend will be paid on 21 May 2010 Mr Saad Shehata, a Non-Executive Director and nominee of Corporate Responsibility Corporate to shareholders on the register as at 23 April 2010. This would Mohammed Abdulmohsin Al-Kharafi & Sons WLL (‘Kharafi’) bring the total for the full year to 0.825 pence per share retired from the Board with effect from 23 June 2009. Mr Samer (2008: 0.75 pence), an increase of 10% over the prior year. Younis, also a nominee of Kharafi, was appointed to the Board as a Non-Executive Director with effect from the same date. Pension As at 31 December 2009, the deficit in the UK Pension Scheme Mr Mohd Hussein bin Abdul Hamid resigned from the Group recorded in the Group’s balance sheet in accordance with IAS 19 Board with effect from 4 December 2009, following his retirement was £75.4 million, net of deferred tax (31 December 2008: from the UEM Group of Companies (‘UEM’). £36.1 million). We thank both Saad and Hussein for their efforts and commitment During the year, the pension scheme asset value has increased to Costain over the years. as a result of a recovery in the global equity markets. However, this has been more than offset by an increase in liabilities due People to an increase in inflationary expectations and a reduction in On behalf of the whole Board, I would like to express our the liability discount rate. gratitude to all our colleagues at Costain. The excellent review Operational & Business performance during the year is the result of the efforts of The most recently completed actuarial valuation of the scheme everyone at the Group and we recognise their hard work was performed by the scheme actuary as at 31 March 2007. and dedication across the business. The current monthly Group contribution of £0.9 million towards funding the scheme’s deficit will continue until the next formal Summary & Outlook actuarial valuation of the scheme, as at 31 March 2010, This was an excellent overall operational performance. Once is finalised. again, the Group has demonstrated its resilience in a difficult economic environment. We are confident that our position in As an important step in managing the pension obligation and markets underpinned by strategic capital expenditure, regulatory reducing volatility, the defined benefit pension scheme was commitment or essential maintenance requirements will continue closed to future accrual from 30 September 2009. Costain to stand us in good stead. now only offers a defined contribution scheme for employees. With a record year-end order book, a significant amount of work

Proposed Share Consolidation already secured for 2010, a net cash balance of over £120 million Governance At the forthcoming Annual General Meeting of the Group, and customers committed to long-term capital investment shareholders will be asked to approve a proposed share programmes, Costain is looking to the future with confidence. consolidation on the basis of one ordinary share in the Company That confidence is reflected in the Board’s recommendation to with a nominal value of 50 pence each for every ten ordinary increase by 10% the total dividend for the year. shares with a nominal value of 5 pence held on 6 May 2010. Building on our success, we are now implementing the next stage The purpose of the share consolidation is, amongst other of our strategy, ‘Choosing Costain’, which will ensure that the Group things, to reduce the volatility in the Group’s share price, thereby enhances its position as one of the leading players in the industry. enabling a more consistent valuation of the Group. Further details in respect of the proposed share consolidation will be set out in the Group’s notice of Annual General Meeting. If approved by shareholders, it is expected that the share consolidation will become effective on 7 May 2010. David Allvey Chairman 10 March 2010 statements Financial

Costain Group PLC Annual Report 2009 / www.costain.com 31 Later in my review, I will set out in detail how we are building on our strong market position, how we will take advantage of the Chief Executive’s opportunities arising from what we expect to be a period of difficult economic conditions and, finally, how we are preparing review for sustained economic recovery in the medium-term.

First, to the year under review. 2009: Delivering another strong performance The Group has continued to make good progress during the year, particularly against the backcloth of economic recession, with a number of key achievements. Of particular note:

• Revenue (including share of joint ventures and associates) exceeded £1 billion for the first time in 16 years • Operating profits increased by 14% • The order book at the year-end stood at £2.6 billion, up 30%, and underpins our long-term visibility • We saw increased operating profits and revenue across our core Infrastructure, Environment and Energy & Process divisions During the year, we achieved further significant progress, • Our strong net cash position was maintained at over £120 million consolidating our position as one of the UK’s premier engineering • The Board has recommended an increased final dividend and construction businesses. We have also taken robust action with our Community division, In what was a challenging economic environment, we are pleased which we continue to scale down, and the Spanish Land to report a growth in profit from operations, an increase in revenues, Development operation which are not providing the required a significant increase in the order book, a strong net cash position level of returns. Further details are set out in the Business & and a recommendation to increase the dividend for the year. Operational review. Costain is recognised as a major industry player. In 2009, the Growth in core operations business received numerous awards including Major Contractor We have increased profits, revenues and the order books across of the Year from New Civil Engineer magazine for an all three of our core divisions: Environment, Infrastructure and unprecedented second successive year and the Supreme Award Energy & Process. from Construction News magazine. The Environment division incorporates our activities in the water, The Group’s operations continued to benefit from the deliberate waste and marine sectors. The division’s order book increased focus on targeted blue-chip customers whose major spending by 66% to £1.3 billion as a result of securing a number of major plans are underpinned by strategic national priorities in chosen long-term contract wins. With significant legislation and regulation sectors. Costain has a proven scale and capability to deliver in these markets, we expect a high level of investment to continue complex solutions to major customers and as a result has entered in these sectors over the coming years. 2010 with a strong order book and pipeline of opportunities. In the Infrastructure division, which incorporates our activities in the highways, rail and airports sectors, we continued to increase our highways maintenance activity which accounts for the majority of the Group’s growing maintenance related activities which, in turn, now represents 13% of the Group’s total order book. The division has a substantial pipeline of future work opportunities, including the Crossrail project in London.

The Energy & Process division, which undertakes work in the hydrocarbons and chemicals, nuclear processing and power sectors, had an excellent year. We secured further work on the major Evaporator D nuclear decommissioning project at Sellafield. There is a growing recognition of the need to invest in UK energy infrastructure and, as a consequence, we see potential for further growth in this sector.

Our Land Development activity in Spain, which is a joint venture with a subsidiary of Santander Bank, continued to be subject to very difficult market conditions and, as anticipated, no land transactions were completed. Meanwhile, construction of the marina, near Gibraltar, is nearing completion and, with the first berth sales having been secured, the facility will be operational by mid-2010.

Andrew Wyllie Chief Executive 32 Costain Group PLC Annual Report 2009 / www.costain.com The Community division, which encompasses our activities in the Safety, Health and Environment health, education and retail sectors, has been intentionally scaled Costain places the highest priority on the effective management down as we continue to allocate resources to more attractive of Safety, Health and Environment. The Group has a policy opportunities. In line with our policy of trading our PFI equity requiring all staff and supply chain partners to possess an portfolio to reinvest in bidding for new projects, we disposed appropriate safety competency card and members of the of two equity stakes in the year. Board demonstrated leadership in this respect by obtaining their Construction Skills Certification Scheme (CSCS) card. A more detailed review of each operating division is contained within the Business & Operational review. Further improvement in performance was achieved in the year, with the Group Accident Frequency Rate (AFR) reducing from 0.17 Order book: up 30% at £2.6 billion to 0.16, which continues to compare favourably with our major A 30% increase in the quality order book during a difficult year, contractor peer group. We remain fully committed to continue is a major achievement. In addition, we ended the year with to achieve improvements in this performance in the future. preferred bidder positions in excess of £400 million. About Costain About People The order book includes £1.6 billion of new orders comprising Our people are core to the development and success of a range of major contract wins across the business. Of particular Costain and we have some of the best people in the industry. note was the contract for the Greater Manchester Waste Disposal We are investing across the organisation to ensure that we Authority (GMWDA), AMP5 contracts for Severn Trent and United continue to have the skills and resources necessary to deliver Utilities, the Evaporator D nuclear project, and a further Highways exceptional business performance. This investment in training Agency five-year Management Agent Contract (MAC) contract. and development, with a focus on providing opportunities and advancement, means that Costain is increasingly recognised Given our strategic focus on blue-chip customers with long-term as an ‘employer of choice’. or multi-project investment programmes, our repeat order level has remained well over 80%. We were also delighted to secure A key initiative in 2009, was the introduction of a new on-line a number of major new customers during the year including ‘Performance review and Career Development review’ process Severn Trent. which is already providing better and more comprehensive management information for managing the business.

The order book includes circa £900 million of work to be carried Responsibility Corporate out in 2010, which is ahead of the equivalent figure at the start Building on success: ‘Choosing Costain’ of last year. The larger, longer-term contracts being awarded The Group’s ‘Being Number One’ strategy, successfully to us by our customers provide significantly enhanced visibility implemented since 2006, has established Costain as one of future revenues. of the UK’s leading engineering and construction businesses.

Since the year-end, we have continued to secure major new The Group’s success has provided it with a platform that, contracts and preferred bidder positions, including Welsh Water alongside the ongoing and rapid changes taking place in the AMP5 and, in various joint ventures, the A8 highways project Group’s marketplace, presents Costain with the opportunity in Northern Ireland, the Royal Oak tunnel portal for Crossrail, to further consolidate its position and to target the delivery appointment to the £2.0 billion Highways Agency Major Project of an even more ambitious development strategy. Framework and the MAC 14 five-year highways maintenance contract. As a consequence, the order book has been maintained Therefore, we are now implementing our ‘Choosing Costain’ at £2.6 billion and our preferred bidder position has increased strategy, which provides a blueprint for the Group’s next to over £600 million. Market conditions are expected to remain stage of development in line with the significant changes review Operational & Business challenging but, as a result of our strategy, we have a good pipeline in the industry that Costain expects to take place over the of opportunities and our bidding teams remain fully occupied. next decade. The way in which we work and our commitment Strong finances to increasingly deliver a full-service offering, from front-end engineering consultancy and design, through construction to The Group is in a healthy financial position. back-end care and maintenance. This will reinforce Costain as the number one choice. It will help to ensure that our customers, We maintained a strong net cash position, which at the end partners, people, suppliers and investors will continue to make of the year was £120.5 million. The average month end cash the informed choice to work successfully with Costain. balance increased to £125.3 million, up from an average of £117.4 million in 2008. The Group has no significant borrowings. ‘Choosing Costain’, whilst evolutionary in nature, is a strategy based on established success and provides an ambitious vision for the Our banking and bonding facilities have recently been extended further development of the Costain Group. to 2013, and increased by 20% to £345 million. We, therefore, have the necessary headroom available to capitalise on ‘Choosing Costain’ market opportunities as they arise and achieve our longer-term Governance Our vision is to be one of the UK’s top solutions providers, with strategic objectives. the scale and resources to meet successfully the increasingly complex and challenging needs of major customers.

Costain will continue to focus its efforts on customers with major multi-billion pound strategic investment programmes which, irrespective of economic environments, are core to the UK’s sustainable ‘life support systems’ and are therefore deemed essential. Financial statements Financial

HRH The Princess Royal (left) meets Steve Merrin, Costain Project Manager at the opening of Johnson Community Hospital, Spalding.

Costain Group PLC Annual Report 2009 / www.costain.com 33 Why choose Costain? Chief Executive’s Costain’s competitive advantage has been built on its ability to understand the complex business needs of its large customers and to develop cost effective, innovative and technically robust solutions review to those business requirements. We then mobilise the necessary continued technical, consultancy, process, human and financial resources to integrate and consistently deliver the resulting major projects and frameworks to time, budget and quality, thus providing real value for money.

Our solutions to customers will be delivered under the single unifying Costain brand. Co-ordination of separate business activities will be done internally to ensure that the customer is presented with an integrated service and a single senior point of contact within Costain.

We must continue to attract and retain the very best people if we are to deliver on our strategic objectives. The ‘Choosing Costain’ strategy provides a wide range of career opportunities and the scope for our people to grow. They will be suitably rewarded for Over the next decade, we believe that those programmes delivering outstanding performance. will be primarily in three growth markets:- The way in which we work and our continuing commitment Infrastructure – particularly highways, rail and airports to deliver on our promises will also help ensure that our customers, Environment – particularly water and waste partners, people, suppliers and investors will choose to work Energy & Process – particularly nuclear, power, and successfully with Costain in the future. hydrocarbons & chemicals The Costain values (see page 35) represent the essence of the In these markets we will place emphasis on those large blue-chip business and set the benchmark of performance for our people. customers with repeat order commitments who are looking for They give direction and structure to everything we do and solutions for each phase of the ‘life-cycle’ of their assets. adherence to these values is paramount.

These large customers are imposing increasingly strict criteria in It is our unswerving commitment and compliance to these selecting their preferred contractors. In particular, customers are principles that allows us to achieve excellence in performance. looking for contractors capable of providing the full ‘life-cycle’ of services. This process is in turn creating significant barriers to Summary entry. In order to succeed, it is essential that Costain has the scale We can be pleased with the strong business performance and ability to deploy the resources required by such customers. delivered in 2009, particularly in view of the difficult macroeconomic conditions we faced. Costain has once again demonstrated Consequently, Costain will look to build on its current strengths its resilience. – and broaden and improve the quality of earnings streams – by accelerating the development of an integrated front-end Looking ahead, our continued success will be built on our leading engineering consultancy and back-end care and maintenance positions in markets that are underpinned by strategic capital operations to sit either side of our proven strength in construction: expenditure, regulatory commitment and essential maintenance requirements. Consulting – one of the fastest growing areas of the Costain business We have come a long way in a few years. Our ‘Being Number Construction – strong market position with world class One’ strategy has delivered significant value. It is now time to build expertise in delivering major complex projects on that success and, despite the current economic environment Care – operations and maintenance, already which we expect to continue, we are excited at the opportunities 13% of our Group order book that lie ahead.

The ‘Choosing Costain’ strategy provides significant opportunity Our ‘Choosing Costain’ strategy is designed both to reinforce for growth by developing our capability across the full ‘life-cycle’ further the Group’s resilience in difficult times and to prepare for of products for our customers. In addition, we can deliver an the opportunities we expect to materialise as economic recovery over-arching solution through a concession or private finance starts to take hold. approach. The economic environment remains challenging but, with a strong Resources will always be targeted on those opportunities that operational business and a strategy for the ongoing development provide the greatest potential return at an acceptable risk profile. of the Group, we are looking to the future with confidence. The primary geographic focus of the business in the medium-term will be the UK although international opportunities will be pursued in line with this customer focused strategy, particularly in the Energy & Process related activities.

It is anticipated that the growth aspirations and ambition for the business will be achieved by organic growth and by suitable Andrew Wyllie Chief Executive acquisitions in line with strategy. 10 March 2010

34 Costain Group PLC Annual Report 2009 / www.costain.com Our values C O S T A I N Customer Open and Safe and Team Players Accountable Improving Natural Choice Focused Honest Environmentally Continuously Costain About Aware and therefore the...

Our markets Water Airports Ofwat’s Asset Management Programme 5 (AMP5) over the This regulated sector covers 170 million passengers per period 2010 to 2015 requires a further investment of £22 billion annum who pass through airports owned by customers BAA, in capital quality enhancements and asset maintenance to the Global Infrastructure Partners (GIP) and Manchester Airport

UK’s water and waste water asset base. Group (MAG). Current capital and operating expenditure is Responsibility Corporate estimated at £1 billion per annum up to 2018. Waste UK and European legislation, landfill diversion targets and Nuclear taxes, as well as growing environmental awareness, are all Opportunities within the UK nuclear decommissioning sector driving the need for major waste infrastructure investment. remain strong and will continue for many decades within the The UK municipal waste market, covered by 80 disposal Nuclear Decommissioning Authority’s latest estimate to address Authorities, produces some 30 million tonnes of waste per legacy facilities set at £44.5 billion. The new nuclear build annum. This requires the development of new treatment market is estimated at £60 billion. Currently three different facilities worth an estimated £7 billion, delivering operating utilities are developing proposals for up to 16 gigawatts of revenues of £14 billion from 2015 onwards. In addition, the new nuclear power on five of the ten sites identified in the UK produces a further 70 million tonnes of commercial Government’s draft Nuclear National Policy Statement. and industrial waste each year. This is similarly subject to increasingly stringent regulation and escalating landfill costs. Power review Operational & Business In order to create 50 gigawatts of new power generation Marine capacity including renewable and new nuclear build by 2025, The marine sector is estimated to invest upwards of it is estimated that an investment in excess of £100 billion £0.8 billion per annum on capital and operational assets will be required. National Grid will be required to upgrade its as well as coastal defence works over the next few years. network, and in excess of £10 billion will be needed to adapt for an expected increase in future demand. Highways The Highways Agency, through its Managed Motorways Hydrocarbons and Chemicals Programme, is focused on using technology to maximise The UK’s investment in this sector is estimated at £60 billion traffic flows and minimise congestion for their customers. through to 2020 with expenditure expected to rise to £5 billion The overall highways investment programme is valued at in 2010. Global energy demand is projected to increase by £6.5 billion through to 2014. 45% by 2030, which will require investment of more than US$1 trillion per annum. Governance Rail , Transport for London and Crossrail are expected Education to invest £55 billion on both operational maintenance and It is anticipated that there will be continued spending capital assets through to 2017. In addition, the Government of £3 billion per annum on the Building Schools for the recently announced plans for a new High Speed Rail Link Future (BSF) programme. from London to Birmingham with a future extension to northern England and Scotland. Estimated overall cost will be circa £30 billion. Financial statements Financial

Costain Group PLC Annual Report 2009 / www.costain.com 35 Business & Water Operational review

Environment

Hornsey Water Treatment Works, part of Costain’s The Environment division, which accounts for 50% of the Thames Water AMP4 framework. Group’s order book, includes Costain’s water, waste and marine activities. Waste Revenue (including share of joint ventures and associates) for the year was £426.1 million (2008: £417.0 million), with an operating profit of £11.7 million (2008: £11.6 million). The division’s year-end order book was £1.3 billion (2008: £0.8 billion), an increase of over 60%.

This strong performance reflects Costain’s established position as a leader in the delivery of the UK’s environmental projects.

In water, the Group continued delivery of major AMP4 programmes of clean and waste water schemes for Yorkshire Water, Welsh Water, United Utilities, Thames Water, Water and Southern Water.

It was a significant year in terms of securing major contracts Riverside Resource Recovery Facility, Belvedere. under the fifth five-year Asset Management Programme (AMP5) which runs from 2010 to 2015. Following outstanding delivery across all of our existing AMP4 contracts, Costain has continued Marine to be successful in renewing and securing new AMP5 contracts. During 2009, we renewed the relationship with United Utilities for another five years and secured a £400 million ten-year framework for new AMP customer, Severn Trent. Since the year-end, we have also renewed the relationship with Welsh Water for a further five years.

During the year, Costain, in joint venture, was also awarded the £225 million Brighton and Hove waste water treatment works project for Southern Water.

This combination of major projects and framework contracts provides the Group with a significant long-term earnings stream. Felixstowe South Reconfiguration Phase One. In waste, continued growth and expansion was underlined in the first half of 2009 with the award of the £397 million Greater Manchester Waste Disposal Authority’s (GMWDA’s) PFI Waste and Recycling Contract, the largest waste services contract in western Europe. This was secured by leveraging Costain’s complementary skills in waste and process engineering and provides a firm platform for future growth. Costain is currently actively engaged in submission of PFI proposals for major waste facilities and further opportunities in this growing sector.

In marine, the Felixstowe South Reconfiguration Phase One is well advanced and is due to be completed in December 2010. This project, for a 730 metre deep water container quay, will also provide 32 hectares of associated container yard and port service areas. St Germans pumping station is now entering the commissioning phase, with the main building completed, representing the second largest pumping station in Europe.

During the year, the Costa Azul breakwater project in Mexico was completed.

Costain’s marine capability significantly enhances its competitive advantage in a number of key sectors, including nuclear and power.

36 Costain Group PLC Annual Report 2009 / www.costain.com Infrastructure Highways

The Infrastructure division accounts for 38% of the Group’s order book and includes Costain’s highways, rail and airports activities.

Revenue (including share of joint ventures and associates) was £364.8 million (2008: £208.7 million), with an operating profit of £16.9 million (2008: £14.4 million). The division’s year-end order book increased by 10% to £1.0 billion (2008: £0.9 billion).

Costain continues to build on its strong market leading position

in infrastructure and this performance reflects the Group’s Costain About reputation for premium quality delivery of large-scale projects in this sector. The Group’s achievements in infrastructure demonstrate a good delivery record and also provide confidence Bell Common Tunnel on the M25. that Costain is in an advantageous position to secure continued progress in these sectors on schemes such as Crossrail, the Highways Agency’s Managed Motorways Programme, London Rail Underground’s station enhancement programme and new nuclear power stations to support the continued and growing investment by customers in the infrastructure markets.

The Group had another good year in the highways sector with a number of new awards. Significantly, Costain’s highways operations and maintenance joint venture is now the leading supplier to the UK’s Highways Agency and currently is responsible for maintaining approximately one third of the Responsibility Corporate Agency’s UK motorway and trunk road network.

At the beginning of 2009, Costain delivered both the major M27 widening schemes at Junctions 11 to 12 and Junctions 3 to 4, ahead of schedule and budget. The Group also commenced the Looking west along the new footbridge at Farringdon Station, first of the Highways Agency’s Managed Motorways Programme which was installed to help achieve an increase in projects on the M1 between Junctions 10 and 13 following Thameslink services. on from the Early Contractor Involvement contract to develop the scheme. Airports In rail, Costain successfully completed the refurbishment of the Grade I listed King’s Cross Eastern Range for Network Rail and achieved all ‘key output zero’ deliverables at Farringdon Station

on the ambitious . The Group delivered review Operational & Business a major part of London Underground’s ‘Cooling the Tube’ programme on the Victoria line including fans to remove some 120m3 of warm air per second.

In airports, Costain is a preferred contractor at Gatwick and is working on site at the airport’s North Terminal. The Group has secured the renewal of its successful five-year framework with the Manchester Airport Group (MAG).

The North Terminal at Gatwick Airport. Governance Financial statements Financial

Costain Group PLC Annual Report 2009 / www.costain.com 37 Business & Health Operational review continued

Community

Johnson Community Hospital, Spalding, part of Costain’s The Community division includes the Group’s reduced health, 3Shires PFI batch of hospitals. education and retail activities. Revenue (including share of joint ventures and associates) for the Education year was £167.8 million (2008: £285.6 million), with an operating loss of £8.4 million (2008: loss of £5.2 million).

The substantial reduction in revenue reflects the previously announced decision to scale down the division as we continue to reallocate resources to more attractive opportunities. The increased loss reflects additional costs necessary to complete a number of projects together with restructuring costs and reduced overhead recovery as the operations are scaled down.

In line with our stated strategy of actively trading our PFI portfolio in order to invest in future opportunities, we disposed of our equity stakes in two PFI’s during the year resulting in a combined profit of £2.0 million. University of Worcester, City Campus. In health, a number of healthcare projects were successfully completed including the remaining two of the three 3Shires PFI batch of hospitals and five new ProCure21 facilities. Retail

In education, Costain, in joint venture partnership, achieved financial close on four further secondary schools in Bradford under the Government’s Building Schools for the Future (‘BSF’) programme. Two schools under the Lewisham BSF have been completed and delivered and the first Phase 2 school has commenced on site.

In retail, construction of the new development in Gracechurch Street is expected to be completed in the second half of 2010, and the Parkway, Newbury town centre redevelopment project is expected to be complete in 2011.

Parkway, Newbury, the construction of the retail-led mixed Energy & Process use redevelopment in Newbury town centre.

Revenue (including share of joint ventures and associates) for the year was £101.2 million (2008: £83.6 million) with an operating profit of £9.3 million (2008: £5.5 million). The division’s order book increased 57% to £180 million (2008: £115 million).

The division saw further success in 2009, building on the progress made in the prior year, and continues to see major opportunities for future growth. The division comprises three core activities including hydrocarbons & chemicals, nuclear and power. During the year, final agreement was reached on the completed Pemex project in Mexico.

During the year, Costain completed the Brine & Water Plant associated with the Storengy (GDF SUEZ) Underground Gas Storage Facility at Stublach in Cheshire. At the neighbouring Holford Underground Gas Storage Facility, Costain is delivering the Gas Plant on a similar facility for E.ON.

38 Costain Group PLC Annual Report 2009 / www.costain.com In nuclear, significant progress has been made on the engineering and construction of the Evaporator D project at Sellafield, one of the UK’s largest nuclear decommissioning projects. The Group Hydrocarbons & Chemicals continues to build its capability in this sector and currently has in excess of 300 specialists based in Manchester.

The operation in Abu Dhabi continued to undertake a number of contracts on the Das Island oil and gas facility.

Costain’s ability to bring innovative and effective solutions to complex problems is a significant attraction to customers in the Energy & Process market. Additional key resources have been added to the team as part of our continued investment to significantly grow our activity in this area. About Costain About

Land Development Stublach Underground Gas Storage Facility, Cheshire.

Revenue for the year was £1.2 million (2008: £1.1 million) with a Nuclear loss after tax of £2.6 million (2008: loss of £2.3 million). The loss in the year represents operating and interest costs and a land value write down.

As previously reported, the real estate market in Spain has been significantly impacted by the global recession. The Group’s joint venture development company, Alcaidesa, continues to secure infrastructure development planning consents on its land bank. This process adds long-term value to the land bank and Responsibility Corporate will facilitate land sales to developers as the market improves.

The construction of the 600-berth yacht marina, adjacent to Gibraltar, is on target and is expected to be operational in summer 2010. We have started forward selling and letting berths The Evaporator D project at Sellafield. and the Group is looking at opportunities to develop associated commercial activities subject to pre-lettings.

An external assessment of the book value of land held has been carried out and, as a consequence, a small write-down on one piece of land due to market conditions and planning constraints was necessary. Business & Operational review Operational & Business Governance Financial statements Financial

Costain Group PLC Annual Report 2009 / www.costain.com 39 The manner in which the Group manages these risks is described in the Corporate Governance statement (including Principal risks Internal controls and Risk management) on pages 49 to 56.

The Company has a senior executive with a suitably qualified team to ensure that standards and regulations are complied with. They are supported by a programme of training courses designed to keep staff fully aware of their responsibilities. Site audits are carried out monthly and appropriate action is taken against any issues identified. Major incident exposing an inadequate safety regime The nature of the business conducted by the Group requires the adoption and maintenance of a rigorous Health and Safety programme. The Group works on a number of significant and high profile projects and therefore the Health and Safety performance is critical to the success of all areas of the Group’s business. The Group takes the management of both operational and occupational safety extremely seriously. Any failure in Health and Safety performance, which results in a major or significant Economic and market cycles and volatility Health and Safety incident, could be costly for the relevant The Group’s business may be affected by the general risks business in terms of resulting potential liabilities. Furthermore, associated with all companies operating in the same construction such a failure could generate significant adverse publicity and markets as the Group. These markets depend on numerous have a negative impact on the Group’s reputation and its ability factors, many of which are beyond the Group’s control, and the to win new business. This, in turn, could adversely affect the exact effect of which cannot be accurately predicted. Such factors operating, financial and share price performance. include, general economic and political activities, including the extent of any governmental regulation, taxation and interest rates. Regular Safety, Health and Environment visits and on-site training take place to reduce the risk of human error. Any breaches in Monthly forecasts are produced at both the project and Group procedures are reported quickly and acted upon as appropriate. levels, which include the possible impact of a number of major Staff are encouraged to take responsibility for safety in their work factors on the business. A review of risks at various levels within areas. Procedures are reviewed regularly and amended to take the business helps to ensure that the areas are identified properly cognisance of new issues that may arise. and appropriate mitigation is in place. Management reviews key risks regularly. Pension liabilities The Group operated a defined benefit pension scheme, which Senior management and skilled personnel has been closed to new members since 1 June 2005 and was The Group is dependent on members of its senior management closed to future accrual on 30 September 2009. team and a flexible, highly skilled and well-motivated work force and believes its future success will depend in part on its The valuation under IAS 19 for the scheme as at 31 December ability to attract, develop and retain highly skilled management 2009 valued the scheme’s assets at £455.8 million and and personnel. If the Group does not succeed in attracting, liabilities at £560.5 million. This leaves a deficit in the scheme developing and retaining skilled personnel, it may not be able to of £104.7 million. Costain has agreed a plan with the Trustee grow its business as anticipated. The departure from the Group to reduce the deficit over a period of ten years. This plan of any of the Executive Directors or certain senior employees was revised in 2009, resulting in the Group making further could, in the short-term, have a material adverse effect on the contributions. The plan will be reviewed when the next Actuarial Group’s business. valuation of the scheme as at 31 March 2010 is finalised. The annual contribution requirement of the Pension Protection Fund The Company monitors staff turnover closely, especially increases the costs borne by the Group. The value of the deficit the reasons for leaving. Pay and conditions of employment recognised in the Group’s balance sheet pursuant to IAS 19 is are reviewed regularly against the prevailing market and dependent on certain critical assumptions including mortality benchmarked against competitors to ensure that the rates, and pension increases, investment returns and inflation Company remains competitive. and is likely to vary from year to year. Recent and prospective changes in the regulatory environment and funding requirement Environmental, health and safety laws, regulations principles may lead to requirements to increase funding in and standards respect of the scheme in future years (possibly to a level in The Group is subject to a broad range of laws, regulations excess of that needed to achieve solvency on an IAS 19 basis). and standards, including those relating to pollution, the health The powers of the Pensions Regulator may also impact on any and safety of employees, protection of the public, protection plans to make returns of capital from the Group to shareholders. of the environment and the storage and handling of hazardous substances and waste materials. These regulations and For example, the Pensions Regulator has powers to levy standards are becoming increasingly stringent. contribution notices and financial support directions in certain circumstances in order to ensure that additional contributions It is the Group’s policy to require that all of its subsidiaries, are paid into a pension scheme or that other financial support is employees, suppliers and subcontractors comply with applicable put in place to the benefit of a pension scheme. In the event that laws, regulations and standards. However, violations of such the market value of the scheme’s assets declines in relation to laws, regulations and standards, in particular, environmental its assessed liabilities, the Group may be required to increase its and health and safety laws could result in restrictions on the contributions to cover any further funding shortfalls. This could operations of the Group’s sites, damages, fines or other have an adverse impact on the Group’s operational results and sanctions, increased costs of compliance, potential reputational cash flow. damage and potential loss of future contracts.

40 Costain Group PLC Annual Report 2009 / www.costain.com The Board reviews the options regarding what actions Failing to win contracts Costain could take to limit its long-term exposure and consults If the Group failed to win major work from a key client or professional advisors, as necessary. funding was not available on projects where the Group had been appointed preferred bidder, this could cause short-term revenue Change of Government policy and profitability issues. The Group is always aware of this and Certain of the Group’s operations are dependent on the seeks a balanced client base. current UK Government’s policy with regard to improving public infrastructure, buildings and services, notably in the education, Contract negotiations highways, health and nuclear sectors. The UK Government The Group’s contracts may require extra or change order work may decide in future to change its priorities and programmes, as directed by the customer even if the customer has agreed including reducing present or future investment in areas in which in advance on the scope or price of the work to be performed. the Group would expect to compete for work. Any reduction This process may result in negotiations over whether the work in such Government investment and funding would be likely to performed is beyond the scope of the work included in the adversely affect the Group’s future revenues and profitability

original project plans and specifications or, if the customer agrees Costain About in the relevant sectors. that the work performed qualifies as extra work, the price the customer is willing to pay for the extra work. Even when the Key factors, which may affect the Company strategy, are kept customer agrees to pay for the extra work, the Group may be under regular review by senior management and action taken required to fund the cost of such work for a period of time until where potential workload shortfalls are identified. the change order is approved and funded by the customer.

Risk of incorrectly budgeting/costing The financial status of all contracts is reviewed regularly and long-term contracts terms and conditions checked to ensure variations can only If the Group is unable to accurately estimate the overall risks, be issued that cover a similar type of work. revenues or costs on a particular contract, then a lower than anticipated profit may be achieved or a loss incurred on such Risk of missing deadlines contracts. The Group generally enters into four principal types of The construction industry is highly schedule driven, and failure contracts with clients: fixed price contracts; ‘cost plus’ contracts; to meet schedule requirements within contracts could adversely framework contracts with clients that span a number of years affect the Group’s reputation and/or exposure to financial liability. and incorporate an agreed mechanism for bearing costs and Many of the Group’s contracts are subject to specific completion Responsibility Corporate sharing profits; and long-term PFI projects. schedule requirements with liquidated damages charged in the event the construction schedules are not achieved. Failure to A significant proportion of the Group’s business depends for its meet any such schedule requirements could damage the profit on costs being controlled and projects being completed on Group’s reputation within the industry and client base, as well time, such that costs are contained within the pricing structure of as incurring significant liquidated damages. The monthly PMR the relevant contract. review discusses progress against programme, reasons for any delay and actions that need to be taken to avoid liquidated ‘Target costs’ and ‘cost plus’ contracts provide for damages. reimbursement of the costs required to complete a project, but generally have a lower base fee and an incentive fee based on Insurance cost and/or scheduled performance. If actual costs exceed the The Group believes it has robust, comprehensive and adequate revenues available under such a contract or are not allowable insurance cover but recognises that a claim could be made under the provisions of the contract, Costain may not receive against it, which exceeds the limits of insurance cover or is in

reimbursement for all of these costs. respect of a matter that is uninsurable or the insured incident review Operational & Business is subject to a large deductible. In those circumstances, the Cost overruns, whether due to inefficiency, poor design (where Group could suffer financial loss. the contractor has design responsibilities), faulty estimates, cost escalation, and/or cost overruns by subcontractors or other Insurance deductibles and any difference in cover are considered factors, result in lower profit or a loss on a project. A significant at tender stage. Through following Costain’s best practice number of contracts are based in part on cost estimates that are processes, insurable incidents should be reduced. Procedures subject to a number of assumptions. If estimates of the overall are in place to ensure potential claims are reported quickly for risks, revenues or costs prove inaccurate or circumstances assessment. change, then a lower profit or a loss on the contract may result. Competition To mitigate this risk, experienced and qualified staff are Contractors are required to compete for new work, which is used to prepare bids and these are subject to internal review won through a process of competitive tendering or bilateral before submission. A clear understanding of the customers’ negotiation. A contractor’s reputation, prior experience with the expectations and a sound relationship with key suppliers is the client and pricing will all have a bearing on gaining new work. basis of this approach. During the life of a contract, regular The failure by the Group to compete effectively on these criteria Governance Project Manager’s Report (PMR) meetings and end forecast could reduce the Group’s profitability. meetings take place to discuss safety, progress, quality, cost, financial performance, risks, etc. Costain, by completing projects ahead of, or on programme, safely, to quality and cost, seeks to be awarded new contracts by its clients through consistently performing to a high standard. These issues are monitored monthly through the PMR and clients are asked to complete performance questionnaires so that any shortcomings can be rectified. Financial statements Financial

Costain Group PLC Annual Report 2009 / www.costain.com 41 Principal risks continued

Subcontractor and supplier failure The Group is reliant on its supply chain. If a subcontractor or supplier of goods or services failed financially or was responsible for late or inadequate delivery or poor quality of work on a project, then it could damage the Group’s reputation and/or cause it to suffer financial losses.

The list of preferred suppliers is reviewed regularly and amended where appropriate and includes more than one supplier under each major key category trade. In addition, measures are in place, both at site and at Group level, to take action in the case of a failure in the supply chain. Risk registers are updated monthly and include mitigation actions. Loss of IT systems The Group is dependent on IT systems for the delivery of its business. The Group believes that its IT systems are reliable and well protected but recognises that such systems need constant updating and maintenance because their failure could cause financial loss to the Group as well as damage to its brand and reputation.

A senior executive is responsible for the IT systems and has a suitably qualified team in support. Critical areas are subject to testing and include rapid recovery as well as sound data backup procedures. Procurement delays Certain Government-related projects on which the Group may work may require relevant approvals from government ministers or senior civil servants. It is possible that, due to difficulties in obtaining such approvals, projects may be delayed before procurement has started, during the tender stage or during the period between the appointment of a preferred bidder and the exchange of contracts. These matters are likely to be beyond the control of the Group and any resulting delays could affect future revenue streams of the Group and have an adverse impact on the Group’s businesses, results of operations and financial condition.

Costain operates in several sectors and for a number of blue- chip companies. Future market trends are monitored by the Group Strategy and Business Development Director and where shortcomings are seen, further work is sought or we turn to other sectors. Availability of Bonding and Banking Facilities The Group’s long-term contracting business is dependent on it being able to supply performance and other bonds as necessary. This means maintaining adequate facilities from banks and surety bond providers to meet the current and projected usage requirements. In March 2010, the facilities were increased to £345 million.

42 Costain Group PLC Annual Report 2009 / www.costain.com Financial Key Performance Indicators Key Performance • Profit from operations The level of profit from operations is a key measure of performance across all areas and divisions of the Group. Indicators The profit from operations for each segment of the business is reported in detail in the Business & Operational review section of the annual report. The Group’s profit from operation in 2009 increased by 14% to £20.8 million as compared to 2008. • Profit before tax Profit before tax is a key measure for the group and incorporates the interest from cash deposits held and the IAS 19 pension interest charge. The reported profit before tax of £18.1 million in 2009 compares to £23.1 million profit

reported for 2008. Whilst the profit from operations has Costain About increased the decrease in profit before tax is due to the impact of reduced interest on cash balances resulting from the sharp drop in interest rates and an increased IAS 19 pension interest charge resulting from a reduction in the expected return on the net assets of the pension scheme. • Order book Key Performance Indicators The level of secured orders on which work is to be carried The Group uses a range of performance indicators across its out is a key measure for achieving continued profitability and business units. These start with a formal three-year business plan, growth. At the end of 2009, the order book for the Group was which sets out clear strategic targets and objectives and which £2.6 billion, this represented a 30% increase on the £2.0 billion forms the basis of the budget for the following financial year. level as at 31 December 2008. The increase results from a number of significant contract awards in the year. The Board considers the following Financial and Non-financial Key Performance Indicators are the most effective measures for Net cash balance monitoring its objectives: The Group has a positive net cash balance and close monitoring Responsibility Corporate and measurement of cash resources is carried out as part of the Non-financial Key Performance Indicators performance measurement process. As at 31 December 2009, • Accident Frequency Rate (AFR) the net cash balance of the Group was £120.5 million, compared Safety is the number one priority in the Group. We have to £146.6 million as at 31 December 2008. The reduction results both corporate and individual responsibility to ensure that our from timing of receipts and payments and a change in the mix of operations are managed in a safe, healthy and environmentally business in the Group. The average month end cash balance for controlled manner. The common measure in the construction the Group increased to £125.3 million compared to £117.4 million sector for measuring safety performance is the Accident in 2008. Frequency Rate (AFR), which measures the number of lost time incidents per 100,000 of hours worked. The AFR for 2009 for The Group produces for each project a Project Manager’s the Group was 0.16 (2008: 0.17). The decrease reflects the Report (PMR) every month that contains a number of continued attention given to all areas of safety and represents indicators regarding the performance of the project, specifically upper quartile safety performance in the construction sector. information on:

• Staff retention review Operational & Business The retention of staff is fundamental in delivering a quality • Health and Safety – record of any accidents or incidents service to customers. The Group undertakes a number of and safety inspection scores important initiatives to retain key staff, including closely • Customer service – feedback from the customer on the managing their career development. Clear action plans are in Company’s performance place to address items such as customer satisfaction, health • Programme – measurement of actual progress against and safety, reward, training and development and job planned progress satisfaction. The ‘voluntary leavers’ turnover rate was 2.9% • Financial performance – anticipated financial outcome on the for 2009, compared to 9.9% in 2008. project, including analysis of costs to date and to completion • Supply Chain Performance compared to the original budget The Group has a number of key suppliers and is reliant on • Claims and variations their performance in carrying out its business. Consequently • Cash management – measurement of the cash flows on an internal performance measurement tool is used to assess the project the performance of key suppliers on a regular basis against a • Resource levels – measurement of the number of direct number of indicators including Health and Safety, Programme, staff and subcontract staff compared to the level budgeted Commercial and Quality performance. The result of the • Risk management – analysis of the key risks and opportunities Governance assessment is shown as a percentage score which allows on the project comparison against previous scores and other suppliers. The assessment and results are then used as a means to The Group’s divisional and senior management teams review discuss with each supplier their performance and to put in the PMRs each month. place actions to improve performance or reduce the amount of work performed using that supplier if appropriate. In 2009, the average key supplier performance score was 59% which is an improvement from the 52% average in 2008. The objective is to ensure that all key suppliers have a performance of at least 50%. Financial statements Financial

Costain Group PLC Annual Report 2009 / www.costain.com 43 Interest Financial review Net finance expense amounted to £2.7 million (2008: £4.8 million finance income).

The Group has a strong positive cash balance and in 2009 earned interest income from bank deposits and other loans and receivables amounting to £2.1 million (2008: £5.8 million). The reduction in interest income is due to the sharp drop in interest rates to historically low levels in 2009. In addition, the net finance expense included the difference between the expected return on the pension scheme’s assets of £23.4 million (2008: £28.3 million) and the interest cost on the present value of the pension scheme’s liabilities of £28.2 million (2008: £29.3 million); the net difference in 2009 was, therefore, a pension scheme related interest cost of £4.8 million (2008: £1.0 million). Tax The Group’s effective rate of tax was 19.3% of profit before tax (2008: 21.2%). There were benefits during the year arising from the profit on sales of joint ventures and associates which have Results been relieved from the charge to corporation tax and a decrease Profit before tax for the year ended 31 December 2009 was in temporary timing differences, being the utilisation of brought £18.1 million (2008: £23.1 million) on revenue (including the forward tax losses and tax provisions. Group’s share of joint ventures and associates) of £1,061.1 million (2008: £996.0 million). Dividend The Board has recommended a final dividend for the year of Basic earnings per share amounted to 2.3 pence (2008: 2.9 pence 0.55 pence per share (2008: 0.5 pence per share) to bring the earnings per share). total for the year to 0.825 pence per share (2008: 0.75 pence per share), an increase of 10%. Profit from operations for the year was £20.8 million (2008: £18.3 million) representing an increase of 14%. As previously reported, the Group intends to make an additional cash contribution to the pension scheme equal to the amount of Order book increased by 30% during the year to £2.6 billion dividend paid to shareholders. (2008: £2.0 billion). The increase resulted from a number of significant contract awards in the year. Subject to confirmation at the Annual General Meeting, on 6 May 2010, the dividend will be paid on 21 May 2010 to shareholders The Chairman’s statement, Chief Executive’s review and on the register at the close of business on 23 April 2010. Business & Operational review provide further information on the key aspects of the Group’s results for 2009. Shareholders’ Equity Shareholders’ equity decreased in the year to a negative £3.8 million (2008: £33.6 million positive). The movements are detailed in the Consolidated statement of changes in equity in the financial statements.

The most significant change was the increase in the Group’s pension scheme deficit, detailed below.

The negative shareholders’ equity position on the balance sheet does not fundamentally impact on the financial standing of the Group. It is as a result of the defined benefit pension scheme deficit position, which is a long-term liability and does not adversely impact on the short-term financial status of the Group.

Tony Bickerstaff Finance Director 44 Costain Group PLC Annual Report 2009 / www.costain.com Pensions Going Concern At 31 December 2009 the Group’s pension scheme deficit, net of The Directors have acknowledged the guidance ‘Going Concern deferred tax, under IAS 19 was £75.4 million (2008: £36.1 million). and Liquidity Risk: Guidance for Directors of UK Companies 2009’ published by the Financial Reporting Council in October During the year, the pension scheme asset value has increased as 2009. Whilst noting the position reported in the shareholders’ a result of a recovery in the global equity markets, however, this was equity section, the balance sheet shows that the Group has a offset by an increase in liabilities due to an increase in inflationary positive current asset ratio, a substantial positive cash balance expectations and a reduction in the liability discount rate. and no significant debt. The Directors have considered the Group’s financial requirements, its current order book and future The most recently completed actuarial valuation of the scheme opportunities and its available bonding facilities. Having reviewed was performed by the Scheme Actuary as at 31 March 2007 and the latest projections, including the application of reasonable a contribution plan that was expected to eliminate the deficit over downside sensitivities, the Directors believe that the Group is a ten year period was agreed with the Trustee of the Scheme. well placed to manage its business risks successfully despite

The next full actuarial review is scheduled to be undertaken the current uncertain economic outlook. Accordingly, the Group Costain About as at 31 March 2010. It has been agreed with the Trustee of the continues to adopt the going concern basis in preparing these Scheme to increase, with effect from April 2009, the monthly financial statements. company contribution towards funding the Scheme’s deficit by £0.4 million to £0.9 million until the next formal actuarial valuation Treasury of the Scheme, as at 31 March 2010, is finalised. This is in The Group’s treasury and funding activities are undertaken by a addition to our ongoing commitment to match dividend payments centralised treasury function. Its primary activities are to manage with an equivalent cash contribution to the pension fund. the Group’s liquidity, funding and financial risk, principally arising from movements in interest rates and foreign currency exchange The Group’s defined benefit pension scheme was closed to future rates. The Group’s policy is to ensure that adequate liquidity and accrual from 30 September 2009. Costain now operates only a financial resources are available to support the Group’s growth defined contribution scheme for all employees from that date. development, while managing these risks. The Group’s policy is not to engage in speculative transactions. Group Treasury Cash Flow and Borrowings operates as a service centre within clearly defined objectives The net cash position at 31 December 2009 of £120.5 million and controls and is subject to periodic review by internal audit. (2008: £146.6 million) included £0.3 million of borrowings Responsibility Corporate (2008: £0.7 million) and cash held by jointly controlled operations Foreign Currency Exposure of £36.0 million (2008: £34.2 million). Translation exposure: the results of the Group’s overseas activities are translated into sterling at rates approximating to The reduction in the net cash position at the end of the year is a the foreign exchange rates ruling at the dates of the transactions. result of the timing of cash flows at the balance sheet date. The The balance sheets of overseas subsidiaries are translated at average month end cash balance during 2009 was £125.3 million foreign exchange rates ruling at the balance sheet date. (2008: £117.4 million). Transaction exposure: the Group has transactional currency The cash position is affected by monthly and contract specific exposure arising from subsidiaries’ commercial activities cycles and in order to accommodate these cyclical flows, the overseas in currencies other than the subsidiaries’ operating Group seeks to maintain a base cash balance. currencies. In such circumstances, and where appropriate, the Group requires its subsidiaries to use forward currency Liquidity Risk contracts to minimise any currency exposure unless a natural

The Group finances its operations primarily by a mixture of hedge exists elsewhere within the Group. review Operational & Business working capital, funds from shareholders and retained profits. The Directors regularly monitor cash usage and forecast usage Interest Rate Risks and Exposure to ensure that projected financing needs are supported by The Group holds financial instruments for two main purposes: adequate cash reserves or bank facilities. to finance its operations and, currently, only within its PFI investments, to manage the interest rate risks arising from Contract Bonding and Banking Facilities its operations and its sources of finance. Various financial The Group’s long-term contracting business is dependent instruments (for example, trade receivables and trade payables) on it being able to supply performance and other bonds as arise directly from the Group’s operations. With the Group’s necessary. This means maintaining adequate facilities from cash balances and low level of borrowings, the main exposure banks and surety bond providers to meet the current and to interest rate fluctuations within the Group’s operations projected usage requirements. In March 2010, the Group arises from surplus cash, which is generally deposited with renegotiated its contract bonding and banking facilities with the Group’s relationship banks. Within the investments in joint its relationship banks and surety companies. The facilities were ventures and associates, interest rate movements will affect increased to £345 million and extended to a maturity date of the value of swaps classified as cash flow hedges and this 30 September 2013. will impact the Group’s equity. Governance

Tony Bickerstaff Finance Director 10 March 2010 Financial statements Financial

Costain Group PLC Annual Report 2009 / www.costain.com 45 Samer G. Younis BSc, Board of Directors Commander of the Knights – Italian Solidarity Star 3 Non-Executive Director (2009) Aged 48. Vice Chairman and Managing Director of Kharafi National Group; Board Member of ABJ David Allvey FCA, ATII³ Engineering and Contracting Co KSCC (Kuwait), Utilities Development Company (Kuwait), Kuwait Chairman (2008) Jordanian Holding Company (Jordan), SSH Age 65. Director since 2001 and Chairman Consultants (Kuwait), Global Clearing House since January 2008. With a career that Systems (Kuwait), Emirates Utilities Company started in civil engineering and subsequently Holding (UAE) and Heavy Engineering Industries as a Chartered Accountant, he has held & Shipbuilding Co (HEISCO) (Kuwait); and is a positions in major international businesses Trustee of the Arab Forum for Environment and including Group Finance Director for BAT Development. Industries plc, Bank plc and Chief Operating Officer for Zurich Financial Services. He is currently Chairman of Arena Coventry Ltd, Senior Non-Executive Director of Intertek Group PLC and William Hill PLC and a Non-Executive Director of Thomas Cook Group plc and Friends Provident Group. He is a former board member of the UK Accounting Standards Board.

Andrew Wyllie FREng, BSc, MBA, FICE, CEng Chief Executive (2005) Age 47. Non-Executive Director, Scottish Water. Formerly Managing Director of Construction Limited (2001-2005) and a member of the Taylor Woodrow plc Executive Committee. Joined Taylor Woodrow in 1984 and worked on major contracts in Africa, the Middle East, the Far East and the UK.

Saad Shehata resigned as a Non-Executive Director on 23 June 2009 and Mohd Hussein bin Abdul Hamid resigned as a Non-Executive Director on 4 December 2009.

Notes 1 Member of Remuneration Committee 2 Member of Audit Committee 3 Member of Nomination Committee 4 Independent Non-Executive Director 5 Senior Independent Director

46 Costain Group PLC Annual Report 2009 / www.costain.com Michael Alexander BSc, James Morley BSc, FCA 1 2 3 4 John Bryant MA (Cantab), FREng, MSc, FIChem.E, FIET, FIGM, Non-Executive Director (2008) FIM, CEng, DSc (Hon) 1 2 3 4 5 1 2 3 4 Non-Executive Director (2002) CEng, CSci Age 61. Non-Executive Director, the Innovation Non-Executive Director (2007) Group PLC, Clarkson PLC and plc. Age 66. Non-Executive Director, Welsh Water Age 62. Chairman of TGE Marine AG; Formerly Chief Operating Officer, Primary Group Plc and Glas Cymru Limited since 2001. Independent Non-Executive Director of the Limited (2006-2007), Group Finance Director, Formerly Chief Executive of Corus Group Plc UK Payments Council; Executive Director Cox Insurance Holdings Plc (2002-2005), (1999-2000), Chief Executive, British Steel Plc of Lexican Limited; European Advisory Board Group Finance Director, Arjo Wiggins Appleton (1999), Executive Director, British Steel Plc member Landis & Gyr. Formerly Chief Executive, Plc (1999-2001), Group Executive Director (1995-1999) and Non-Executive Director, British Energy PLC (2003-2005); Executive Finance, Guardian Royal Exchange Plc Bank of Wales Plc (1996-2001). Director, MD British Gas Trading and Chief (1990-1999), Deputy Chief Executive and Operating Officer, Centrica PLC (1994-2003); Finance Director, Avis Europe Plc (1976-1989) Non-Executive Chairman Goldfish Bank Limited and Non-Executive Director, the Bankers’ (2002-2003); and Non-Executive Director of the Investment Trust PLC (1994-2008) W S

Energy Savings Trust Limited (1994-2001). PLC (2001-2009), and Trade Indemnity Group Costain About plc (1991-1996). Corporate Responsibility Corporate Business & Operational review Operational & Business Governance The Executive Board The Executive Board has primary authority for the day-to-day management of the Group’s operations, following policies laid down by the Board. It consists of the Executive Directors and certain senior managers and is chaired by Andrew Wyllie, Chief Executive. The other members of the Executive Board are: Tony Bickerstaff David Jenkins (Finance Director) (Managing Director – Environment) Patrick Bruce Alan Kay (Group Commercial Director) (Chief Operating Officer) Tony Bickerstaff FCCA Clive Franks Charles Sweeney Finance Director (2006) (Company Secretary) (Managing Director – Energy & Process) Age 45. Formerly Finance Director of Alistair Handford Alex Vaughan (Managing Director – Community) Taylor Woodrow Construction Limited (PFI Director) statements Financial (2001-2006). Joined Taylor Woodrow in Martin Hunter Stephen Wells 1982 and undertook a number of senior (Group Financial Controller) (Group Strategy and Business Development Director) roles both in the UK and overseas including Darren James Divisional Operations Director prior to (Managing Director – Infrastructure) Tracey Wood becoming Finance Director in 2001. (HR and Legal Director)

Costain Group PLC Annual Report 2009 / www.costain.com 47 48 Costain Group PLC Annual Report 2009 / www.costain.com Corporate Governance statement

Throughout the year to 31 December 2009, except where The independent non-executive directors all have terms and Costain About indicated within this report, the Company complied with the conditions of appointment, which are available for inspection provisions of the Combined Code on Corporate Governance during normal business hours at the Company’s Registered June 2008 (the ‘Combined Code’). The Company is committed Office. An independent non-executive director’s appointment to the principles of corporate governance contained in the is for an initial period of three years, at the expiry of which Combined Code and aims to comply with established best practice, time, the appointment is reviewed to determine whether the wherever possible and where it is in the Company’s interests. appointment should continue. The two major shareholders are each entitled to appoint a non-executive director for so long The Board and Committees as those shareholders each hold 7% of the aggregate nominal The Board currently comprises two executive directors and value of the then issued ordinary share capital of the Company. five non-executive directors of whom one is the Chairman In consequence, the Company did not comply with provision and three are independent non-executive directors (one being A7.2 of the Combined Code, which requires that all non-executive the Senior Independent Director). The Board considers its directors should be appointed for a specific term and be subject independent non-executive directors to be independent in to re-election. The Company’s Articles of Association require that all character and judgement. directors, including nominee non-executive directors, should be subject to election by shareholders at the first opportunity after their Responsibility Corporate No independent non-executive director has: appointment and to re-election thereafter at intervals of no more than three years, thus complying with provision A7.1 of the • been an employee of the Group within the last five years; Combined Code. • had within the last three years, a material business relationship with the Group; Brief biographies of the executive and non-executive • received remuneration other than a director’s fee; directors appear on pages 46 and 47. The biographies illustrate • had close family ties with any of the Group’s advisers, directors that the non-executive directors have a range of business or senior employees; and financial experience that is important and relevant to the • held cross-directorships or had significant links with other management of the Company. directors through involvement in other companies or bodies; • represented a significant shareholder; or The Group is controlled through its Board. The Board’s • served on the Board for more than nine years. main roles are to create value for shareholders, to provide entrepreneurial leadership of the Group, to approve the Group’s

The Combined Code indicates that a Chairman of the Company strategic objectives and to ensure that the necessary financial review Operational & Business should meet the independence criteria on appointment, and the and other resources are made available to enable the Group current Chairman did, but thereafter the test of independence is to meet those objectives. not appropriate in relation to the Chairman. Details of Board members’ attendance at Board meetings, The remaining non-executive director is nominated by major Audit Committee meetings, Remuneration Committee meetings shareholder, Mohammed Abdulmohsin Al-Kharafi & Sons WLL. and Nomination Committee meetings during the year ended Until 4 December 2009, a non-executive director was nominated 31 December 2009 are given in the table overleaf. by York Place Limited, a subsidiary of UEM Builders Berhad, the other major shareholder. UEM Builders Berhad have not yet taken advantage of the right to nominate a successor to the non-executive director who retired on 4 December 2009.

The Company complies with the requirement under provision A3.2 of the Combined Code that at least half of the Board, excluding the chairman, should comprise non-executive directors Governance determined by the Board to be independent, notwithstanding that this requirement is waived in respect of smaller companies such as the Company being a member of the FTSE small cap companies. Financial statements Financial

Costain Group PLC Annual Report 2009 / www.costain.com 49 Corporate Governance statement continued

Board Audit Remuneration Nomination Number of meetings held in the year 8 5 6 3 D P Allvey 8 (Chairman) 5* 4* 3 (Chairman) A Wyllie 8 5* 4* 2* A O Bickerstaff 8 5* 1* 2* J M Bryant 8 5 5 3 M R Alexander 7 2 6 (Chairman) 3 J Morley 8 5 (Chairman) 6 3 S G Younis (appointed 23 June 2009) 4 1* 1* 1

M H Hamid (resigned 4 December 2009) 6 2* - 2 S Y Shehata (resigned 23 June 2009) 3 1* 1* 1

* By invitation.

In addition to the formal Board meetings, the Board held six remuneration and the severance of executive directors’ service ad hoc telephone conference meetings during the year. agreements; and ensuring that a satisfactory dialogue takes place with shareholders. The schedule of matters reserved to Under the Companies Act 2006 (the ‘2006 Act’), a director the Board will be reviewed in 2010. must avoid a situation where he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the The Company has complied with provision A3.3 of the Combined Company’s interests. The 2006 Act allows directors of public Code by appointing John Bryant as Senior Independent Director. companies to authorise conflicts and potential conflicts, where The Board decided that the role of the Senior Independent appropriate, and where the articles of association contain a Director should encompass the following: provision to this effect. The 2006 Act also allows the articles of association to contain other provisions for dealing with directors’ • Evaluation and appraisal – meet with the other members of conflicts of interest to avoid a breach of duty. The Articles give the Board without the Chairman present on at least an annual the directors authority to approve such situations. The Company basis in order to evaluate and appraise the performance of annually sends a questionnaire to directors to ensure that the the Chairman. Company had an exhaustive list of the other directorships of each • Succession – chair the Nomination Committee when director, any material share ownerships, and to identify potential the succession to the role of the Chairman of the Board conflicts of interest which might need authorising and requires is being considered. directors to notify the Company when any change occurs. The • Shareholder/stakeholder contact – act as a point of contact for Board (the unconflicted directors) considered potential conflicts shareholders and other stakeholders with concerns which have of interest in the light of the duty to promote the success of the either not been resolved or which it would not be appropriate Company and, in authorising conflicts, considered and imposed to raise through the normal channels of the Chairman, Chief certain terms and conditions on the authorisation. The Company Executive and/or Finance Director. Secretary keeps a record of all disclosures by directors of their • Executive director contact – act as an alternative point of outside interests and the terms and conditions of authorisation contact for executive directors, if required, in addition to the of conflicts. The Board will review periodically the conflicts normal channels of the Chairman and/or Chief Executive. authorisation to determine whether any authorisation given • Non-executive director contact – meet with the other members should continue on the terms and conditions upon which it of the Board as and when deemed appropriate. has been granted or whether additional terms and conditions should be imposed or whether the authorisation should upon As required by provision A5.3 of the Combined Code, reasonable notice be revoked. all directors have access to the advice and services of the Company Secretary and a procedure also exists whereby any The Board has adopted a schedule of matters specifically director, wishing to do so in furtherance of his duties, may take reserved to itself for decision. The principal matters reserved independent professional advice at the Company’s expense to the Board include: setting Group strategy and approving as required by provision A5.2. In the year ended 31 December the annual budget and medium-term projections; reviewing 2009, no director sought independent professional advice. operational and financial performance; approving major acquisitions, divestments and capital expenditure; reviewing In order to discharge their duties, the directors are provided with the Group’s systems of financial control and risk management; full and timely access to papers prior to Board meetings and the ensuring that appropriate management development and directors are free to seek any further information they consider succession plans are in place; reviewing the environmental, necessary. In addition, between Board meetings, non-executive health and safety performance of the Group; approving directors have access to the Chief Executive, Finance Director appointments to the Board and the appointment of the Company and Company Secretary in order to progress the Company’s Secretary; approving policies relating to executive directors’

50 Costain Group PLC Annual Report 2009 / www.costain.com business. The non-executive directors also receive a weekly The Chairman’s other significant commitments during 2009 Costain About report from the Chief Executive and monthly management are disclosed in the Chairman’s biographical details (provision accounts, certain internal audit reports and regular management A4.3 of the Combined Code). reports and information, which enable them to scrutinise the Group’s and its management’s performance against agreed In accordance with provision A1.5 of the Combined Code, objectives. the Company has in place Directors’ and Officers’ Insurance in respect of the directors’ duties as directors. On appointment, the directors, as required by provision A5.1 of the Combined Code, take part in an induction The principal Board Committees are the Audit Committee, programme, where they receive information about the Group, the Remuneration Committee and the Nomination Committee. the role of the Board and the matters reserved for its decision, Current members of the Audit Committee are Mr Morley as the terms of reference and membership of the principal board Chairman, Mr Bryant and Mr Alexander, who have all been committees and the powers delegated to the committees, members throughout the financial year ended 31 December the Group’s corporate governance practices and procedures, 2009. The Company complies with provision C3.1 of the and the latest financial information about the Group. As to Combined Code. The Audit Committee has established written the continuing education of the executive and non-executive terms of reference, which were last reviewed, revised and Responsibility Corporate directors, Board members, independent of any formal training re-issued on 9 September 2008. Details of the attendance arranged by the Company, are encouraged to attend seminars at Audit Committee meetings in 2009 are given in the table on and conferences on issues relevant to their appointment as page 50. The executive directors, the external auditors, the Head directors of a public company, particularly matters concerned of Internal Audit and the Group Financial Controller attend all with corporate governance, audit and remuneration issues. meetings by invitation. The Audit Committee regularly meets privately with the external auditors and internal auditors. The The Board has established a formal process for the evaluation Company Secretary is the Secretary to the Audit Committee. of the performance of the Board and its principal committees. Since the process was introduced, the evaluations have The Company considered that it had in Mr Morley, as Chairman either been performed using independent advisers or by using of the Audit Committee, an appropriate person possessing what questionnaires which were generated internally. In 2009, the the Smith Report describes as recent and relevant experience. evaluation was conducted by a third party consultant (the Mr Morley, a chartered accountant, was Finance Director, Avis ‘Consultant’). The review covered some nine areas of Board Europe PLC (1976-1989), Group Executive Director, Finance, effectiveness, including the role and composition of the Board, Guardian Royal Exchange Plc (1990-1999), Group Finance review Operational & Business strategy, management of the business of the Board, stakeholder Director, Arjo Wiggins Appleton Plc (1999-2001) and Group engagement, sub-committees and risk. Board members were Finance Director, Cox Insurance Holdings Plc (2002-2005). invited to complete a questionnaire, which was followed up by an interview which probed the views expressed in the replies Under its terms of reference, the Audit Committee monitors to the questionnaire and the evidence supporting them. The the integrity of the Group’s financial statements and any Consultant also reviewed documentation relating to the Board formal announcement relating to the Group’s performance. and committees, including the schedule of matters reserved for The Committee is responsible for monitoring the effectiveness the Board, the terms of reference of the committees, the agendas of the external audit process and making recommendations and minutes covering the majority of meetings of the Board and to the Board in relation to the appointment, re-appointment committees in 2009 and the corporate strategy. The Consultant and remuneration of the external auditors. It is responsible for also sat in on a Board meeting and Audit Committee meeting. ensuring that an appropriate relationship between the Group The Consultant’s review was debated in a special meeting of and the external auditors is maintained, including reviewing the Board with the Consultant present and the Board adopted non-audit services and fees. The Audit Committee also reviews a number of the proposals to improve its effectiveness. the Group’s system of internal controls and the processes for management of the risks facing the Group. The Committee Governance The Company did not comply with parts of provision A6.1 of reviews the effectiveness of the internal audit function and the Combined Code in that the Chairman, during 2009, did not is responsible for approving, in consultation with the Chief undertake an individual appraisal of each director as this was Executive, the appointment and termination of the head of that encompassed in the review undertaken by the Consultant referred function. The Committee reviews its terms of reference and its to above. However, the Chairman did engage in regular dialogue effectiveness from time to time and recommends to the Board with directors, which enabled him to refine his assessments any changes required as a result of the review. The Committee’s of individual directors and guide them on future performance. terms of reference are available from the Company Secretary The Company does comply with parts of provision A6.1 of the and are published on the Company’s website. Combined Code in that a performance evaluation was undertaken on the Chairman. The Chairman does hold meetings with the non-executive directors without the executive directors being present, as required by provision A1.3 of the Combined Code. Financial statements Financial

Costain Group PLC Annual Report 2009 / www.costain.com 51 Corporate Governance statement continued

In 2009, the Audit Committee discharged its responsibilities by: The process of self-certification and hierarchical reporting, which is in place, provides for a documented and auditable trail • reviewing the Group’s draft financial statements and interim of accountability. These procedures are relevant across Group results prior to Board approval and reviewing the external operations and provide assurance to senior management and, auditors’ detailed reports thereon; finally, to the Board. Internal Audit also provides assurance as to • reviewing the Group’s draft interim management statements the operation and validity of the systems, processes and checks prior to Board approval; within the internal control environment. • reviewing the appropriateness of the Group’s accounting policies; The Chairman of the Audit Committee is one of the individuals • reviewing and approving the audit fee and reviewing non-audit named in the Company’s Public Interests Disclosure Policy fees payable to the Group’s external auditors; (whistle-blowing procedures) to whom employees and third • reviewing the external auditors’ plan for the audit of the parties may communicate any wrongdoing, which they believe Group’s financial statements (this plan includes the audit has occurred or is about to occur. The Audit Committee has scope, auditors’ assessment of the key risks for the financial wide powers to establish special investigations in the event that statements, confirmation of auditor independence and the any wrongdoing is brought to its notice, in particular, in the case proposed audit fee) and approving the terms of engagement of defalcations, fraud and theft. for the audit; • reviewing and monitoring the external auditors’ independence The Audit Committee monitors the non-audit services and objectivity and the effectiveness of the audit process, being provided to the Group by its external auditors, and taking into consideration relevant UK professional and has developed a formal policy on the provision of non-audit regulatory requirements; services by the external auditors to check this does not impair • reviewing the internal audit function’s terms of reference, its their independence or objectivity, and that the Group maintains work programme, internal audit reports and quarterly reports a sufficient choice of appropriately qualified audit firms. The on its work during the year; policy sets out four key principles that underpin the provision of • reviewing the risks associated with the business; non-audit services by the external auditors: the auditors should • reviewing and monitoring the development of the Group’s not audit their own firm’s work; make management decisions commercial and financial IT systems; and for the Group; have a mutuality of financial interest with the • reviewing the Group’s system of internal controls and its Group; or be put in the role of advocate for the Group. Prior effectiveness, reporting to the Board on the results of the approval of the Audit Committee is required for any services review and receiving regular updates on key risk areas of provided by the external auditors where the fee is likely to be financial control. in excess of £25,000. The Audit Committee reviews all services being provided by the external auditors annually to review the The processes used by the Audit Committee on behalf of independence and objectivity of the external auditors, taking into the Board to review the effectiveness of the system of internal consideration relevant performance and regulatory requirements controls include the following: so that those are not impaired by the provision of permissible non-audit services. • reviewing and agreeing the external and internal audit work plans; Full particulars of the Remuneration Committee are given • monitoring the process for formally identifying, evaluating in the Directors’ remuneration report, which appears on pages and managing any significant risks and opportunities within 63 to 69. The Company complies with that element of provision the business; B2.1 of the Combined Code, which requires that all members • overseeing the establishment of procedures to identify of the Remuneration Committee are independent non-executive and manage perceived and real risks; directors. The Remuneration Committee comprises three • consideration of reports from management and internal independent non-executive directors, namely Mr Alexander and external auditors on the adequacy and effectiveness as Chairman, Mr Morley and Mr Bryant. The Remuneration of the system of internal control, including risk management Committee’s terms of reference were last reviewed, revised systems and any material control weaknesses; and re-issued on 8 October 2009. The Committee’s terms • discussion with management of the actions taken on problem of reference are available from the Company Secretary and areas identified by Board members or in management reports are published on the Company’s website. The Company or in the internal or external audit reports and monitoring Secretary is the Secretary of the Remuneration Committee. the follow-up on any agreed remedial action; and • a review of the self-certification returns on risks and internal controls from the various operations of the Group.

52 Costain Group PLC Annual Report 2009 / www.costain.com The Nomination Committee comprises the Chairman The Company has two major shareholders, who between them Costain About and all non-executive directors. The Chairman is the Chairman control the beneficial interest in 43% of the issued share capital of the Committee. The Combined Code recommends that the of the Company and, also, provided that their shareholding majority of members of the Committee should be independent remains above a certain level, each have the right to appoint a non-executive directors. The Nomination Committee has nominee to sit on the Board of the Company. Currently, only one established written terms of reference, which were last reviewed, of the major shareholders exercises this right. The Company has revised and re-issued on 9 September 2008. The Committee’s approximately 13,000 other shareholders. In 2009, the Company terms of reference are available from the Company Secretary asked shareholders whether they would prefer to receive the and are published on the Company’s website. This Committee Annual Report, Interim Report and other communications from meets, as required, to select and propose to the Board suitable the Company, such as circulars and prospectuses, in paper form candidates for appointment as executive and non-executive or electronically. In common with most other companies, only a directors. The Nomination Committee directs the Board minority of shareholders elected to receive communications in paper effectiveness review and also reviews management training form. The Company has an internet website www.costain.com and succession planning arrangements in respect of senior on which it publishes the Annual Report, Interim Report and management. The Company Secretary is the Secretary of the any other communications which shareholders are to be Nomination Committee. In 2009, the Nomination Committee made aware of, together with ‘copies’ of Stock Exchange Responsibility Corporate met formally on three occasions. Details of the attendance announcements, press releases, a Costain on-line news service at the Nomination Committee meetings in 2009 are given in (which replaced the Company in-house magazine (Blueprint)) the table on page 50. and other information covering the Company’s business. The Annual General Meeting is normally attended by all directors, The Disclosure and Transparency Rules introduced new rules shareholders are invited to ask questions during the meeting regarding the way listed companies manage inside information. and to meet with the directors after the formal proceedings have In consequence, the Company introduced a set of procedures, ended. Shareholders, whose shares are held by nominees, rules and controls to ensure compliance with the Company’s may access communications on the Company’s website. obligations under the Listing Rules (including the obligations under the Disclosure and Transparency Rules) of the United The Company will comply with provision D2.4 of the Combined Kingdom Listing Authority (UKLA). It is recommended good Code by giving 20 working days’ notice of the Annual General practice that each listed company should have a Disclosure Meeting. The Company complied with this obligation in respect Committee. The Company established a Disclosure Committee of the notice for the Annual General Meeting in 2009. The with its own terms of reference that are available from the Company will provide shareholders voting by proxy with the review Operational & Business Company Secretary. The members of the Disclosure Committee option of withholding their vote on a resolution and the Company are the Chairman of the Company, the Chairman of the Audit will publish details of proxies lodged on resolutions where votes Committee, Chief Executive, Finance Director and Group are taken on a show of hands. Financial Controller. The Company Secretary is the Secretary of the Disclosure Committee. The procedures also deal with the insider list process and a code for dealing in securities. Relationship with institutional investors and private investors The Company continues to increase its communication with institutional investors and brokers. At the time of the announcement of the full year and half-year results, presentations are made to brokers’ analysts, the press and institutional investors. In addition, there are meetings with analysts, financial journalists and institutional investors throughout the year. Governance Financial statements Financial

Costain Group PLC Annual Report 2009 / www.costain.com 53 Corporate Governance statement continued

Internal controls and Risk management Risk management Risk management has been an important issue within the Review of internal controls Company for many years but, following the publication of the The Board is responsible for the Group’s system of internal Turnbull guidance, the Company formalised its risk evaluation controls and for reviewing its effectiveness. However, such a processes and at the same time introduced new procedures system can only manage rather than eliminate the risk of failure to to assist in the identification and management of risk. These achieve business objectives and can only provide reasonable, but procedures included a specific project risk management not absolute, assurance against material misstatement or loss. procedure, which among other things requires a Tender Project Risk Register and a Commercial Risk Review of the contract to The Board maintains full control over strategic, financial, be prepared in respect of each contract bid. This identifies key operational and compliance issues. Within the overall objectives risks, the probability of those risks occurring, their impact if they set by the Board, the management of the Group is delegated to do occur and the actions necessary to manage those risks to an the Chief Executive, who is assisted by members of the Executive acceptable level. The risks are divided into four broad categories: Board. The responsibilities of the Executive Board include: safety; technical; operational; and environmental. They are reviewed by the project manager and commercial manager • the development and recommendation of strategic plans for of the project on a continuing basis following contract award. consideration and approval by the Board that reflect the longer term objectives and priorities established by the Board; The Company’s risk register includes opportunities as well • implementation of the strategies and policies of the Group as risks. The Company has also established sector business as determined by the Board; risk registers, which are monitored and updated regularly. • monitoring of the operating and financial results against The Sector Directors submit quarterly reports on the risks and the plans and budgets; opportunities faced by their respective Sectors to the Group • prioritising the allocation of technical, financial and Commercial Director for analysis. The Group Commercial human resources; Director submits a Corporate Risk/Opportunity Register, • developing and implementing risk management which encompasses the Site and Sector Risk Reports, to each systems; and Executive Board meeting with a summary of the main corporate • managing and monitoring health, safety and risks facing the Company. This includes a note of actions taken environmental matters. to reduce the risk profile since the provision of the last report and the most significant risks facing the Company’s operations, The Chief Executive has full authority to act subject to the matters naming the person responsible for their management and the reserved to the Board and to the requirements of Group Policies. steps being taken to mitigate them. The Group Commercial Director also reports to the Audit Committee and with the The Board confirms that there is an ongoing process for Finance Director submits reports to that Committee on the identifying, evaluating and managing the significant risks faced by main corporate risks and opportunities facing the Company. the Group, which has been in place for the year under review and up to the date of approval of the Annual Report. This process The Project Manager is responsible for ensuring that an initial extends not only to projects undertaken solely by subsidiaries of site workshop takes place and there is a full handover from the the Group but also to projects undertaken in joint arrangements tender team. The Regional Systems Managers assist with the risk and by joint ventures and associates. This process is reviewed management inductions and facilitation. Under the Implementing by the Audit Committee on behalf of the Board and accords with Best Practice (IBP) programme, the Systems Managers ensure, the Turnbull guidance. by audit, that both the initial workshop and close-out workshop occur; if not, the deficiency appears on Project Performance The Audit Committee has reviewed the effectiveness of the Assessment Reports. system of internal controls. The review covered all controls, including financial, operational and compliance controls During the currency of the contract, the Risk/Opportunity and risk management. Registers are updated monthly and the top five risks and opportunities are included on the Project Manager’s Report (PMR); these are interrogated at the formal monthly PMR meeting attended by Group senior management, including the Chief Executive, Finance Director, Group Financial Controller and Group Commercial Director and relevant divisional management, including the Managing Director, Commercial Director, and, by invitation, representatives from site teams. In addition, Internal Audit carries out site reviews and circulates reports with further follow-up actions and inspections.

54 Costain Group PLC Annual Report 2009 / www.costain.com The Executive Investment Panel, which has been operating since Internal Audit meets monthly with the Chief Executive, Finance Costain About 2005, is a sub-group of the Executive Board. It is empowered to Director and Group Financial Controller. In addition to reviewing review tender bids and risk mitigations in respect of those bids, the risk based audit plan, these meetings enable Internal Audit including projects with joint venture partners and projects that to outline key findings from recent reviews and to discuss any require equity participation. Part of the purpose of the review is management actions that may result. The effectiveness of the to ensure that the Group is selective when it comes to taking on controls in place, including risk management, forms a key agenda potential liabilities or recognising opportunities. This approach has item. The Head of Internal Audit attends most Audit Committee proved to be successful and has allowed the Group to build its order meetings and reports on the activities of Internal Audit. The Head book in-line with published strategy and its desired risk appetite. of Internal Audit also has unfettered access to the Chairman of the Audit Committee. IBP remains the Company’s risk-based management system focussing on the key business areas: work winning; risk/ Internal Audit also meets with the Business Systems Group on opportunity management; planning and programming; design a quarterly basis. These forums allow Internal Audit to inform management; supply chain management; subcontractor those responsible for developing company systems about key management; temporary works management; and corporate issues and trends from audit assignments, in order to maintain accounting and reporting. These standards are presented as a continuous improvement feed-back process. Internal Audit Responsibility Corporate process flowcharts and are supported by tools and guides, has developed a ‘lessons learned’ register of non-compliances which are available to employees of the Group on the Costain identified, which is communicated to business units to ensure intranet (iCosNet). continuous improvement.

The Company has developed and implemented a new Management reviews the role of insurance in managing risks project management process, focussing on raising minimum across the Group and brings any important issues to the standards in project delivery. To support this process, a new attention of the Board. Project Performance Assessment (PPA) was introduced, which addresses Leadership, Policy and Strategy, People, Resources Operational and Partnerships, as well as Processes (IBP). The PPA scores a Controls and procedures are detailed in Group Policy Statements, project on how well the team plans to tackle something, executes procedure manuals and other written instructions. The procedure its plans and reacts to the results achieved. Results are issued as manuals are reviewed regularly by management and are published graphical reports to senior management, with four traffic lights on iCosNet. A method of navigating the various controls is included showing how well the key areas of Safety, Quality, Programme in training programmes to ensure all project managers are aware of review Operational & Business and Cost are being managed. Benefits of the PPA include: their obligations and accountability. extending the scope for projects to demonstrate improvement; all projects irrespective of size can be assessed using the same In the United Kingdom, the Company has developed operational model; and it provides senior management with an early warning management systems that are accredited to ISO 9001: 2000. indication of project performance and potential project outcome. These systems are designed to set out an operating framework that supports management in the provision of safe construction Internal Audit provides the Audit Committee, the remaining processes of the highest quality. The IBP standards referred members of the Board and corporate and project management to above are incorporated within the Project Management Plan with independent assurance that risks inherent to the business for each new contract and this also forms part of the accredited processes are reasonably controlled. It assists management in management system. The implementation and compliance with assessing the risks the Company faces in its business activities the management system are monitored and audited by Internal and helps management evaluate the effectiveness of internal Audit. In order to maintain the Company’s accreditation, external controls that manage those risks. Internal Audit also promotes audits of the management systems are undertaken twice yearly best practice in risk management processes to ensure delivery by the British Standards Institution. of corporate objectives. Governance The monthly PMR is the key tool for reporting performance at In 2009, Internal Audit conducted project and departmental a project level. Each PMR is completed by the Project Manager reviews in the UK and internationally to appraise and report and is copied to the Chief Executive, Finance Director, Group on the effectiveness of the risk management processes. Commercial Director and the operational Managing Director All reviews carried out were subject to appropriate follow-up and Commercial Director. The information provided in the PMR action, which revisits areas previously subject to audit and includes, safety, health and environmental statistics, cash flow, provides assurance that accepted recommendations have value, cost and profit, claims and variations, risk management, been implemented effectively. The overall assessment is that progress and staffing levels. Guidance notes have been issued a strong risk management culture is continuing to develop on the completion of the PMRs. within the Group. Financial statements Financial

Costain Group PLC Annual Report 2009 / www.costain.com 55 Corporate Governance statement continued

Internal controls and Risk management continued

All projects operate within a controlled framework of best practice, safety, health and environmental guidelines. Execution of and compliance with these systems are monitored by the project management team and audited by Safety, Health and Environmental advisers.

The Board and Executive Board receive reports at each meeting on safety, health and environmental performance and on significant operational matters. The responsibility for ensuring compliance with the Company’s procedures lies with the Executive Board. The Chief Executive is the Board member responsible for Health and Safety. Financial There is a comprehensive annual budgeting system for each business within the Group, which is linked to the annual review of strategy. The annual budget is discussed by the Executive Board and reviewed by the Chief Executive, Finance Director and Group Financial Controller prior to presentation to the Board by the Executive Board for approval. The Company produces monthly a rolling forecast update for the current year, which is compared with the annual budget.

Monthly actual performance of each operation is reviewed by management and reported against budget to the Executive Board and to the Board. Reports cover profit and loss and cash flow with an accompanying narrative on significant issues underlying the financial reports.

The Group Treasurer and Group Taxation Manager report to the Finance Director, who reports to the Audit Committee, from time to time, on any issues of significance to the Group. Compliance The Group’s policies contain a statement on business conduct, which emphasises the legal, ethical and moral standards that have to be employed in all of the Company’s business dealings. The Company expects the highest standards from all employees and key suppliers.

Litigation and other legal matters were controlled in 2009 by the Head of Legal. A legal report is submitted to the Board in the event of a critical legal issue and, subject to that, a review of all litigation with a value above £50,000 is submitted to, and reviewed by, the Board annually. Significant changes in laws and regulations are drawn to the attention of the appropriate staff and training is given where necessary.

The Chairman of the Audit Committee reports the outcome of the Audit Committee meetings to the Board and all Board members receive the minutes of all Audit Committee meetings.

56 Costain Group PLC Annual Report 2009 / www.costain.com Directors’ report

The directors submit to the members their Report and Accounts Mr Samer Younis, a nominee of Mohammed Abdulmohsin Costain About of the Company for the year ended 31 December 2009. Al-Kharafi & Sons WLL, was appointed as a non-executive director on 23 June 2009 to replace Mr Saad Shehata, who The Director’s report of the Company for the year ended had been a non-executive director of the Company since 1997 31 December 2009 is set out on pages 57 to 62 and the Business and who resigned on 23 June 2009. & Operational review (pages 36 to 39), the Principal Risks (pages 40 to 42) and Key Performance Indicators (page 43) are Mr Mohd Hussein bin Abdul Hamid, a nominee of UEM Builders incorporated by reference into this Directors’ report, together with Berhad, resigned as a non-executive director on 4 December the other sections of the Report and Accounts referred to in the 2009. UEM Builders Berhad have not yet exercised their right Directors’ report. to appoint a successor to Mr Hamid.

Activities As Mr Younis was appointed as a non-executive director during The principal activities of the Group are Engineering, Construction, the period since the last Annual General Meeting, the Company’s Maintenance and Land Development. The progress and prospects Articles of Association and the Combined Code on Corporate of the Group’s businesses and the main factors which could Governance require that he retire, and being eligible, offer himself affect the future development and performance of the Group for re-election. In accordance with the Company’s Articles of Responsibility Corporate are set out in the Chairman’s statement (pages 30 and 31), Association and the Combined Code on Corporate Governance, the Chief Executive’s review (pages 32 to 34), the Business & Mr Bickerstaff, being eligible, will offer himself for re-election Operational review (pages 36 to 39), the Principal Risks at the Annual General Meeting. Mr Bickerstaff has a service (pages 40 to 42) and Key Performance Indicators (page 43). agreement with the Company. Mr Younis does not have a service agreement with the Company. Fixed assets The Board is of the opinion that the aggregate market value With regard to the re-election of Mr Bickerstaff, the Chairman of the Group’s land and buildings is in excess of book value has confirmed that, following a performance evaluation, but that this difference is not significant in relation to the affairs Mr Bickerstaff continues to perform effectively and demonstrate of the Group as a whole. commitment of time for Board and committee meetings and other respective duties. Profit and dividends The profit after tax for the financial year ending 31 December No director had any material interest in any contract of

2009 amounted to £14.6 million. An interim dividend of 0.275 significance with the Group during the period under review. review Operational & Business pence per share (2008: 0.25 pence) amounting to £1.74 million Details of directors’ emoluments and interests in shares in the (2008: £1.6 million) was paid on 31 October 2009. The directors Company, including any changes in interests during 2009, are propose to recommend a payment of a final dividend at the contained in the Directors’ remuneration report, which appears rate of 0.55 pence per share (2008: 0.5 pence) amounting to on pages 63 to 69. £3.5 million (2008: £3.2 million). If approved, the dividend will be paid on 21 May 2010 to shareholders registered at close of Related party transactions business on 23 April 2010. Details of transactions with related parties undertaken by the Group during the year are disclosed in Note 25 to the financial Going Concern statements on page 110 and 111. The directors believe, after due and careful enquiry, that the Group has sufficient resources for its present requirements and, Share capital and major shareholders therefore, consider it appropriate to adopt the going concern As at 31 December 2009, the Company’s issued share capital basis in preparing the 2009 financial statements as discussed comprised a single class of ordinary shares. Details of the share on page 45 of the Financial review. capital of the Company as at 31 December 2009 are set out in Note 21 on page 107. Governance Forward looking statements This Annual Report contains forward looking statements. The five-year savings contracts in the Company’s 2004 Save These forward looking statements are not guarantees of future As You Earn Plan matured in December 2009. The Save As performance. Rather, they are based on current views and You Earn Plans had been approved by shareholders at an assumptions and involve known and unknown risks, uncertainties Annual General Meeting held on 24 May 2002. The Company and other factors that may cause actual results to differ from any made a block listing of 10,511,630 ordinary shares of 5 pence future results or developments expressed or implied from the each in the capital of the Company on 30 November 2007 in forward looking statements. Each forward looking statement order to satisfy options granted to employees under the Save speaks only as of its particular date. As You Earn Plans. The Company’s share price at the time of the maturity of the five-year 2004 Save As You Earn Plan was below Directors and directors’ interests the option price for that Plan and, since 1 January 2009, a total Brief biographies of the present members of the Board are given of 22,566 ordinary shares of 5 pence each have been allotted on pages 46 and 47. for a consideration of £6,609.58. Financial statements Financial

Costain Group PLC Annual Report 2009 / www.costain.com 57 Directors’ report continued

At the Annual General Meeting in 2008, the shareholders • Political and Other Charitable Donations policy, which prohibits approved the introduction of a scrip dividend scheme which political donations without Board approval. The Company has authorises the directors to offer and allot ordinary shares in lieu of not made political donations since 1990; a cash dividend to those members who elect to participate in the • Equal Opportunities policy, which provides for non- scrip dividend. In May 2009, 330,328 ordinary shares of 5 pence discrimination and equal opportunities. The policy is directed to each were allotted to shareholders in respect of the final dividend avoiding discrimination based on gender, ethnic origin, religion, for 2008, and 529,756 ordinary shares of 5 pence each were age, disability or sexual orientation. The policy also contains the allotted to shareholders in October 2009, in respect of the interim Company’s code of practice on harassment at work; and dividend for 2009. • Public Interest Disclosure policy (whistleblowing procedure), which encourages employees and their partners to report The issued share capital of the Company as at 31 December wrongdoing by the Company or any of its employees that fall 2009 was £31,712,435.65, consisting of 634,248,713 ordinary short of the business principles of the Group and ensures that shares of 5 pence each. As at 9 March 2010, the Company employees who do report wrongdoing are protected. had been notified, in accordance with the Disclosure and Transparency Rules issued by the Financial Services Authority, Group policies are kept under regular review. of the following interests in its ordinary share capital: Employment and employment policies Mohammed Abdulmohsin Employment is addressed in ‘Corporate Responsibility’ section Al-Kharafi & Sons WLL 138,544,915 21.84% of this report under the heading ‘Our People’. The ‘Achieving Value Through People’ strategic plan has been developed York Place Limited* 138,108,505 21.78% after reviewing the business strategy for the next three years. Gartmore Investments Limited 32,148,621 5.07% By developing interventions that address the people implications Legal & General Group PLC 25,858,465 4.08% of this business strategy, we will help drive superior business results. Our people are the key to Costain being a corporately * UEM Builders Berhad owns 100% of York Place Limited. responsible business, and our people initiatives over the next three years will uphold our values and standards around people, The above holdings are all indirect, being held by nominees by promoting behaviours such as integrity, tolerance, teamwork on behalf of the beneficial owners. and inclusion.

Corporate Responsibility It is our vision over the next three years to have the very best The Company’s Corporate Responsibility section of this report team of people. This is dependent upon the creation of a shared is on pages 14 to 27. culture and work ethic, driven by strong leaders that is sustained through career progression and enhanced through talent Group policies identification and management, personal development, Details of some of the policies are given below: recognition and reward.

• Business Conduct policy, which covers the legal, ethical The identification and management of high potential employees and moral standards that the Group must adhere to in all its and the management of poor performance continue to be key business dealings. It covers conflict of interest and lays down parts of our strategic plan. In 2008/2009, we introduced a stringent guidelines for the receiving and the giving of gifts, comprehensive performance management system to ensure loans and entertainment and makes it clear that the offering that Costain attracts, retains, motivates and develops the talented of a gift (however nominal in value) could constitute bribery people it needs now and in the future. Training continues to and corruption. It deals with the current statutes covering be given to help managers deal with performance issues. corruption in the United Kingdom and the Anti-Terrorism Crime and Security Act 2001, which gives extra-territorial scope Strong, proactive and visible leadership remains the focus within to the statutes covering the United Kingdom and so covers Costain. We will be running a further High Potential Development bribery and corruption of a foreign official, notwithstanding Programme and a new 2020 Board, designed to identify and the act of bribery and corruption is carried out in a country develop individuals on our Graduate Development Programme, or territory outside the United Kingdom. The policy also who could be leaders within Costain in 2020. The Project prohibits anti-competitive behaviour. Management Academy, designed to build project management • Community Involvement policy, which recognises that the work excellence, is now well developed and has been recognised in of the Company impacts on communities throughout the world. the recent Construction News quality awards. It is therefore important for the Group to (i) support employees involved in the community for both business reasons and their Manpower planning is focussed on ensuring that the business personal development; (ii) safeguard both the built and natural has the right people, at the right time on projects, facilitating the environment; (iii) create employment; (iv) encourage enterprise transfer of skills and experience across projects and sectors. Our and promote regeneration in areas of need; (v) contribute next step is to align resource planning, with retention methods, to education and training through true partnerships and (vi) such as talent management and reward. We will bring the develop awareness of the work and values of the Group recruitment and management of weekly paid staff into the and the construction industry, as a whole, as a resource for Human Resources function to ensure a fair and consistent education in the wider community; approach for all Costain people. We will ensure that all people

58 Costain Group PLC Annual Report 2009 / www.costain.com activities continue to be inclusive and that we provide fair access Although this policy is a fundamental part of the Company’s Costain About and participation in training, promotions, reward and recognition, diversity strategy, it will only succeed if it is reinforced by a behavioural and technical competencies. We will continue focussed and structured strategic diversity plan. In order to to encourage and retain entrants into the industry from do this, the Company is committed to: non-traditional backgrounds. • Developing and cascading policies, benchmarking our Costain is committed to providing a working environment that approach to that of our sector; promotes and maintains the wellbeing and good health of our • Recruiting and selecting the most suitable candidates for own staff and other personnel engaged in work for Costain. all roles, minimising the need for external recruitment by There is regular occupational health support on all Costain sites implementing sound development, training, promotion and and offices and all new employees, who are undertaking safety transfer policies and continually reviewing the terms and critical roles are required to undergo a full medical examination. conditions of employment; Also, we implemented random drugs and alcohol testing in 2009. • Providing offers of employment, which ensure that no Group employment on work rated as equivalent or on work of equal We continue to position Costain as ‘Being Number One’ for skills value in terms of effort, skill and decisions made, is treated less and development and to drive our clients’ strategy on this topic. favourably than another on the basis of gender, marital status, Responsibility Corporate We aim to encourage people to develop continuously their skills, age, sexual orientation, disability, religion, colour, nationality broaden their knowledge and widen their experience within the or race; business. We are committed to delivering training that is targeted • Providing promotion opportunities and succession planning; and enhances individual and company performance. This is • Offering training and development on a fair basis to all being aided by the Career Development Review, which for the employees to support them in their jobs, improve first time enables us to ascertain competency, performance, performance and develop the skills necessary for the mobility, ability and aspiration. future of the business; and • Support the continuing employment, to the extent practicable, We implement our National Skills Academy model across our of employees who have become disabled whilst employed by sites as appropriate. This model for work based learning centres the Company, providing training and reasonable adjustments will enable Costain to train local people into jobs at the same time where possible. as raising the skills of our own workforce. The key focus of this model will be around apprentices and supply chain engagement. Companies in all business sectors are looking for effective

During 2010, we will be looking at making available around 20 ways to predict and control the risks involved in providing review Operational & Business apprenticeships and delivering to them a structured development pension arrangements for their employees. Costain is no programme, including key skills, academic study and experience, exception and in 2009, we undertook a review of our pension leading to level 3 qualifications and a wide range of careers in schemes. We worked closely with our Pensions Advisers, and construction, including front line supervision. after full consultation with affected employees, the Costain Pension Scheme and the Costain Group Stakeholder Plan The Company is committed to positive policies, which promote were closed to existing contributory members on 30 September equal opportunities and diversity in employment. The Company 2009. All employees were invited to join the Costain Pension Plan believes that it is in its best business interests to offer both – a Group Flexible Retirement Plan – on 1 October 2009. As part employees and potential employees a fair and consistent of the changes to our pension arrangements, we introduced environment in which they can contribute their best efforts and salary exchange as a more efficient way of making pension talent, in the knowledge that the Company will recruit, select, contributions. We will monitor the impact of the changes to the promote and train people on the basis of merit. pension schemes and the introduction of salary exchange. We will explore further cost effective benefits, particularly in health, The Company will not discriminate on the grounds of race, using salary exchange where possible. gender, disability, nationality, religion, age, sexual orientation, Governance family status or any other irrelevant factor and we will build a All employment policies are reviewed regularly and available culture that values meritocracy, openness, fairness and for staff to view on iCosnet, the Company’s intranet. In 2009, transparency. Using fair, objective and innovative employment we have reviewed our policies on expenses and allowances. practices, as described above, the Company will endeavour to ensure that: Employee involvement The Company provides information to its employees, both of a • all employees and potential employees are treated fairly general company nature and to encourage awareness of financial and with respect at all stages of their employment; and economic factors, which affect the Company in various ways. • all employees have an equal chance to contribute and These include a monthly update to all staff from the Chief Executive, to achieve their potential; and a Costain on-line news service (which replaced the Company • all employees have the right to be free from harassment in-house magazine), information via our electronic mail system, and bullying or any other form of unwanted behaviour. circulation of press releases, management briefings on Company results and a report to employees on the annual accounts of

The Company will support the supply chain and encourage its the Company. statements Financial active commitment to our approach on equality and inclusion.

Costain Group PLC Annual Report 2009 / www.costain.com 59 Directors’ report continued

Employee involvement in the Company’s performance is Research and development encouraged through participation in the Company’s share The Group is involved in research and development in all incentive schemes. sectors in which it operates but specifically in highways, rail, airports, nuclear, energy & process, waste and water. The Employee Consultative Committee (ECC) has now The Group’s engineers and technical staff in these named been running for a year, enabling our people to obtain a better sectors develop and deliver technical advances, processes understanding of, and wider interest in, matters affecting the and innovations in an effort to achieve practical, integrated organisation as a whole; to permit Staff and Management jointly solutions that incorporate the most advanced technologies, to examine and discuss problems of concern to both and to seek, while taking account of the broader regulatory perspective and where possible, mutually acceptable solutions through a genuine seek to resolve all scientific and technological uncertainties. In exchange of views and information. The ECC facilitates discussions undertaking certain elements of this research and development in areas of good practice and performance and provides the work, the Group is supported by arrangements with certain opportunity for members of Staff to suggest areas for performance British universities. improvement or innovation to enhance the competitive position of Costain. The ECC is also the body required by statute to consult on Donations Health and Safety, the Environment, continuity of employment and Group charitable donations of £95,293 (2008: £68,759) were transfer of undertakings. The ECC has recently had its profile raised made during the year. Further information on charitable giving within the business through its involvement in the consultation can be found in the Corporate Responsibility section of this period prior to the change in pension provision. Our objective report. No political donations were made (2008: £Nil). during 2010 is to continue further to raise this committee’s profile within the business. Participation and involvement are encouraged As required by the Large and Medium-sized Companies and through regular management meetings with employees. Groups (Accounts and Reports) Regulations 2008, donations in excess of £2,000 must be reported in the Annual Report: Policy and practice on payment of suppliers £ As a result of the nature of the Group’s business, the contractual Community and Sport 32,907 relationships with suppliers of goods and services and with WaterAid 12,164 sub-contractors vary according to circumstances. It is the East Anglian Children’s Hospice 2,000 Group’s policy to enter into an appropriate form of contractual Business in the Community 5,800 agreement on payment terms when agreeing the terms of each Rainbow Trust Children’s Charity 2,157 transaction and to pay according to those terms. The Group Cherished Memories 3,000 does not follow any particular code or practice for the payment Help for Heroes 2,200 of creditors. In practice, the Group makes every effort to pay Kent Air Ambulance Trust 9,000 accordingly when it can be confirmed that the supplier has CRASH 6,000 provided the goods or services in accordance with the relevant 75,228 terms of the contract. The amount for trade creditors of the major subsidiary trading companies represents 47 (2008: 60) days of * A total of £20,065 was donated in amounts smaller than £2,000 and so are average daily purchases. The Company has no trade creditors not included above. (2008: Nil). Disclosure of information to auditors Significant agreements The directors who held office at the date of approval of this report The directors are not aware of any significant agreements to confirm that, so far as they are each aware, there is no relevant which the Company and/or any of its subsidiaries or associates audit information of which the Company’s external auditors are is a party that take effect, alter or terminate upon a change of unaware; and each director has taken all the steps that he ought control of the Company following a takeover bid, save in respect to have taken as a director to make himself aware of any relevant of the Facility Agreements relating to the Company’s banking and audit information and to establish that the Company’s external surety bonding facilities and that a subsidiary that ceased to be auditors are aware of that information. a subsidiary of the Company would cease to benefit from the Company’s financing arrangements. There are no agreements This confirmation is given and should be interpreted in between the Company and its directors or employees providing accordance with the provisions of Section 418 of the Companies for compensation for loss of office or employment that occurs Act 2006. because of a takeover bid. Auditors KPMG Audit Plc has expressed its willingness to continue in office, as independent auditor of the Company and a resolution to re-appoint will be proposed at the forthcoming Annual General Meeting.

60 Costain Group PLC Annual Report 2009 / www.costain.com Directors’ Indemnity The Board may withhold payment of all or any part of any Costain About There are no subsisting indemnities in favour of directors. dividends or other monies payable in respect of the Company’s shares from a person with a 0.25% interest in a class of the Directors’ conflicts of interest Company’s shares if such a person has been served with a There are procedures in place to deal with directors’ conflicts restriction notice after failure to provide the Company with of interest arising under Section 175 of the Companies Act information concerning interests in those shares required 2006 and such procedures have operated effectively from to be provided under the Companies Acts. 1 October 2008. Variation of Rights Directors’ responsibilities Subject to the Companies Acts, rights attached to any class of The directors’ responsibilities for the financial statements shares may be varied with the written consent of the holders of contained within this Annual Report and the directors’ not less than three-fourths in nominal value of the issued shares confirmations required under DTR 4.1.12 are set out on page 70. of that class (calculated excluding any shares held as treasury shares), or with the sanction of a special resolution passed at a The Takeover Directive requires the disclosure of certain separate general meeting of the holders of those shares. At every information in the Directors’ report. To the extent not disclosed such separate general meeting (except an adjourned meeting), Responsibility Corporate elsewhere in the report, this information is set out below. the quorum shall be one or more persons holding or representing by proxy not less than one-third in nominal value of the issued Rights and obligations attaching to shares shares of the class (calculated excluding any shares held as Subject to applicable statutes (in this section the ‘Companies treasury shares). The rights conferred upon the holders of any Acts’), any resolution passed by the Company under the shares shall not, unless otherwise expressly provided in the Companies Acts and other shareholders’ rights, shares may rights attaching to those shares, be deemed to be varied by the be issued with such rights and restrictions as the Company may creation or issue of further shares ranking pari passu with them. by ordinary resolution decide, or (if there is no such resolution or so far as it does not make specific provision) as the Board Restrictions on transfer of securities in the Company may decide. Subject to the Articles, the Companies Acts and There are no restrictions on the transfer of securities in the other shareholders’ rights, unissued shares are at the disposal Company, except: of the Board. • that certain restrictions may from time to time be imposed by

Voting laws and regulations (for example, insider trading laws); and review Operational & Business Every member and every duly appointed proxy present at a • pursuant to the Listing Rules of the Financial Services Authority general meeting or class meeting has, upon a show of hands, whereby certain employees of the Company require the approval one vote and every member present in person or by proxy has, of the Company to deal in the Company’s ordinary shares. upon a poll, one vote for every share held by him. In the case of joint holders of a share, the vote of the senior who tenders a vote, The Company is not aware of any agreements between whether in person or by proxy, shall be accepted to the exclusion holders of securities that may result in restrictions on the transfer of the votes of the other joint holders and, for this purpose, of securities. seniority shall be determined by the order in which the names stand in the register in respect of the joint holding. Amendment of Articles of Association Unless expressly specified to the contrary in the Articles Restrictions on voting of Association of the Company, the Company’s Articles of No member shall be entitled to vote at any general meeting or Association may be amended by a special resolution of the class meeting in respect of any share held by him if any call or Company’s shareholders. The Company will at the Annual General other sum then payable by him in respect of that share remains Meeting to be held on 6 May 2010 seek shareholders’ approval to Governance unpaid or if a member has been served with a restriction notice adopt new articles of association (the ‘New Articles’) in order to (as defined in the Articles) after failure to provide the Company update the Company’s current articles of association (the ‘Current with information concerning interests in those shares required Articles’) primarily to take account of the coming into force of the to be provided under the Companies Acts. Companies (Shareholders’ Rights) Regulations 2009 and the implementation of the last parts of the Companies Act 2006. The Company is not aware of any agreements between holders of securities that may result in restrictions on voting rights. Dividends and Other Distributions The Company may by ordinary resolution from time to time declare dividends not exceeding the amount recommended by the Board. Subject to the Companies Acts, the Board may pay interim dividends, and also any fixed rate dividend, whenever the financial position of the Company, in the opinion of the Board, justifies its payment. If the directors act in good faith, they are not statements Financial liable for any loss that shareholders may suffer because a lawful dividend has been paid on other shares which rank equally with or behind their shares.

Costain Group PLC Annual Report 2009 / www.costain.com 61 Directors’ report continued

Appointment and replacement of directors Powers in relation to the Company issuing its The directors shall be not less than four (or two under the New own shares Articles) and not more than eighteen in number. The Company The directors may only issue and buy back shares if authorised may by ordinary resolution vary the minimum and/or maximum to do so by the Articles of Association or the shareholders in number of directors. general meeting. At the Company’s Annual General Meeting held on 8 May 2008 shareholders granted an authority to the directors A director shall not be required to hold any shares in the to allot or grant rights over ordinary shares up to an aggregate Company. Directors may be appointed by the Company by nominal amount of £10.47 million such authority to apply until ordinary resolution or by the Board. A director appointed by the 7 May 2013. As at 31 December 2009, no ordinary shares had Board holds office only until the next following Annual General been allotted save for any shares allotted in order to satisfy Meeting of the Company and is then eligible for re-appointment. awards under employee share schemes and the 2008 and The Board or any committee authorised by the Board may 2009 scrip dividends. The directors did not request authority from time to time appoint one or more directors to hold any to allot or to buy back any of the Company’s shares at the last employment or executive office for such period and on such Annual General Meeting in 2009 and they do not propose to terms as they may determine and may also revoke or terminate do so at this year’s Annual General Meeting. any such appointment. Major shareholders At every Annual General Meeting of the Company, any director Details of the major shareholders of the Company are given on who has been appointed by the Board since the last Annual page 58 of the Directors’ report. General Meeting, or who held office at the time of the two preceding Annual General Meetings and who did not retire at Securities carrying special rights either of them, or who has held office with the Company, other No person holds securities in the Company carrying special than employment or executive office, for a continuous period rights with regard to control of the Company. of nine years or more at the date of the meeting, shall retire from office and may offer himself for re-appointment by the Rights under the employee share schemes members. The Company may by special resolution remove any Excellerate HRO Share Plan Services (Guernsey) Limited, as director before the expiration of his period of office. The office Trustee of the Costain Group Employee Trust, holds 0.004% of a director shall be vacated if: (i) he resigns or offers to resign of the issued share capital of the Company as at 31 December and the Board resolve to accept such offer; (ii) his resignation 2009 on trust for the benefit of ‘good leavers’ from the Company is requested by all of the other directors and all of the other who are members of any Save As You Earn Plan and leave the directors are not less than three in number; (iii) he is or has been employment of the Company before the scheme matures. suffering from mental or physical ill health and the Board resolves that his office be vacated; (iv) he is absent without the permission Annual General Meeting of the Board from meetings of the Board (whether or not an The Annual General Meeting of the Company will be held in the alternate director appointed by him attends) for six consecutive East Room at Tate Modern, Bankside, London, SE1 9TG (via the months and the Board resolves that his office is vacated; (v) he River Entrance) on Thursday 6 May 2010 at 11.00 am. becomes bankrupt or compounds with his creditors generally; (vi) he is prohibited by a law from being a director; (vii) he ceases The Notice of Annual General Meeting will be sent in paper form to be a director by virtue of the Companies Acts; or (viii) he is to all shareholders. It will also be available on the Company’s removed from office pursuant to the Company’s Articles. website – www.costain.com. This 2009 Annual Report will be available on the Company’s website. You may recall that the Powers of the directors Company now provides this information in electronic form unless Subject to the Company’s Memorandum of Association you have elected to receive the documents in paper form. For (which will cease to apply in the event that the New Articles are those who elected for paper form, this 2009 Annual Report will approved), the Articles, the Companies Acts and any directions accompany the Notice of Annual General Meeting. given by the Company by special resolution, the business of the Company will be managed by the Board who may exercise all The Notice of Annual General Meeting contains: a letter from the the powers of the Company, whether relating to the management Chairman; the Notice of Annual General Meeting; an explanatory of the business of the Company or not. In particular, the Board note on the proposed resolutions; and, as one of the resolutions may exercise all the powers of the Company to borrow money, relates to the adoption of the New Articles, an explanatory to guarantee, to indemnify, to mortgage or charge any of its note on the principal changes to the Company’s Articles of undertaking, property, assets (present and future) and uncalled Association. capital and to issue debentures and other securities and to give security for any debt, liability or obligation of the Company or of Mr James Morley, the Chairman of the Audit Committee and any third party. Mr Mike Alexander, the Chairman of the Remuneration Committee will be available at the Annual General Meeting.

By Order of the Board

Clive L Franks Company Secretary 10 March 2010

62 Costain Group PLC Annual Report 2009 / www.costain.com Directors’ remuneration report

Introduction contracting sector, to ensure that the remuneration packages Costain About This report, approved by the Board, has been prepared within the Group bear reasonable comparison with those of in accordance with the requirements of the Companies Act other companies of a similar size. The Committee is, however, 2006, (the ‘Act’) and the Listing Rules of the Financial Services conscious that such comparisons must be viewed with caution Authority. The Board has applied the principles of good in order to avoid the risk of an upward ratchet of remuneration governance relating to directors’ remuneration contained within levels without corresponding improvement in performance levels. the Combined Code on Corporate Governance – June 2008 The analysis and comparison exercises referred to earlier are only (‘Combined Code’). one element to assist the Committee in exercising its judgment; the Committee also takes into account personal performance. The Act requires the auditors to report to the Company’s shareholders on the audited information within the report and In early 2009, with the assistance of HNBS, the Committee to state whether, in their opinion, those parts of the report have undertook a review of the reward structure for the executive been prepared in accordance with the Act. The auditors will directors and senior management which resulted in certain report on ‘Long-Term Incentive Plan’, ‘Save As You Earn Share changes to the weightings as between different performance Option Scheme’, ‘pension’, sums paid to third parties and on the targets and the introduction of a wider usage in the calibration tables relating to directors’ remuneration and directors’ interests of annual bonus targets. A deferred share bonus plan was Responsibility Corporate section of this report. Other elements of this report are unaudited. introduced to operate alongside the Long-Term Incentive Plan. The auditors’ opinion is set out on page 71. The overall effect was to enhance the pay for performance principle and to strike a better balance between short term and Remuneration Committee longer term incentives. Subject to corporate performance, this The Remuneration Committee (the Committee) members are can promote alignment through higher levels of share ownership Michael Alexander (Chairman), John Bryant and James Morley. and retention of key executives. Each of these non-executive directors is recognised by the Board as independent and has served throughout the year. The Committee has concluded that the current remuneration policy remains appropriate, and intends to continue with this The Company’s Chairman and Chief Executive attend Committee policy for executive directors and other senior management meetings but by invitation only. They do not attend where their for 2010 and subsequent financial years. individual remuneration is discussed and no director is involved in deciding his own remuneration. Remuneration packages

Remuneration packages for executive directors and other review Operational & Business In 2009, the Committee met six times and details of the member of senior management consist of the following elements: attendance at those meetings are provided in the Corporate Governance statement on page 50. • Basic salary; • Annual bonus; The Committee has authority to obtain advice from external • Deferred share bonus plan; independent remuneration consultants. It is solely responsible • Long-Term Incentive Plan; for their appointment, retention and termination and for approval • Pension provision; and of the basis of their fees and other terms. In the year to • Other benefits. 31 December 2009, the following provided advice to the Committee: Basic salary – salary is the major element of the remuneration package. The Committee reviews in February/March of each • Hewitt New Bridge Street (HNBS) as independent year the salaries of the executive directors and the Company remuneration advisors. HNBS also provided advice to the Secretary, having reviewed the performance of the individuals Company in connection with the closure of the Company’s and, at the same time, gives guidance to the Chief Executive Governance Deferred Benefit Pension Scheme to future accrual; and as to the matters to be taken into account in the salary review • who drafted and advised on the rules of of other senior management and all other employees of the the deferred share bonus plan and associated documentation. Group. The remuneration of the executive directors and other Slaughter and May also provide legal advice to the Company. senior management is targeted broadly at the median position and is determined in the light of the levels of remuneration Remuneration Policy generally within the Company and other companies in the The Committee determines remuneration policy for executive UK-based construction sector. The level of remuneration directors and other senior management with the aim of attracting, also takes account of the executive’s experience, responsibilities motivating and retaining executives of the appropriate calibre and performance. A salary increase, if awarded, is effective and expertise so that the Company is managed successfully from 1 April in each year. for the benefit of its stakeholders. The Committee is aware that it should avoid paying more than is appropriate or necessary. The Board took the decision in early 2009 that in the light of The Committee accepts that total rewards should be set at levels the then current economic climate it would be inappropriate that are competitive in the sector and to assist in determining to increase salaries in 2009. this HNBS carried out an exercise to benchmark remuneration statements Financial packages and their constituent elements with those of comparable organisations, primarily within the UK-based

Costain Group PLC Annual Report 2009 / www.costain.com 63 Directors’ remuneration report continued

The Committee have approved salary increases across the made in the six weeks following the preliminary announcement Company in 2010. This decision was influenced by the of the results for the financial year ended 31 December 2009. performance of the business during the challenges of 2009, the The deferred bonus award will vest on the second anniversary closure of the final salary pension scheme and demotivational of the date of grant. The shares to satisfy the deferred bonus will impact of a second year of a salary freeze at a time when inflation be purchased by a trust on behalf of the Group and so the DSBP is increasing. The basic salaries of the executive directors with will not lead to any dilution of shareholder interest. A condition effect from 1 April 2010 will be: of the vesting of the deferred bonus is that the participants must be in employment with the Company and not under notice Basic salary Basic salary of termination (either given or received) on the date of vesting. at 1 April at 1 April There are carve-outs for good leavers (e.g. death, disability, Executive Director 2009 2010 redundancy, etc). However, if employment ceases for other A Wyllie £375,000 £400,000 reasons then the award lapses. A O Bickerstaff £240,000 £265,000 It is intended that the DSBP includes a mechanism to allow the Annual bonus – an annual bonus scheme is a further component Company to deliver the DSBP awards in a tax-efficient manner of the remuneration package for executive directors and other at no additional cost to the Company by delivering to participants senior management. The targets for the annual bonus are set a combination of HM Revenue & Customs (HMRC) tax-approved at the beginning of the year by the Committee and are reviewed market value share options over a fixed number of shares and with appropriate input from the Audit Committee at the end of non tax-approved market value share options over a fixed value the year. The Chief Executive has a maximum bonus potential of of shares. These two sets of options would be linked, both in 100% of basic salary and the Finance Director has a maximum terms of value and on exercise, and would mirror the same bonus potential of 80% of basic salary. commercial terms as a DSBP award.

For the year ended 31 December 2009, 90% of the executive It is intended that the first awards under the combined directors’ annual bonus metrics were set as measurable financial arrangement will be granted in March 2010, to eligible targets. These metrics included Group earnings before interest employees. and tax, Group overhead costs, committed revenue and health and safety targets. The remaining 10% of the bonus was linked The advantages of the DSBP include: it is a more focussed to personal development goals. Notwithstanding the economic incentive arrangement in that executives are awarded for delivering conditions experienced during the year, the Group’s earnings good performance in the shorter term; it is more retentive in before interest and tax increased by 14% over the previous year that executives know the value of the awards after one year; it and other pre-set targets were met in full. No discretion has been promotes greater alignment with shareholders because after the used and no financial targets have been amended during the grant of the deferred share award the executives own a direct year. This has resulted in Mr Wyllie being awarded a bonus of interest in shares; it has a lower expected accounting cost for £322,500 and Mr Bickerstaff being awarded a bonus of £165,120 the Company; and the combined arrangement allows for greater for 2009. tax efficiencies for the participant and the Company.

The bonus payments are not pensionable and are payable For its inaugural year and in response to the economic in cash. conditions, the executive directors were given a transitional maximum potential of 35% of salary under the DSBP in respect Deferred share bonus plan – the Committee introduced a deferred of the year ended 31 December 2009. This means that the share bonus plan (DSBP) which was approved by the Board in executive directors will be granted a deferred share bonus with 2009. On the introduction of the DSBP, the executive directors’ a value equivalent to 25.2% of their salary in respect of the results entitlement under the LTIP award was reduced from 100% of salary for 2009. For 2010, the executive directors will have a maximum to 50% of salary. The first performance period for the DSBP was potential of 50% of salary under the DSBP. With the reduction of the financial year ending on 31 December 2009. The performance the LTIP grant from 100% of salary to 50% of salary, the overall measure was Earnings Before Interest and Tax (EBIT) for the Group. level of variable remuneration remains broadly the same as in If the EBIT achieved is above £19 million but below £21.5 million 2009 and earlier years. for the year ended 31 December 2009, a nil-cost option would be granted to participants on a sliding scale between 0% and 100% As it has this year in respect of the 2009 DSBP award, the pro rata to the EBIT achieved. The EBIT for the Group for the Committee will disclose on a retrospective basis the EBIT year ended 31 December 2009 was £20.8 million and so the measure for 2010 in next year’s Directors’ remuneration report. measure has been met as to 72%. The number of shares to which a participant in the DSBP will be entitled will be calculated on the Long-Term Incentive arrangements – the Long-Term Incentive basis of the monetary value of the deferred bonus divided by the Plan (LTIP) was approved by shareholders on 24 May 2002. average closing share price for the Group during the month of The LTIP was designed to reward executive directors and December 2009. The grant of the deferred bonus award will be other senior management by reference to the performance of the Group. The LTIP allows for conditional awards to a

64 Costain Group PLC Annual Report 2009 / www.costain.com participant with a maximum face value of up to 100% of basic annual salary at the date of grant of the award. In respect of all Costain About outstanding awards other than the award made in 2009, the Chief Executive and Finance Director are entitled to a number of shares calculated by reference to 100% of their annual salary at the time of grant. In 2009, following the introduction of the DSBP, the Committee decided that the entitlement of the executive directors to conditional awards under the LTIP should be reduced from 100% of their basic salary at the date of grant of award to 50% of their basic salary. The performance condition for each award was earnings per share (EPS) as the Committee considers this to be the most appropriate performance target in order to focus on achieving a demanding business plan.

The performance conditions for unvested awards are as follows: Award made on 18 April 2007 In the event that an EPS of 3.27p was achieved for the financial year ended 31 December 2010, 25% of the award would vest;

In the event that an EPS of 3.71p was achieved for the financial year 31 December 2010, 100% of the award would vest; and

In the event that an EPS was achieved above 3.27p but below 3.71p for the year ended 31 December 2010, an award would vest Responsibility Corporate on a sliding scale between 25% and 100% pro rata to the EPS actually achieved. Award made on 21 April 2008 In the event that an EPS of 3.09p was achieved for the financial year ended 31 December 2010, 25% of the award would vest;

In the event that an EPS of 3.43p was achieved for the year ended 31 December 2010, 100% of the award would vest; and

In the event that an EPS above 3.09p but below 3.43p was achieved for the financial year ended 31 December 2010, an award would vest on a sliding scale between 25% and 100% pro rata to the EPS actually achieved. Award made on 7 April 2009 In the event that an EPS of 2.10p was achieved for the financial year ending 31 December 2011, 15% of the award would vest;

In the event that an EPS of 2.75p was achieved for the financial year ending 31 December 2011, 100% of the award would vest; and review Operational & Business

In the event that an EPS was achieved above 2.10p but below 2.75p for the year ending 31 December 2011, an award would vest on a sliding scale between 15% and 100% pro rata to the EPS actually achieved.

Details of the executive directors’ participation in the LTIP are as follows:

Maximum number of shares subject to award

Granted Lapsed Vested Date At 1 Jan during during during At 31 Dec Exercisable Name of Director Granted 2009 the year the year the year 2009 from A Wyllie 19.09.05 777,715 – 777,715 – – – 21.04.06 696,855 – – – 696,855* – 18.04.07 775,998 – – – 775,998 March 2011 21.04.08 1,546,391 – – – 1,546,391 March 2011 Governance 07.04.09 – 824,175 – – 824,175 March 2012 A O Bickerstaff 10.10.06 382,376 – – – 382,376* – 18.04.07 434,109 – – – 434,109 March 2011 21.04.08 907,216 – – – 907,216 March 2011 07.04.09 – 527,472 – – 527,472 March 2012

Notes (a) The awards, which are expressed as options, are subject to an exercise price of £1. (b) The average closing middle market price of ordinary shares of 5p each in the Company for the dealing day immediately preceding the date of the grant for the 2007 award was 51p, for the 2008 award was 24.25p and for the 2009 award was 22.75p. (c) The number of ordinary shares of 5p each still outstanding and the subject of the 2007 award is 1,210,107 (2008: 1,210,107) and the 2008 award is 2,453,607 (2008: 2,453,607) and the 2009 award is 7,339,788. (d) At 31 December 2009, the derived mid-market price of the ordinary shares of the Company, as advised by the Company’s Brokers, was 24.75p. The range of the share price of the ordinary shares during 2009 was 19.5p to 35p.

* The respective awards to Mr Wyllie and Mr Bickerstaff of 696,855 and 382,376 ordinary shares of 5p each in the Company lapsed when it became apparent statements Financial in March 2010 that the performance target had not been met.

Costain Group PLC Annual Report 2009 / www.costain.com 65 Directors’ remuneration report continued

In May 2007, the Committee introduced the Phantom for members of the Executive Board (excluding the executive directors) and other members of senior management. The rules of the Phantom closely follow those of the LTIP but, whereas the LTIP normally results in the award of shares if performance conditions are met, the Phantom results in the award of cash if the performance target is met. The Phantom is driven by a notional award of shares in the same way as the LTIP but the cash received by the participant is calculated by converting to cash at the time the award matures the value of the notional number of shares that the participant would have received if the performance target is met. The Phantom, which did not require shareholder approval, was adopted by the Company on 9 May 2007. Awards have been made on 14 June 2007 and 21 April 2008 with the same performance targets as apply to the share based awards made to the executive directors in the same year. Following the introduction of the DSBP, no further awards will be made under the Phantom. Save As You Earn A Save As You Earn Share Option Scheme (the Plan) was approved by shareholders at the 2002 Annual General Meeting. All eligible employees and executive directors are entitled to participate in the Plan. The option prices of the shares under the Plan that were impacted by the 2007 rights issue were adjusted in 2007.

The Company granted options on 22 October 2002 at an option price of 17.43p per share and the entitlement to participate was subject to the proviso that the eligible employee had been in the employment of the Company for 12 months. The Company granted options on 21 October 2004 at an option price of 29.29p and participants were not subject to any service qualification. The Company granted options on 18 May 2007 at an option price of 33.30p and participants were not subject to any service qualification. The Company granted options on 23 May 2008 at an option price of 19.60p and participants were not subject to any service qualifications. Mr Wyllie and Mr Bickerstaff participated in the 2008 Plan. The details are given below:

Number of Options At Granted Exercised Lapsed At Date 1 Jan during during during 31 Dec Exercise Exercisable Name of Director granted 2009 the year the year the year 2009 price from A Wyllie 23.05.08 47,959 – – – 47,959 19.60p Jul-Dec 2011

A O Bickerstaff 23.05.08 47,959 – – – 47,959 19.60p Jul-Dec 2011

Details of the grants made under the Plan are shown in Note 20 to the financial statements on pages 103 to 106.

No payments were made to or benefits received by the executive directors during the year under any long-term incentive scheme.

Pension arrangements – neither executive director participated in the Group’s main registered pension scheme, which was closed to the future accrual of benefits with effect from 30 September 2009. Senior management participated in the executive section of the Group’s main registered pension scheme up until 30 September 2009. From 1 October 2009, a new Group Flexible Retirement Plan was set up with the for employees and senior management.

Members of senior management joining the Group on or after 1 October 2009 are offered pension provision on a defined contribution basis through the Group Flexible Retirement Plan and they are covered for a lump sum death in service benefit of four times basic salary through a separate life assurance scheme.

In the case of Mr Wyllie, he is entitled, under his terms of engagement, to an annual pension allowance of 22% of his basic salary. The Company contributes the pension allowance to the Scottish Widows Plc stakeholder pension scheme. The Company contributed a sum of £82,500 (2008: £80,850) towards Mr Wyllie’s pension provision during the year. Mr Bickerstaff is entitled, under his terms of engagement, to an annual pension allowance of 22% of his basic salary. The Company contributes the pension allowance to the Winterthur Life stakeholder pension scheme. The Company contributed a sum of £52,066 (2008: £46,915) towards Mr Bickerstaff’s pension provision during the year.

Life assurance cover of four times basic salary is provided through the Costain Life Assurance Scheme. The annual premiums payable in respect of life assurance for Mr Wyllie and Mr Bickerstaff were respectively £2,531 (2008: £4,410) and £1,568 (2008: £2,559).

Benefits – Benefits comprise primarily of the provision of a company car or car allowance, fuel and medical insurance and the amounts stated exclude the pension and life assurance costs identified separately under ‘Pension Arrangements’. The amounts stated also exclude the cost of permanent health insurance, which is provided by the Group to all staff employees under a general policy with no separately-identifiable costing in respect of individual beneficiaries. The premiums attributable to Messrs Wyllie and Bickerstaff in respect of permanent health insurance, based on a proportion of total cost, were respectively £1,875 (2008: £1,837) and £1,183 (2008: £1,066).

66 Costain Group PLC Annual Report 2009 / www.costain.com Contracts of Service – The executive directors have service contracts that can be terminated by either party on the giving of one Costain About year’s notice. The Remuneration Committee considers that such notice periods are reasonable and fair in the interests of the Group and the individual concerned, having regard to prevailing practice amongst public companies both in the industry in which the Group operates and elsewhere.

There is no provision for payment of predetermined compensation in case of wrongful termination by the Group. The Remuneration Committee also believes that a robust line should be taken on reducing compensation to reflect the departing directors’ obligations to mitigate loss.

Mr Wyllie’s service agreement is dated 25 April 2005 and provides for him to serve the Company as Chief Executive or in such capacity of a like status as the Company may require. Mr Wyllie’s service agreement terminates automatically when he reaches the age of 60 years. Subject to that, Mr Wyllie’s engagement as Chief Executive can be terminated on 12 months’ notice given at any time.

Mr Bickerstaff’s service agreement is dated 3 March 2006 and provides for him to serve the Company as Finance Director or in such other capacity of a like status as the Company may require. Mr Bickerstaff’s service agreement terminates automatically when Responsibility Corporate he reaches the age of 60 years. Subject to that, Mr Bickerstaff’s engagement as Finance Director can be terminated on 12 months’ notice given at any time.

Outside Appointments – The Company encourages executive directors to take an outside appointment, with the prior consent of the Company, in the belief that such appointments broaden their skills and the contribution, which they can make to the Company’s performance. However, not more than one such appointment may be undertaken except in special circumstances. There must be no conflict of interest, and the time to be devoted to the outside appointment must be reasonable in relation to the individual’s commitment to the Company. Fees paid for outside appointments may be retained by the individual concerned. The Company announced on 7 April 2009 that Mr Wyllie had been appointed a Non-Executive Director of Scottish Water. The fee received and retained by Mr Wyllie is £19,872 per annum. Total shareholder return performance graph The graph below shows the Company’s Total Shareholder Return (TSR) performance compared to the FTSE All-Share Index TSR over the last five years, namely the period from 1 January 2005 to 31 December 2009. TSR is defined as share price growth plus review Operational & Business reinvested dividends. The FTSE All-Share Index TSR has been rebased so that it starts at the same TSR point as the Company on 1 January 2005. As a broad index is required for a comparison, the Board is of the opinion that the FTSE All-Share Index is the most appropriate for the Company as the Company is a constituent part of that index.

160

140

120

100

80 Governance

60

40

20

0 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09

Costain Financial statements Financial FTSE All Share

Costain Group PLC Annual Report 2009 / www.costain.com 67 Directors’ remuneration report continued

Directors’ remuneration The aggregate directors’ remuneration for the year ended 31 December 2009 was £1,457,902 as set out in the following table:

Salary/fee Bonus Benefits 2009 2008 Name of Director £ £ £ Total £ Total £ Executive Directors A Wyllie 375,000 322,500 13,314 710,814 723,634 A O Bickerstaff 236,666 165,120 11,814 413,600 391,279

Non-Executive Directors D P Allvey 120,000 – – 120,000 120,000 M H Hamid¹ 36,088 – – 36,088 39,000 M R Alexander 45,000 – – 45,000 44,250 J M Bryant 45,000 – – 45,000 44,250 J Morley 47,500 – – 47,500 46,750 S Y Shehata² 19,500 – – 19,500 39,000 S G Younis³ 20,400 – – 20,400 – Former Directors – – – – 27,389 Total 945,154 487,620 25,128 1,457,902 1,475,552 1 Resigned 4 December 2009. 2 Resigned 23 June 2009. 3 Appointed 23 June 2009. The Company discloses the bonuses above on a payable basis. Mr Wyllie is entitled to a performance related bonus for 2009 of £322,500. Mr Bickerstaff is entitled to a performance related bonus for 2009 of £165,120. No compensation was paid to a former director for loss of office during 2009 (2008: £Nil). Payments made to third parties in respect of directors’ services amounted to £36,088 (2008: £52,639). This figure is included within the directors’ emoluments. There are no alternate directors. The emoluments of the highest paid director were £710,814 (2008: £723,634); both figures exclude attributable pension contributions. Directors’ interests Directors’ interests recorded by the Company are as follows:

Name of Director At 01.01.09 At 31.12.09 D P Allvey a 52,500 52,500 M H Hamid – –+ A Wyllie a 268,009 275,938† b 777,715 – c 696,855 696,855 f 775,998 775,998 g 1,546,391 ,1,546,391 h 47,959 47,959 i – 824,175 A O Bickerstaff a 120,000 120,000 d 382,376 382,376 e 401,495 – f 434,109 434,109 g 907,216 907,216 h 47,959 47,959 i – 527,472 J M Bryant a 90,194 92,861† M R Alexander a 41,232 42,452† J Morley a 50,000 50,000 S Y Shehata – –+ S G Younis –º –

68 Costain Group PLC Annual Report 2009 / www.costain.com Notes to Directors’ interests Costain About (a) Costain PLC ordinary shares of 5p each. (b) Options granted on 19 September 2005 to acquire Costain Group PLC ordinary shares of 5p each under the 2005 Long-Term Incentive Plan. This option lapsed in 2009. (c) Options granted on 21 April 2006 to acquire Costain Group PLC ordinary shares of 5p each under the 2006 Long-Term Incentive Plan. This option lapsed in March 2010. (d) Options granted on 10 October 2006 to acquire Costain Group PLC ordinary shares of 5p each under the 2006 Long-Term Incentive Plan. This option lapsed in March 2010. (e) Options granted on 10 October 2006 to acquire Costain Group PLC ordinary shares of 5p each. This option lapsed in 2009. (f) Options granted on 18 April 2007 to acquire Costain Group PLC ordinary shares of 5p each under the 2007 Long-Term Incentive Plan. (g) Options granted on 21 April 2008 to acquire Costain Group PLC ordinary shares of 5p each under the 2008 Long-Term Incentive Plan. (h) Options granted on 23 May 2008 to acquire Costain Group PLC ordinary shares of 5p each under the 2008 Save As You Earn Share Option Plan.

(i) Options granted on 7 April 2009 to acquire Costain Group PLC ordinary shares of 5p each under the 2009 Long-Term Incentive Plan. Responsibility Corporate º At date of appointment. + At date of resignation. † Messrs Alexander, Bryant and Wyllie participated in the Scrip dividend scheme and during the course of the year were issued with 1,220, 2,667 and 7,929 ordinary shares of 5p each respectively. All interests are beneficial. Particulars of directors’ options are contained in the register of directors’ interests. The basis on which executive directors participate in Long-Term Incentive Plans is decided by the Remuneration Committee, except for the Costain SAYE Scheme which is open to all relevant UK employees. Non-executive directors do not participate in any of these schemes. No options were exercised by directors during the year. Details of all outstanding options are set out in Note 20 to the financial statements on pages 103 to 106. Non-executive directors The independent non-executive directors have letters of appointment. These cover, amongst other things, the initial terms for which the

independent non-executive directors are appointed, a general statement on their role and duties, and the fees they will receive as a review Operational & Business non-executive director. The dates of their original appointment were as follows Date of Expiry of Non-executive Director Appointment current term* David P Allvey 01.11.2001 31.10.2010 John M Bryant 01.02.2002 31.01.2011 Mike R Alexander 25.07.2007 24.07.2010 James Morley 09.01.2008 08.01.2011 Samer G Younis 23.06.2009 22.06.2012 * Subject to election at the AGM following their appointment and subsequent re-election at intervals of no more than three years in accordance with the Company’s Articles of Association. The appointment of an independent non-executive director can be terminated by reasonable notice on either side. At the end of the initial period, the appointment may be continued by mutual agreement. Messrs Allvey, Alexander, Bryant and Morley are not entitled to compensation for loss of office. Governance The nominee non-executive directors, as indicated in the Directors’ Report, hold office for as long as the shareholder nominating them holds a specific percentage of the issued share capital of the Company. The nominee non-executive directors are nevertheless required to stand for re-election in the usual way and are not entitled to compensation for loss of office. Currently, only one of the two major shareholders has appointed a nominee to sit on the Board. Under the terms of reference of the Remuneration Committee, the fee of the Chairman is determined and recommended to the Board following consultation between the non-executive directors acting through the Remuneration Committee and the Chief Executive. The fees payable to all other non-executive directors are recommended to the Board following consultation between the Chairman and the Chief Executive. The fees of the Chairman and the other non-executive directors were to be reviewed annually in October but the Board on the advice of the Committee has decided that the fees payable to the Chairman and the other non-executive directors will be reviewed in February/March in each year at the same time as the employees of the Group and any increase will be effective as from 1 April in each year. The fees were not adjusted in 2009. However, a review was undertaken by HNBS early in 2010 to determine the appropriate level of fees for the Chairman and non-executive directors of the Company. As a result of the advice received from HNBS, it was decided not to adjust the fees in 2010. Financial statements Financial This report was approved by the Board of directors on 10 March 2010 and has been signed on its behalf by: Michael R Alexander Chairman of the Remuneration Committee 10 March 2010

Costain Group PLC Annual Report 2009 / www.costain.com 69 Statement of Directors’ responsibilities

The directors are responsible for preparing the Annual Report We confirm that to the best of our knowledge: and the Group and parent company financial statements in accordance with applicable law and regulations. • the financial statements, prepared in accordance with the Company law requires the directors to prepare the Group and applicable set of accounting standards give a true and fair view parent company financial statements for each financial year. of the assets, liabilities, financial position and profit or loss of the Under that law, they are required to prepare the Group financial Company and the undertakings included in the consolidation statements in accordance with IFRSs as adopted by the EU and taken as a whole; and applicable law and have elected to prepare the parent company • the Directors’ report, the Business & Operational review, the financial statements on the same basis. Principal risks, Key Performance Indicators and the Financial review sections of this report include a fair review of the Under company law the directors must not approve the financial development and performance of the business and the position statements unless they are satisfied that they give a true and fair of the issuer and the undertakings included in the consolidation view of the state of affairs of the Group and parent company and taken as a whole, together with a description of the principal of their profit or loss for that period. risks and uncertainties that they face.

In preparing each of the Group and parent company financial On behalf of the Board statements, the directors are required to: David Allvey Chairman • select suitable accounting policies and then apply them consistently; Andrew Wyllie Chief Executive • make judgments and estimates that are reasonable 10 March 2010 and prudent; • state whether they have been prepared in accordance with IFRSs as adopted by the EU; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the parent company will continue in business.

The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the directors are also responsible for preparing a Directors’ report, Directors’ remuneration report and Corporate governance statement that comply with that law and those regulations.

The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

70 Costain Group PLC Annual Report 2009 / www.costain.com Independent Auditors’ Report to the members of Costain Group PLC

We have audited the Group and parent company financial Opinion on other matters prescribed by Costain About statements of Costain Group PLC for the year ended 31 December the Companies Act 2006 2009 set out on pages 72 to 111. The financial reporting framework In our opinion: that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by • the part of the Directors’ remuneration report to be audited the EU and, as regards the parent company financial statements, has been properly prepared in accordance with the Companies as applied in accordance with the provisions of the Companies Act 2006; Act 2006. • the information given in the Directors’ report for the financial year for which the financial statements are prepared is This report is made solely to the Company’s members, as a consistent with the financial statements; and body, in accordance with Chapter 3 of Part 16 of the Companies • information given in the Corporate governance statement Act 2006. Our audit work has been undertaken so that we might on pages 49 to 56 with respect to internal control and risk state to the company’s members those matters we are required management systems in relation to financial reporting to state to them in an auditor’s report and for no other purpose. processes and about share capital structures is consistent To the fullest extent permitted by law, we do not accept or with the financial statements. assume responsibility to anyone other than the Company Responsibility Corporate and the Company’s members as a body, for our audit work, Matters on which we are required to report by for this report, or for the opinions we have formed. exception We have nothing to report in respect of the following: Respective responsibilities of directors and auditors Under the Companies Act 2006 we are required to report As explained more fully in the Statement of Directors’ to you if, in our opinion: responsibilities set out on page 70, the directors are responsible for the preparation of the financial statements and for being • adequate accounting records have not been kept by the satisfied that they give a true and fair view. Our responsibility is parent company, or returns adequate for our audit have to audit the financial statements in accordance with applicable not been received from branches not visited by us; or law and International Standards on Auditing (UK and Ireland). • the parent company financial statements and the part of Those standards require us to comply with the Auditing Practices the Directors’ remuneration report are not in agreement with Board’s (‘APB’s’) Ethical Standards for Auditors. the accounting records and returns; or • certain disclosures of directors’ remuneration specified by

Scope of the audit of the financial statements law are not made; or review Operational & Business A description of the scope of an audit of financial statements is • we have not received all the information and explanations provided on the APB’s website at www.frc.org.uk/apb/scope/UKP. we require for our audit.

Opinion on financial statements Under the Listing Rules we are required to review: In our opinion: • the directors’ statement, set out on page 57, in relation to going • the financial statements give a true and fair view of the concern; and state of the Group’s and of the parent company’s affairs as • the part of the Corporate governance statement on pages 49 to at 31 December 2009 and of the Group’s profit for the year 56 relating to the Company’s compliance with the nine provisions then ended; of the June 2008 Combined Code specified for our review. • the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU; S McCallion (Senior Statutory Auditor) • the parent company financial statements have been properly for and on behalf of KPMG Audit Plc, Statutory Auditor prepared in accordance with IFRSs as adopted by the EU and 8 Salisbury Square Governance as applied in accordance with the provisions of the Companies London EC4Y 8BB Act 2006; and 10 March 2010 • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006; and, as regards the Group financial statements, Article 4 of the IAS Regulation. Financial statements Financial

Costain Group PLC Annual Report 2009 / www.costain.com 71 Consolidated income statement Year ended 31 December

2009 2008 Notes £m £m Revenue 3 1,061.1 996.0 Less: Share of joint ventures and associates revenue 13 (67.7) (93.4) Group revenue 993.4 902.6

Cost of sales (949.2) (861.3) Gross profit 44.2 41.3

Administrative expenses (22.2) (21.8) Group operating profit 22.0 19.5

Profit on sale of interests in joint ventures and associates 2.0 2.7 Share of results of equity accounted joint ventures and associates 13 (3.2) (3.9) Profit from operations 3 20.8 18.3

Finance income 7 26.0 34.8 Finance expense 7 (28.7) (30.0) Net finance (expense)/income (2.7) 4.8

Profit before tax 4 18.1 23.1 Income tax expense 8 (3.5) (4.9) Profit for the year attributable to equity holders of the parent 14.6 18.2

Earnings per share Basic 9 2.3p 2.9p Diluted 9 2.3p 2.9p

During the year and the previous year, no businesses were acquired. The impact of business disposals in either year was not material and, therefore, all results are classified as arising from continuing operations.

72 Costain Group PLC Annual Report 2009 / www.costain.com Consolidated statement of comprehensive income and expense Year ended 31 December

2009 2008 Costain About £m £m Profit for the year 14.6 18.2

Exchange differences on translation of foreign operations (3.6) 9.7 Cash flow hedges Group: Effective portion of changes in fair value during year (0.4) 0.9 Net change in fair value of cash flow hedges transferred to retained earnings (0.9) 0.1 Tax recognised on changes in fair value 0.4 (0.3) Joint ventures and associates: Effective portion of changes in fair value (net of tax) during year 2.7 (10.9) Disposed of during year (net of tax) 1.9 (0.7) Actuarial losses on defined benefit pension scheme (67.4) (10.5)

Tax recognised on actuarial losses recognised directly in equity 18.9 3.0 Responsibility Corporate Other comprehensive expense for the year (48.4) (8.7)

Total comprehensive (expense)/income for the year attributable to equity holders of the parent (33.8) 9.5

Company statement of comprehensive income and expense The Company does not have any comprehensive income or expense, other than a profit for the year of £2.1 million (2008: loss of £0.8 million). Business & Operational review Operational & Business Governance Financial statements Financial

Costain Group PLC Annual Report 2009 / www.costain.com 73 Consolidated statement of financial position As at 31 December

2009 2008 Notes £m £m Assets Non-current assets Property, plant and equipment 11 11.5 7.7 Intangible assets 12 1.0 1.8 Investments in equity accounted joint ventures 13 27.2 32.2 Investments in equity accounted associates 13 1.6 0.1 Loans to equity accounted joint ventures 13 12.8 9.5 Loans to equity accounted associates 13 2.5 0.9 Other receivables 14 12.7 6.0 Deferred tax 8 34.6 18.9 Total non-current assets 103.9 77.1

Current assets Inventories 2.4 1.6 Trade and other receivables 14 201.9 180.3 Cash and cash equivalents 15 120.8 147.3 Total current assets 325.1 329.2 Total assets 429.0 406.3

Equity Share capital 21 31.7 31.7 Share premium 1.9 1.7 Foreign currency translation reserve 7.0 10.6 Hedging reserve (9.0) (12.7) Retained earnings (35.4) 2.3 Total equity attributable to equity holders of the parent (3.8) 33.6

Liabilities Non-current liabilities Retirement benefit obligations 20 104.7 50.2 Other payables 18 4.5 2.4 Provisions for other liabilities and charges 19 3.1 8.0 Total non-current liabilities 112.3 60.6

Current liabilities Trade and other payables 18 313.3 305.0 Income tax liabilities 8 1.7 1.7 Bank overdrafts 15 0.3 0.4 Interest bearing loans and borrowings 16 – 0.3 Provisions for other liabilities and charges 19 5.2 4.7 Total current liabilities 320.5 312.1 Total liabilities 432.8 372.7 Total equity and liabilities 429.0 406.3

The financial statements were approved by the Board of Directors on 10 March 2010 and were signed on its behalf by:

A Wyllie Director A O Bickerstaff Director

Registered number: 1393773

74 Costain Group PLC Annual Report 2009 / www.costain.com Company statement of financial position As at 31 December

2009 2008 Costain About Notes £m £m Assets Non-current assets Investments in subsidiaries 13 114.5 113.3 Total non-current assets 114.5 113.3

Current assets Trade and other receivables 14 1.6 1.9 Cash and cash equivalents 15 26.3 66.7 Total current assets 27.9 68.6 Total assets 142.4 181.9

Equity Corporate Responsibility Corporate Share capital 21 31.7 31.7 Share premium 1.9 1.7 Other reserve 2.3 1.2 Retained earnings 44.9 47.7 Total equity attributable to equity holders of the parent 80.8 82.3

Liabilities Non-current liabilities Provisions for other liabilities and charges 19 1.5 1.6 Total non-current liabilities 1.5 1.6

Current liabilities Trade and other payables 18 58.0 96.0

Income tax liabilities 8 1.7 1.7 review Operational & Business Provisions for other liabilities and charges 19 0.4 0.3 Total current liabilities 60.1 98.0 Total liabilities 61.6 99.6 Total equity and liabilities 142.4 181.9

The financial statements were approved by the Board of Directors on 10 March 2010 and were signed on its behalf by:

A Wyllie Director A O Bickerstaff Director

Registered number: 1393773 Governance Financial statements Financial

Costain Group PLC Annual Report 2009 / www.costain.com 75 Consolidated statement of changes in equity

Share Share Translation Hedging Retained Total capital premium reserve reserve earnings equity £m £m £m £m £m £m At 1 January 2008 31.4 1.1 0.9 (1.8) (4.2) 27.4 Comprehensive income/(expense) – – 9.7 (10.9) 10.7 9.5 Equity-settled share based payments – – – – 0.5 0.5 Shares issued 0.2 0.5 – – – 0.7 Dividends paid 0.1 0.1 – – (4.7) (4.5) At 31 December 2008 31.7 1.7 10.6 (12.7) 2.3 33.6 At 1 January 2009 31.7 1.7 10.6 (12.7) 2.3 33.6 Comprehensive income/(expense) – – (3.6) 3.7 (33.9) (33.8) Equity-settled share based payments – – – – 1.1 1.1 Dividends paid – 0.2 – – (4.9) (4.7) At 31 December 2009 31.7 1.9 7.0 (9.0) (35.4) (3.8)

Company statement of changes in equity Share Share Other Retained Total capital premium reserve earnings equity £m £m £m £m £m At 1 January 2008 31.4 1.1 0.7 53.2 86.4 Comprehensive expense – – – (0.8) (0.8) Equity-settled share based payments – – 0.5 – 0.5 Shares issued 0.2 0.5 – – 0.7 Dividends paid 0.1 0.1 – (4.7) (4.5) At 31 December 2008 31.7 1.7 1.2 47.7 82.3 At 1 January 2009 31.7 1.7 1.2 47.7 82.3 Comprehensive income – – – 2.1 2.1 Equity-settled share based payments – – 1.1 – 1.1 Dividends paid – 0.2 – (4.9) (4.7) At 31 December 2009 31.7 1.9 2.3 44.9 80.8

There are no significant restrictions on the ability to remit Overseas reserves.

Details of the nature of the above reserves are set out below.

Group Translation reserve The translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations that are not integral to the operations of the Company, as well as from the translation of liabilities that hedge the Group’s net investment in a foreign subsidiary.

Hedging reserve The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions that have not yet occurred. Company Other reserve The Company grants certain of its subsidiaries rights to its equity instruments as part of its share-based payment incentive plans. The impact is recognised within this non-distributable reserve.

76 Costain Group PLC Annual Report 2009 / www.costain.com Consolidated cash flow statement Year ended 31 December

2009 2008 Costain About Notes £m £m Cash flows from/(used by) operating activities Profit for the year 14.6 18.2 Adjustments for: Depreciation of property, plant and equipment 4 2.7 2.1 Amortisation of intangible assets 4 0.9 1.0 Finance income 7 (26.0) (34.8) Finance expense 7 28.7 30.0 Share-based payments expense 5 1.1 0.6 Income tax 8 3.5 4.9 Profit on sales of interests in joint ventures and associates (2.0) (2.7) Share of results of joint ventures and associates 13 3.2 3.9 Amounts written off equity and loans to associate 13 – 0.4

Cash from operations before changes in working capital and provisions 26.7 23.6 Responsibility Corporate

(Increase)/decrease in inventories (0.8) 0.4 Increase in receivables (32.7) (24.7) Increase in payables 9.1 35.5 Movement in provisions and employee benefits (18.4) (11.5) Cash (used by)/from operations (16.1) 23.3 Interest paid (0.5) (0.7) Income tax received 0.1 – Net cash (used by)/from operating activities (16.5) 22.6

Cash flows from/(used by) investing activities Interest received 2.6 6.5 Dividends received from joint ventures and associates 13 0.6 0.7

Additions to property, plant and equipment 11 (7.2) (5.8) review Operational & Business Additions to intangible assets 12 (0.1) (0.1) Proceeds of disposal of property, plant and equipment 0.4 – Proceeds from sales of interests in joint ventures and associates 8.7 5.0 Additions to investments in joint ventures and associates 13 (0.2) – Loan repayments by joint ventures and associates 13 0.7 – Additions to loans to joint ventures and associates 13 (9.7) (11.7) Net cash used by investing activities (4.2) (5.4)

Cash flows (used by)/from financing activities Issue of ordinary share capital – 0.7 Ordinary dividends paid (4.7) (4.5) Repayment of borrowings (0.3) (0.3) Net cash used by financing activities (5.0) (4.1) Governance Net (decrease)/increase in cash, cash equivalents and overdrafts (25.7) 13.1

Cash, cash equivalents and overdrafts at beginning of the year 15 146.9 133.4 Effect of foreign exchange rate changes (0.7) 0.4 Cash, cash equivalents and overdrafts at end of the year 15 120.5 146.9

Financial statements Financial

Costain Group PLC Annual Report 2009 / www.costain.com 77 Company cash flow statement Year ended 31 December

2009 2008 Notes £m £m Cash flows from/(used by) operating activities Profit/(loss) for the year 2.1 (0.8) Adjustments for: Finance income (4.5) (2.5) Finance expense 0.7 1.1 Income tax (0.8) (0.6) Cash used by operations before changes in working capital and provisions (2.5) (2.8)

Decrease/(increase) in receivables 0.5 (0.6) (Decrease)/increase in payables (37.6) 10.8 Movement in provisions – 0.2 Cash (used by)/from operations (39.6) 7.6 Interest paid (1.1) (2.8) Income tax received 0.6 3.1 Net cash (used by)/from operating activities (40.1) 7.9

Cash flows from/(used by) investing activities Dividends received 4.0 – Interest received 0.5 2.5 Additions to investment in subsidiaries (0.1) – Net cash from investing activities 4.4 2.5

Cash flows (used by)/from financing activities Issue of ordinary share capital – 0.7 Ordinary dividends paid (4.7) (4.5) Net cash used by financing activities (4.7) (3.8)

Net (decrease)/increase in cash and cash equivalents (40.4) 6.6

Cash and cash equivalents at beginning of the year 15 66.7 60.1 Cash and cash equivalents at end of the year 15 26.3 66.7

78 Costain Group PLC Annual Report 2009 / www.costain.com Notes to the financial statements

1 General information The Group’s principal business activity involves long-term Costain About Costain Group PLC (‘the Company’) is a public limited contracts with a number of customers, mainly across the United company incorporated in the United Kingdom. The address of Kingdom. To meet its day-to-day working capital requirements, its registered office and principal place of business is disclosed it uses cash balances provided from shareholders’ capital and on the last page of this Annual Report. The principal activities retained earnings. As part of its contracting operations, it is of the Company and its subsidiary undertakings (collectively sometimes required to provide performance and other bonds. referred to as ‘the Group’) are described in the Business & It satisfies these requirements by utilising its committed bonding Operational review section of these financial statements. facilities from banks and surety companies. These facilities, which since the year-end have been increased and extended The consolidated financial statements of the Company for the in term, have financial covenants, including a profit-based one, year ended 31 December 2009 comprise the Group and the which are tested quarterly. Group’s interests in associates, jointly controlled entities and jointly controlled operations. The parent company financial The directors have acknowledged the guidance ‘Going statements present information about the Company as a Concern and Liquidity Risk: Guidance for Directors of UK separate entity and not about its Group. Companies 2009’ published by the Financial Reporting Council in October 2009. The Group has negative shareholders’ equity Responsibility Corporate The financial statements were authorised for issue by the at 31 December 2009 arising from the market movements on directors on 10 March 2010. the Group’s defined benefit pension scheme. This is a long-term liability and does not adversely impact the short-term financial 2 Summary of significant accounting policies requirements of the Group. The directors have considered Both the Company financial statements and the Group these requirements, the Group’s current order book and future consolidated financial statements have been prepared and opportunities and its available bonding facilities. Having reviewed approved by the directors in accordance with International the latest projections, including the application of reasonable Financial Reporting Standards as adopted by the EU (‘Adopted downside sensitivities, the directors believe that the Group is IFRS’) and their related interpretations. On publishing the parent well placed to manage its business risks successfully despite Company financial statements here together with the Group the current uncertain economic outlook. Accordingly, they financial statements, the Company is taking advantage of the continue to adopt the going concern basis in preparing these exemption in Section 408 of the Companies Act 2006 not to financial statements. present its individual income statement and related notes that form a part of these approved financial statements. Accounting policies review Operational & Business The accounting policies set out below have, unless otherwise Basis of preparation stated, been applied consistently by the Group and the Company These financial statements are presented in Pounds sterling, to each period presented in these financial statements. rounded to the nearest hundred thousand. The financial statements are prepared on the historical cost basis, except that The following IFRSs which are effective for the first time have financial assets and derivative financial instruments are stated at been applied in these financial statements. Where adoption is their fair value as required by IFRS. material the effect on the financial statements is detailed below.

The preparation of financial statements in conformity with IFRS • IFRS 8 ‘Operating Segments’ is applicable for the Group’s requires management to make judgements, estimates and financial statements for the year ending 31 December 2009. assumptions that affect the application of policies and reported The application of IFRS 8 does not impact the primary financial amounts of assets and liabilities, income and expenses. The statements. The increased disclosure is set out in Note 3. estimates and associated assumptions are based on historical • IFRS 2 (Amendment), ‘Share-based payments’. The amended experience and various other factors that are believed to be standard deals with vesting conditions and cancellations. Governance reasonable under the circumstances, the results of which form It clarifies that vesting conditions are service conditions and the basis of making the judgements about carrying values of performance conditions only. All cancellations, whether by the assets and liabilities that are not readily apparent from other entity or by other parties, should receive the same accounting sources. Actual results may differ from these estimates. treatment. This has had no material impact on the financial Judgements made by management in the application of IFRS statements. that have a significant effect on the financial statements and • IAS 23 (Amendment), ‘Borrowing costs’. The amendment estimates with a significant risk of material adjustment in the requires an entity to capitalise borrowing costs directly next year are discussed in Note 26. attributable to the acquisition, construction or production of a qualifying asset (one that takes a substantial period of time Going concern to get ready for use or sale) as part of the cost of that asset. The Group’s business activities and the factors likely to affect The option of immediately expensing those borrowing costs its future development, performance and position are set out has been removed. The adoption of this amendment has had in the Business & Operational review section of these financial no impact on the financial statements. statements. The financial position of the Group, its cash flows, liquidity position, borrowing and bonding facilities, use of financial statements Financial instruments and hedging activities, exposure to credit risk and its objectives, policies and processes for managing its capital and financial risk are described in the Financial review section of these financial statements and in Note 17.

Costain Group PLC Annual Report 2009 / www.costain.com 79 Notes to the financial statements continued

2 Summary of significant accounting policies – amounts receivable that may not be recoverable or there are continued further commitments to provide funding. • IAS 1 (Revised), ‘Presentation of financial statements’. (c) Jointly controlled entities are those joint ventures where All non-owner changes in equity are required to be shown control is shared with another entity, established by in a performance statement, but entities can choose whether contractual agreement. Jointly controlled entities are to present one performance statement (the statement of accounted for using the equity method from the date that the comprehensive income) or two statements (the income statement jointly controlled entity commences until the date that joint and statement of comprehensive income). The Group has applied control of the entity ceases. The share of profits or losses are IAS 1 (Revised) from 1 January 2009 and both the income recognised in the income statement. If the share of losses statement and statement of comprehensive income have equals the investment in the entity, no further losses are been presented. recognised, except to the extent that there is an amount • IAS 28 (Amendment), ‘Investments in associates’ (and receivable that may not be recoverable or there are further consequential amendments to IAS 32, ‘Financial Instruments: commitments to provide funding. Presentation’, and IFRS 7, ‘Financial instruments: Disclosures’). (d) Jointly controlled operations are those joint ventures over An investment in an associate is treated as a single asset which joint control exists, established by contractual for the purposes of impairment testing. Any impairment agreement, which are not legal entities. Where a jointly loss is not allocated to specific assets included within the controlled operation exists, then the Group entity involved investment, for example, goodwill. Reversals of impairment records the assets it controls, the liabilities and expenses are recorded as an adjustment to the investment balance it incurs and its share of income. Such jointly controlled to the extent that the recoverable amount of the associate operations are reported in the consolidated financial increases. The adoption of these amendments has had statements on the same basis. Transactions between no impact on these financial statements. Group companies and jointly controlled operations eliminate • IAS 19 (Amendment), ‘Employee benefits’. The amendment on consolidation. clarifies that a plan amendment that results in a change in the (e) Intra-group balances and transactions together with any extent to which benefit promises are affected by future salary unrealised gains arising from intra-group transactions are increases is a curtailment, while an amendment that changes eliminated in preparing the consolidated financial statements. benefits attributable to past service gives rise to a negative past Unrealised gains arising from transactions with jointly service cost if it results in a reduction in the present value of the controlled entities and jointly controlled operations are defined benefit obligation. The definition of return on plan eliminated to the extent of the interest in the entity or assets has been amended to state that plan administration operation. The share of unrealised gains arising from costs are deducted in the calculation of return on plan assets transactions with associates and joint ventures is eliminated only to the extent that such costs have been excluded from against the investment in the associate or joint venture. The measurement of the defined benefit obligation. This share of unrealised losses is eliminated in the same way as amendment has had no effect on these financial statements. unrealised gains, but only to the extent that there is no • IFRIC 14, ‘IAS 19 – The limit on a defined benefit asset, evidence of impairment. minimum funding requirements and their interaction’ was early adopted by the Group in the 2008 financial statements. Currency translation • IFRIC 15, ‘Agreements for construction of real estates’. The Transactions in foreign currencies are translated at the foreign interpretation clarifies whether IAS 18, ‘Revenue’, or IAS 11, exchange rate ruling at the date of the transaction. Monetary ‘Construction contracts’, should be applied to particular assets and liabilities denominated in foreign currencies at the transactions and is likely to result in IAS 18 being applied to statement of financial position date are translated to Pounds a wider range of transactions. As most of the Group’s operations sterling at the foreign exchange rate ruling at that date. Foreign account for revenue under IAS 11, the adoption of IFRIC 15 has exchange differences arising on translation are recognised in not had any significant impact on these financial statements. the income statement.

Basis of consolidation The assets and liabilities of foreign operations, including goodwill (a) The Group’s financial statements include the financial and fair value adjustments, are translated to Pounds sterling at statements of the Company and subsidiaries controlled by the foreign exchange rates ruling at the statement of financial position Company. Control exists where the Company or one of its date. The revenues and expenses of foreign operations are subsidiaries has the power, directly or indirectly, to govern the translated to Pounds sterling at rates approximating to the foreign financial and operating policies of an entity so as to obtain exchange rates ruling at the dates of these transactions. benefits from its activities. In assessing control, potential voting rights that presently are exercisable are taken into Exchange differences arising from the translation of the net account. The financial statements of subsidiaries are included investment in foreign operations and of related hedges are in the consolidated financial statements from the date that recognised directly in equity and those that have arisen since control commences until the date that control ceases. 1 January 2004, the date of transition to IFRS, are presented (b) Associates are operations over which power exists to exercise as a separate component of equity. Cumulative exchange significant influence but not control, generally accompanied differences are released into the income statement upon by a share of between 20% and 50% of the voting rights. disposal. Translation differences that arose before the date Associates are accounted for using the equity method. If the of transition to IFRS in respect of all foreign operations are share of losses equals its investment, the Group does not not presented as a separate component. recognise further losses, except to the extent that there are

80 Costain Group PLC Annual Report 2009 / www.costain.com 2 Summary of significant accounting policies – Rental income is recognised in the income statement on a Costain About continued straight-line basis over the term of the lease. Lease incentives Revenue recognition are recognised as an integral part of the total rental income Revenue is measured at the fair value of the consideration on a straight-line basis over the term of the lease. received or receivable, net of value added tax and Group revenue includes the share of revenue of jointly controlled operations. Pre-contract costs Most of the revenue arises from construction contracts. Costs associated with bidding for contracts are written off as incurred. When it is probable that a contract will be awarded, Construction contracts usually when preferred bidder status is secured, costs incurred Revenue arises from increases in valuations on contracts. Where from that date to the date of financial close are carried forward the outcome of a construction contract can be estimated reliably in the statement of financial position and included in amounts and it is probable that the contract will be profitable, revenue and due from customers for contract work. costs are recognised by reference to the stage of completion of the contract activity at the statement of financial position date. When financial close is achieved on PFI contracts, costs are Stage of completion is assessed by reference to the proportion recovered from the special purpose vehicle and pre-contract of contract costs incurred for the work performed to date relative costs within this recovery that were not previously capitalised are Responsibility Corporate to the estimated total costs, except where this would not be credited to the income statement. When an interest in a special representative of the stage of completion. purpose vehicle is retained and that interest is accounted for as an associate or joint venture, the credit is recognised over the life When it is probable that total contract costs will exceed total of the construction contract to which the costs relate. contract revenue, the expected loss is recognised as an expense immediately. Intangible assets Intangible assets are carried at cost less accumulated Variations and claims are included in revenue where it is probable amortisation and impairment losses. Amortisation begins when that the amount, which can be measured reliably, will be an asset is available for use and is calculated on a straight-line recovered from the customer. When the outcome of a basis to allocate the cost of the assets over their estimated useful construction contract cannot be estimated reliably, contract lives (computer software – generally 3 to 5 years). Subsequent revenue is recognised to the extent of contract costs incurred expenditure on capitalised intangible assets is capitalised only where it is probable those costs will be recoverable. Contract when it increases the future economic benefits embodied in the costs are recognised as expenses in the period in which they specific asset to which it relates. All other expenditure is review Operational & Business are incurred. expensed as incurred.

Construction work in progress is stated at cost plus profit Property, plant and equipment recognised to date less a provision for foreseeable losses and Property, plant and equipment is carried at cost less less amounts billed and is included in amounts due from accumulated depreciation and impairment losses. Where parts customers for contract work. Cost includes all expenditure of an item of property, plant and equipment have different useful related directly to specific projects and an appropriate allocation lives, they are accounted for as separate items. Cost comprises of fixed and variable overheads based on normal operating purchase price and directly attributable costs. Freehold land is capacity. Amounts valued and billed to customers are included in not depreciated. For all other property, plant and equipment, trade receivables. Where cash received from customers exceeds depreciation is calculated on a straight-line basis to allocate cost the value of work performed, the amount is included in credit less residual values of the assets over their estimated useful lives balances on long-term contracts. as follows:

Other revenue Freehold buildings 50 years Governance Revenue from the sale of goods is recognised when the Leasehold buildings Shorter of 50 years or lease term significant risks and rewards of ownership of the goods have Plant and equipment Remaining useful life been transferred to the buyer, the amount of revenue can be (generally 3 to 10 years) measured reliably and it is probable that the economic benefits associated with the transaction will flow to the Group. The assets’ residual values and useful lives are reviewed, and adjusted, if appropriate, at each statement of financial Revenue from services is recognised when the service position date. is provided. Investments – Company Revenue in respect of property development sales is recognised Company investments in subsidiaries are carried at cost less on the transfer to the buyer of the significant risks and rewards impairment losses less any pre-acquisition dividends received. of ownership. This is typically achieved when the legal title is transferred. If at the time that the sale reaches legal completion there remain infrastructure works to complete, the nature and extent of the Group’s continuing involvement is assessed to statements Financial determine whether it is appropriate to recognise revenue. Where the conditions for revenue recognition are met, an appropriate amount is recognised. Amounts deferred in respect of infrastructure works are only recognised when such works are substantially complete. Costain Group PLC Annual Report 2009 / www.costain.com 81 Notes to the financial statements continued

2 Summary of significant accounting policies – Provisions continued A provision is recognised in the statement of financial position PFI investments when there is a legal or constructive obligation as a result of a As IFRIC 12 is not yet mandatory, the Group has opted to past event and it is probable that an outflow of economic benefits continue to apply elements of the approach set out in UK will be required to settle the obligation. If the effect is material, Financial Reporting Standard 5, ‘Reporting the substance provisions are determined by discounting the expected future of transactions’ (‘FRS 5’) in accounting for its interests in PFI cash flows at a pre-tax rate that reflects current market projects, which are all undertaken by jointly controlled entities assessments of the time value of money and, where appropriate, or associates. The investments recognise the FRS 5 finance the risks specific to the liability. debtors relating to concession arrangements at amortised cost, as defined by IAS 39. FRS 5 fixed assets relating to A provision for onerous contracts is recognised when the concession arrangements are accounted for in accordance expected benefits to be derived from a contract are lower with IAS 16 property, plant and equipment. The impact of than the unavoidable cost of meeting the obligations under adopting IFRIC 12 is not expected to be significant. the contract.

The PFI associates and jointly controlled entities use derivatives Taxation to manage the financial risks to which they are exposed in relation The tax expense represents the sum of United Kingdom to changes in interest rates and the Retail Price Index (‘RPI’). corporation tax and Overseas tax currently payable and Changes in the fair value of derivative financial instruments that Deferred tax. are designated and effective as hedges of future cash flows are recognised directly in equity and the ineffective portion is The tax currently payable is based on the taxable profit for the recognised immediately in the income statement. Changes in the year. Taxable profit differs from profit before tax as reported fair value of derivative financial instruments that do not qualify for in the income statement because it excludes items of income hedge accounting are recognised in the income statement as or expense that are taxable or deductible in other years and it they arise. further excludes items that are never taxable or deductible. The liability for current tax is calculated using tax rates and laws that The presentation in the statement of financial position in respect have been enacted or substantively enacted by the statement of of the investments in joint ventures and associates restricts the financial position date. minimum carrying value to £Nil. Where the cost of investment is negative, due to losses incurred, then an amount equal to the Deferred tax is the tax expected to be payable or recoverable on negative position is applied to any outstanding loan balance with differences between the carrying amounts of assets and liabilities the investment or, where future funding commitments exist, a in the financial statements and the corresponding tax bases provision is made up to the value of the commitment. These used in the computation of taxable profit and is accounted for transfers are shown within reclassifications in Note 13. using the statement of financial position liability method. Deferred tax liabilities are generally recognised for all temporary differences Impairment of non-financial assets except for those specific exemptions set out below and deferred The carrying amounts of assets, other than inventories and taxation assets are recognised to the extent that it is probable that deferred tax assets, are reviewed at each statement future taxable profits will be available against which deductible of financial position date to determine whether there is any temporary differences can be utilised. The carrying amount of indication of impairment. If any such indication exists, that deferred tax assets is reviewed at each statement of financial asset’s recoverable amount is estimated. position date. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of An impairment loss is recognised whenever the carrying amount goodwill or other assets and liabilities, other than in a business of an asset, or its cash-generating unit, is less than the combination, in a transaction that affects neither the taxable recoverable amount. Impairment losses are recognised in the profit nor the accounting profit. income statement. Deferred tax liabilities are recognised for temporary differences An impairment loss is reversed if there has been a change in the arising on investments in subsidiaries and interests in joint estimates resulting in the recoverable amount rising above the ventures, except where the Group is able to control the reversal impaired carrying value of the asset. An impairment loss is of the temporary difference and it is probable that the temporary reversed only to the extent that the carrying amount of the assets difference will not reverse in the foreseeable future. Deferred does not exceed the carrying amount that would have been tax is calculated at the tax rates based on those enacted or determined, net of depreciation or amortisation, if no impairment substantially enacted at the statement of financial position date. loss had been recognised. Deferred tax is charged or credited in the income statement except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

Additional taxes arising from the distribution of dividends are recognised at the same time as the liability to pay the related dividend.

82 Costain Group PLC Annual Report 2009 / www.costain.com 2 Summary of significant accounting policies – Pension scheme assets are measured using market values. Costain About continued Pension scheme liabilities are measured using a projected unit Leases method and discounted at the current rate of return on a high Payments made under operating leases are recognised as an quality corporate bond of equivalent term and currency to the expense in the income statement on a straight-line basis over liability. The liability recognised in the statement of financial the lease term. Any incentives to enter into operating leases are position in respect of the defined benefit pension scheme is the recognised as a reduction of rental expense over the lease term present value of the defined benefit obligations less the fair value on a straight-line basis. Operating lease income is credited to of scheme assets at the statement of financial position date. the income statement as it is earned. The increase in the present value of the liabilities of the defined Financial guarantee contracts benefit pension scheme expected to arise from employee service Where the Company enters into financial guarantee contracts is charged to profit from operations in the period. The expected to guarantee the indebtedness of other companies within return on the scheme’s assets and the increase during the period the Group, the Company considers these to be insurance in the present value of the scheme’s liabilities arising from the arrangements and accounts for them as such. In this respect, passage of time are included in finance income and finance the guarantee contract is treated as a contingent liability until expense respectively. Actuarial gains and losses are recognised Responsibility Corporate such time as it becomes probable that a payment under the in the consolidated statement of comprehensive income. guarantee will be required. Obligations for contributions to defined contribution pension Share capital plans are recognised as an expense in the income statement Ordinary shares are classified as equity. Incremental costs as incurred. directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Financial assets and liabilities Financial assets and financial liabilities are recognised in the Dividends Group’s statement of financial position when they become a Dividends are recognised as distributions in the period in which party to the contractual provisions of the instrument. they are declared. Dividends proposed but not declared are not recognised but are disclosed in the note 10 to the financial (a) Financial assets statements. Financial assets are classified as available-for-sale financial

assets, loans and receivables and financial assets classified as review Operational & Business Share-based payments at fair value through profit and loss. The classification depends These comprise equity-settled and cash-settled share-based on the nature and purpose of the financial assets and is compensation plans. determined at the time of initial recognition.

Equity-settled share-based payments are measured at fair value De-recognition of financial assets at the date of grant and the fair value is expensed over the A financial asset is de-recognised only when the contractual vesting period, based on the estimate of awards that will rights to the cash flows from that asset expire; or it transfers eventually vest. For cash-settled share-based payments, a liability the financial asset and substantially all the risks and rewards equal to the portion of the services received is recognised at its of ownership of the asset to another entity. current fair value determined at each statement of financial position date. Fair value is measured by the use of a Effective interest method Black-Scholes option pricing model. The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest IFRS 2 has been applied, in accordance with IFRS 1, to equity income over the relevant period. The effective interest rate is Governance settled share options granted after 7 November 2002 and not the rate that exactly discounts estimated future cash receipts vested at 1 January 2005. (including all fees on points paid or received that form an integral part of the effective interest rate, transaction costs and other Where options are granted over shares in the Company to premiums or discounts) through the expected life of the financial employees of subsidiaries, the Company recognises in its asset, or, where appropriate, a shorter period. Income is financial statements an increase in the cost of investment in recognised on an effective interest basis for debt instruments. its subsidiaries equivalent to the equity-settled share-based payment charge recognised in its subsidiaries’ financial Loans and receivables statements, with the corresponding credit being recognised Loans and other receivables that have fixed or determinable directly in equity. payments that are not quoted in an active market are classified as loans and receivables. Loans and receivables are measured Retirement benefit obligations at amortised cost using the effective interest method, less any A pension scheme is operated in the United Kingdom providing impairment. Interest income is recognised by applying the benefits based on pensionable salary. The assets of the scheme effective interest rate, except for short-term receivables when are held separately from those of the Group. the recognition of interest would be immaterial. statements Financial

Costain Group PLC Annual Report 2009 / www.costain.com 83 Notes to the financial statements continued

2 Summary of significant accounting policies – Hedges are classified as follows: continued Trade and other receivables • Fair value hedges that hedge the exposure to changes in the Trade and other receivables do not carry interest and are stated fair value of a recognised asset or liability; and at their initial value less impairment losses. • Cash flow hedges that hedge exposure to variability in cash flows that is attributable to either a particular risk associated Impairment of financial assets with a recognised asset or liability or a forecast transaction. Estimated recoverable amounts are based on the ageing of the outstanding receivable and individual receivables are provided For fair value hedges, any gain or loss from re-measuring the against when management deem amounts are not collectable. hedging instrument at fair value is recognised in the income statement and any gain or loss on the hedged item is adjusted Cash and cash equivalents against the carrying amount of the hedged item and similarly Cash and cash equivalents comprise cash balances and call recognised in the income statement. deposits. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are For cash flow hedges, the portion of the gain or the loss on the included as a component of cash and cash equivalents for hedging instrument that is determined to be an effective hedge the purpose of the statement of cash flows. is recognised in equity, with any ineffective portion in the income statement. When hedged cash flows result in the recognition Investments of a non-financial asset or liability, the associated gains or Investments are recognised and de-recognised on the trade date losses previously recognised in equity are included in the initial where the purchase or sale of an investment is under a contract measurement of the asset or liability. For all other cash flow whose terms require delivery of the investment within the hedges, the gains or losses that are recognised in equity are timeframe established by the market concerned. Investments transferred to the income statement in the same period in which are measured initially at fair value, plus transaction costs, except the hedged cash flow affects the income statement. financial assets classified as at fair value through profit or loss, which are measured initially at fair value. Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies (b) Financial liabilities for hedge accounting. Any cumulative gain or loss on the hedging Financial liabilities, including borrowings, are initially measured instrument previously recognised in equity is retained in equity at fair value, net of transaction costs. Financial liabilities are until the hedged transaction occurs. If the hedged transaction subsequently measured at amortised cost using the effective is no longer expected to occur, the net cumulative gain or loss interest method, with interest expense recognised on an effective recognised in equity is transferred to the income statement. yield basis. Where borrowings are the hedged item in an effective fair value hedge relationship, the carrying value is adjusted to Any gains or losses arising from changes in fair value of derivative reflect the fair value movements associated with the hedged risk. financial instruments not designated as hedges are recognised in the income statement. De-recognition of financial liabilities Financial liabilities are de-recognised only when the obligations IFRSs endorsed but not applied are discharged, cancelled or expire. The following Adopted IFRSs have been endorsed but are not mandatory and have not been applied by the Group in these Trade payables financial statements. Their adoption is not expected to have a Trade payables are non-interest bearing and valued at their material affect on the financial statements unless otherwise nominal value. indicated:

(c) Derivative financial instruments • Revised IFRS 3 ‘Business Combinations’ (mandatory for year Derivative financial instruments are used in order to manage commencing on or after 1 July 2009). risks arising from changes in foreign exchange rates, interest • Amendments to IAS 27 ‘Consolidated and Separate Financial rates and inflation. Statements’ (mandatory for year commencing on or after 1 July 2009). Derivative financial instruments are measured at their fair value • IFRIC 12 ‘Service Concession Arrangements’ (mandatory for and those utilised include interest rate and RPI swaps and EU adopters for year commencing on or after 29 March 2009). forward foreign exchange contracts. The fair value of forward • IFRIC 15 ‘Agreements for the Construction of Real Estate’ exchange contracts is their quoted market value at the statement (mandatory for year commencing on or after 1 January 2010). of financial position date. The fair value of interest rate and RPI • IFRIC 16 ‘Hedges of a Net Investment in a Foreign Operation’ swaps is the estimated amount that would be received or paid (mandatory for EU adopters for the year commencing on or to terminate the swap at the statement of financial position date. after 30 June 2009). Valuations for forward exchange contracts and interest rate and • Amendments to IAS 39 ‘Financial Instruments: Recognition RPI swaps are determined using valuation techniques supported and Measurement: Eligible Hedged Items’ (mandatory for year by reference to market values for similar transactions. commencing on or after 1 July 2009). • Amendments to IAS 39 ‘Reclassification of Financial Assets: Certain derivative financial instruments are designated as hedges Effective Date and Transition’ (mandatory for year commencing in line with established risk management policies. on or after 1 July 2009).

84 Costain Group PLC Annual Report 2009 / www.costain.com 2 Summary of significant accounting policies – continued Costain About • IFRIC 17 ‘Distributions of Non-cash Assets to Owners’ (mandatory for year commencing on or after 1 November 2009). • IFRIC 18 ‘Transfer of Assets from Customers’ (mandatory for year commencing on or after 1 November 2009). • Amendments to IAS 32 ‘Financial Instruments: Presentation – Classification of rights issue’ (mandatory for year commencing on or after 1 February 2010). • Improvements to IFRSs (issued 16 April 2009) (adoption dates varies but certain improvements are mandatory for year commencing on or after 1 July 2009). 3 Business and geographical segment information by origin From 1 January 2009, segment information is based on the information provided to the Chief Executive who is the chief operating decision maker. The segments are strategic business units with separate management and have different core customers or offer different services. The segments are discussed in the Business & Operational review section of these financial statements. Previously segments were determined and presented in accordance with IAS 14 ‘Segment Reporting’. Comparative segment information has been restated accordingly.

The accounting policies of the operating segments are the same as those described in the summary of significant accounting Responsibility Corporate policies. The Group evaluates segment performance on the basis of profit or loss from operations before interest and income tax expense. The segment results that are reported to the Chief Executive include items directly attributable to a segment as well as those that can be allocated on a reasonable basis.

Intersegment sales and transfers are not material.

Land Environ- Infra- Energy & Develop- Central ment structure Community Process ment costs Total Year ended 31 December 2009 £m £m £m £m £m £m £m Segment revenue External revenue 376.2 364.8 155.7 96.7 – – 993.4 Share of revenue of joint ventures and associates 49.9 – 12.1 4.5 1.2 – 67.7

Total segment revenue 426.1 364.8 167.8 101.2 1.2 – 1,061.1 review Operational & Business

Segment profit Group operating profit/(loss) 13.1 16.9 (11.0) 9.1 – (6.1) 22.0 Profit on sales of joint ventures and associates – – 2.0 – – – 2.0 Share of results of joint ventures and associates (1.4) – 0.6 0.2 (2.6) – (3.2) Reportable segment profit/(loss) 11.7 16.9 (8.4) 9.3 (2.6) (6.1) 20.8 Net finance expense (2.7) Profit before tax 18.1

Reportable segment profit/(loss) is stated after charging the following:

Depreciation 0.8 1.1 – 0.8 – – 2.7

Amortisation 0.3 0.3 0.1 0.2 – – 0.9 Governance Financial statements Financial

Costain Group PLC Annual Report 2009 / www.costain.com 85 Notes to the financial statements continued

3 Business and geographical segment information by origin – continued Segment assets and liabilities Land Environ- Infra- Energy & Develop- Central ment structure Community Process ment costs Total Segment assets £m £m £m £m £m £m £m Reportable segment assets 99.7 76.8 19.1 42.3 35.4 0.3 273.6 Unallocated assets: Deferred tax 34.6 Cash and cash equivalents 120.8 Total assets 429.0

Expenditure on non-current assets Property, plant and equipment – 6.4 0.2 0.6 – – 7.2 Intangible assets – – – 0.1 – – 0.1 Investments in joint ventures and associates – – 0.2 – – – 0.2 Loans to joint ventures and associates – – 4.0 – 5.7 – 9.7

Segment liabilities Reportable segment liabilities 125.7 92.8 61.1 46.0 – 0.5 326.1 Unallocated liabilities: Retirement benefit obligations 104.7 Overdraft and loans 0.3 Income tax liabilities 1.7 Total liabilities 432.8

Land Environ- Infra- Energy & Develop- Central ment structure Community Process ment costs Total Year ended 31 December 2008 £m £m £m £m £m £m £m Segment revenue External revenue 346.5 208.7 267.7 79.7 – – 902.6 Share of revenue of joint ventures and associates 70.5 – 17.9 3.9 1.1 – 93.4 Total segment revenue 417.0 208.7 285.6 83.6 1.1 – 996.0

Segment profit Group operating profit/(loss) 13.8 14.4 (8.5) 5.5 – (5.7) 19.5 Profit on sales of joint ventures and associates – – 2.7 – – – 2.7 Share of results of joint ventures and associates (2.2) – 0.6 – (2.3) – (3.9) Reportable segment profit/(loss) 11.6 14.4 (5.2) 5.5 (2.3) (5.7) 18.3 Net finance income 4.8 Profit before tax 23.1

Reportable segment profit/(loss) is stated after charging the following:

Depreciation 0.6 0.9 – 0.6 – – 2.1 Amortisation 0.4 0.3 0.1 0.2 – – 1.0

86 Costain Group PLC Annual Report 2009 / www.costain.com 3 Business and geographical segment information by origin – continued Costain About Segment assets and liabilities Land Environ- Infra- Energy & Develop- Central ment structure Community Process ment costs Total Segment assets £m £m £m £m £m £m £m Reportable segment assets 101.7 48.1 28.8 26.3 35.2 – 240.1 Unallocated assets: Deferred tax 18.9 Cash and cash equivalents 147.3 Total assets 406.3

Expenditure on non-current assets Property, plant and equipment – 4.7 – 1.1 – – 5.8

Intangible assets – – – 0.1 – – 0.1 Responsibility Corporate Loans to joint ventures and associates 4.0 – 4.9 – 2.8 – 11.7

Segment liabilities Reportable segment liabilities 142.4 70.8 71.4 35.0 – 0.5 320.1 Unallocated liabilities: Retirement benefit obligations 50.2 Overdraft and loans 0.7 Income tax liabilities 1.7 Total liabilities 372.7

Geographical information In presenting information on the basis of geographical segments, segment revenue is based on the geographical location of customers. Segment assets are based on the geographical location of the assets.

Revenue Non-current assets review Operational & Business 2009 2008 2009 2008 £m £m £m £m United Kingdom 1,025.8 969.6 62.9 36.1 Spain 1.2 1.1 35.4 35.2 Rest of the World 34.1 25.3 5.6 5.8 1,061.1 996.0 103.9 77.1

Customers accounting for more than 10% of revenue One customer (2008: one) in the Infrastructure segment accounted for revenue of £145.8 million (2008: £135.1 million) and one customer (2008: Nil) in the Environment segment accounted for revenue of £121.0 million. 4 Other operating expenses and income 2009 2008

£m £m Governance Profit before tax is stated after charging: Depreciation of property, plant and equipment (Note 11) 2.7 2.1 Amortisation of intangible assets (Note 12) 0.9 1.0 Hire of plant and machinery 36.5 30.1 Rent of land and buildings 3.3 4.2 and after crediting: Income from rent of land and buildings 1.9 1.7

2009 2008 Auditors’ remuneration £m £m Fees payable to the Group’s auditor for the audit of the annual financial statements 0.1 0.1 Fees payable to the Group’s auditor and its associates for other services – Audit of the Company’s subsidiaries, pursuant to legislation 0.4 0.4

– Other services relating to taxation advice (2008: Corporate finance transactions) 0.1 0.1 statements Financial 0.6 0.6

Amounts paid to the Company’s auditors and their associates in respect of services to the Company, other than the audit of the Company’s financial statements, have not been disclosed as the information is required to be disclosed on a consolidated basis.

Costain Group PLC Annual Report 2009 / www.costain.com 87 Notes to the financial statements continued

5 Employee benefit expense 2009 2008 Group £m £m Wages and salaries 124.9 113.1 Social security costs 11.8 10.5 Pension costs (Note 20) 6.7 7.4 Share-based payments expense (Note 20) 1.1 0.6 144.5 131.6

2009 2008 Average number of persons employed Number Number Environment 1,248 1,543 Infrastructure 948 619 Community 374 570 Energy & Process 1,410 1,074 Central 23 23 4,003 3,829 Company The Company does not employ any personnel, except for the directors considered in Note 6. 6 Remuneration of directors Details of the directors’ remuneration, pension entitlements, interest in the long term incentive plans, contingent awards and share options are included in the Directors’ remuneration report. 7 Net (finance expense)/finance income 2009 2008 £m £m Interest income from bank deposits 1.2 5.6 Interest income on loans to related parties 1.4 0.9 Expected return on defined benefit pension scheme assets 23.4 28.3 Finance income 26.0 34.8

Interest payable on bank overdrafts and loans (0.5) (0.7) Interest cost on the present value of the defined benefit obligations (28.2) (29.3) Finance expense (28.7) (30.0)

Net finance (expense)/income (2.7) 4.8

Interest income on loans to related parties relates to shareholder loan interest receivable from investments in equity accounted joint ventures and associates.

88 Costain Group PLC Annual Report 2009 / www.costain.com 8 Income tax Costain About 2009 2008 £m £m On profit for the year United Kingdom corporation tax at 28.0% (2008: 28.5%) – – Adjustments in respect of prior years 0.1 0.1 Current tax credit for the year 0.1 0.1

Deferred tax charge for the current year (3.4) (5.0) Adjustments in respect of prior years (0.2) – Deferred tax charge for the year (3.6) (5.0)

Income tax expense in the consolidated income statement (3.5) (4.9) Corporate Responsibility Corporate 2009 2008 £m £m Tax reconciliation Profit before tax 18.1 23.1 Income tax at 28.0% (2008: 28.5%) (5.1) (6.6) Rate adjustments relating to overseas profits 0.2 0.5 Share of results of joint ventures and associates at 28.0% (2008: 28.5%) (0.9) (1.1) Disallowed provisions and expenses (0.5) (0.8) Non-taxable gains and profits relieved by capital losses 0.6 0.8 Utilisation of previously unrecognised temporary differences 2.3 2.1 Rate adjustment relating to deferred tax – 0.1 Adjustments in respect of prior years (0.1) 0.1 Income tax expense in the consolidated income statement (3.5) (4.9) Business & Operational review Operational & Business The income tax above does not include any amounts for equity accounted joint ventures and associates, whose results are disclosed in the consolidated income statement net of tax.

The current tax liabilities of £1.7 million (2008: £1.7 million) for the Group and Company represent the amount of income taxes in respect of all outstanding periods.

Accumulated tax losses carried forward, mainly in the United Kingdom, are estimated at £8.6 million (2008: £14.2 million).

2009 2008 £m £m Deferred tax asset recognised: Accelerated capital allowances 2.5 2.3 Short-term temporary differences 2.8 2.5 Retirement benefit obligations 29.3 14.1 Governance Deferred tax asset 34.6 18.9

The Company had no deferred tax asset at either year end. 2009 2008 £m £m Movements in deferred tax asset: At 1 January 18.9 21.2 Amount charged in consolidated income statement (3.6) (5.0) Amount credited to consolidated statement of changes in equity 19.3 2.7 At 31 December 34.6 18.9 Financial statements Financial

Costain Group PLC Annual Report 2009 / www.costain.com 89 Notes to the financial statements continued

8 Income tax – continued Deferred tax charge recognised in the consolidated income statement 2009 2008 £m £m Accelerated capital allowances 0.2 0.4 Short-term temporary differences (0.2) (2.3) Retirement benefit obligations (3.6) (3.1) (3.6) (5.0)

Deferred tax recognised directly in the consolidated statement of changes in equity 2009 2008 £m £m Retirement benefit obligations 18.9 3.0 Cash flow hedges 0.4 (0.3) 19.3 2.7

Factors that may affect future tax charges The Group and Company have potential deferred tax assets in their United Kingdom operations that have not been recognised at the year end on the basis that their future economic benefits were not assured at the statement of financial position date.

Deferred tax assets not recognised Group Company 2009 2008 2009 2008 £m £m £m £m Accelerated capital allowances 1.0 1.0 – – Short-term temporary differences 3.4 4.3 0.1 0.1 Trading tax losses 2.4 4.8 – – Management expenses and charges 15.9 15.9 15.9 15.9 Temporary differences 22.7 26.0 16.0 16.0

In addition to the above temporary differences, the following deferred tax assets are available: Surplus Advance Corporation Tax 9.7 9.7 – – Capital losses 77.1 77.3 67.3 67.5

The current year tax effect, at 28.0%, of using the above short-term temporary differences and trading tax losses was £2.3 million (2008: £2.1 million) as detailed in the tax reconciliation above.

There are no expiry dates associated with the deferred tax assets, recognised and not recognised, and tax relief will be obtained if suitable profits arise in the future. 9 Earnings per share The calculation of earnings per share is based on profit of £14.6 million (2008: £18.2 million) and the number of shares set out below.

2009 2008 Number Number (millions) (millions) Weighted average number of ordinary shares in issue for basic earnings per share calculation 633.7 631.9 Dilutive potential ordinary shares arising from employee share schemes 12.7 2.1 Weighted average number of ordinary shares in issue for diluted earnings per share calculation 646.4 634.0

At 31 December 2009, 2.8 million options (2008: 6.3 million) were excluded from the diluted weighted average number of ordinary shares calculation as their effect would have been anti-dilutive.

90 Costain Group PLC Annual Report 2009 / www.costain.com 10 Dividends Costain About During the year, the 2008 final dividend of 0.5p (2008: 0.5p) per share was paid to shareholders (£3.1 million in cash and £0.1 million via scrip alternative (2008: £3.0 million in cash and £0.1 million via scrip alternative)). An interim 2009 dividend of 0.275p (2008: 0.25p) per share (£1.7 million in cash and £0.1 million via scrip alternative (2008: £1.5 million in cash and £0.1 million via scrip alternative)) was also paid.

A final dividend in respect of the year ended 31 December 2009 of 0.55p per share, amounting to a dividend of £3.5 million, is to be proposed at the Annual General Meeting. If approved, the dividend is expected to be paid on 21 May 2010 to shareholders registered at the close of business on 23 April 2010 and a scrip dividend alternative will be offered. These financial statements do not reflect the final dividend payable. 11 Property, plant and equipment – Group Plant and Land and buildings equipment Total Freehold Leasehold Responsibility Corporate Over 50 years 50 years and under £m £m £m £m £m Cost At 1 January 2008 1.2 0.3 0.2 13.5 15.2 Currency realignment – – 0.1 0.6 0.7 Additions – – 0.1 5.7 5.8 Disposals – – – (0.9) (0.9) At 31 December 2008 1.2 0.3 0.4 18.9 20.8 At 1 January 2009 1.2 0.3 0.4 18.9 20.8 Currency realignment – – (0.1) (0.3) (0.4) Additions – – 0.2 7.0 7.2 Disposals – – – (4.2) (4.2)

At 31 December 2009 1.2 0.3 0.5 21.4 23.4 review Operational & Business

Depreciation At 1 January 2008 0.1 0.1 – 11.5 11.7 Currency realignment – – – 0.2 0.2 Provided in year – – 0.1 2.0 2.1 Disposals – – – (0.9) (0.9) At 31 December 2008 0.1 0.1 0.1 12.8 13.1 At 1 January 2009 0.1 0.1 0.1 12.8 13.1 Currency realignment – – – (0.1) (0.1) Provided in year – – 0.1 2.6 2.7 Disposals – – – (3.8) (3.8) At 31 December 2009 0.1 0.1 0.2 11.5 11.9 Governance Net book value At 31 December 2009 1.1 0.2 0.3 9.9 11.5 At 31 December 2008 1.1 0.2 0.3 6.1 7.7 At 1 January 2008 1.1 0.2 0.2 2.0 3.5

Freehold land and buildings includes land of £0.7 million (2008: £0.7 million) on which no depreciation has been charged. Financial statements Financial

Costain Group PLC Annual Report 2009 / www.costain.com 91 Notes to the financial statements continued

12 Intangible assets – Group

Software development costs and licences £m Cost At 1 January 2008 5.0 Additions 0.1 Disposals (0.2) At 31 December 2008 4.9 At 1 January 2009 4.9 Additions 0.1 At 31 December 2009 5.0

Amortisation At 1 January 2008 2.3 Provided in year 1.0 Disposals (0.2) At 31 December 2008 3.1 At 1 January 2009 3.1 Provided in year 0.9 At 31 December 2009 4.0

Net book value At 31 December 2009 1.0 At 31 December 2008 1.8 At 1 January 2008 2.7

The net book value of intangible assets comprises £0.9 million (2008: £1.7 million) relating to software development costs and £0.1 million (2008: £0.1 million) relating to software licences.

92 Costain Group PLC Annual Report 2009 / www.costain.com 13 Investments Costain About Investments Loans Joint Joint ventures Associates ventures Associates Total Group £m £m £m £m £m Cost or fair value At 1 January 2008 22.8 0.3 17.2 2.0 42.3 Currency realignment 7.3 0.1 0.5 – 7.9 Additions – – 6.0 5.7 11.7 Disposals – – (2.5) (2.7) (5.2) At 31 December 2008 30.1 0.4 21.2 5.0 56.7 At 1 January 2009 30.1 0.4 21.2 5.0 56.7 Currency realignment (2.7) – (0.3) – (3.0) Additions – 0.2 5.7 4.0 9.9 Repayments – – (0.7) – (0.7) Responsibility Corporate Disposals (0.1) – (2.0) (0.1) (2.2) At 31 December 2009 27.3 0.6 23.9 8.9 60.7

Share of post-acquisition reserves At 1 January 2008 (8.1) 0.7 – – (7.4) Currency realignment 0.4 – – – 0.4 Disposals (0.5) (0.7) – – (1.2) Dividends (0.7) – – – (0.7) Loss for the year (3.7) (0.2) – – (3.9) Cash flow hedges (3.5) (8.1) – – (11.6) At 31 December 2008 (16.1) (8.3) – – (24.4) At 1 January 2009 (16.1) (8.3) – – (24.4)

Disposals (0.3) – – – (0.3) review Operational & Business Dividends (0.3) (0.3) – – (0.6) (Loss)/profit for the year (3.6) 0.4 – – (3.2) Cash flow hedges – change in fair value – 2.7 – – 2.7 Cash flow hedges – disposals 1.9 – – – 1.9 At 31 December 2009 (18.4) (5.5) – – (23.9)

Amounts written off At 1 January 2008 – – – – – Additions – (0.2) – (0.2) (0.4) At 31 December 2008 – (0.2) – (0.2) (0.4) At 1 January 2009 and 31 December 2009 – (0.2) – (0.2) (0.4)

Reclassifications At 1 January 2008 14.3 1.2 (9.9) (0.4) 5.2 Governance Arising in the year 3.9 7.0 (1.8) (3.5) 5.6 At 31 December 2008 18.2 8.2 (11.7) (3.9) 10.8 At 1 January 2009 18.2 8.2 (11.7) (3.9) 10.8 Arising in the year 0.1 (1.5) 0.6 (2.3) (3.1) At 31 December 2009 18.3 6.7 (11.1) (6.2) 7.7

Net book value At 31 December 2009 27.2 1.6 12.8 2.5 44.1 At 31 December 2008 32.2 0.1 9.5 0.9 42.7 At 1 January 2008 29.0 2.2 7.3 1.6 40.1 Financial statements Financial

Costain Group PLC Annual Report 2009 / www.costain.com 93 Notes to the financial statements continued

13 Investments – continued Analysis of Group’s share of joint ventures and associates revenue, income and assets and liabilities

2009 2008 Alcaidesa Other joint Alcaidesa Other joint Holding SA ventures Associates Total Holding SA ventures Associates Total £m £m £m £m £m £m £m £m Revenue 1.2 49.0 17.5 67.7 1.1 71.8 20.5 93.4

(Loss)/profit before tax (3.7) (0.8) 0.9 (3.6) (3.3) (1.3) (0.1) (4.7) Income tax 1.1 (0.2) (0.5) 0.4 1.0 (0.1) (0.1) 0.8 (Loss)/profit for the year (2.6) (1.0) 0.4 (3.2) (2.3) (1.4) (0.2) (3.9)

Non-current assets 21.7 36.8 114.5 173.0 13.3 73.9 71.8 159.0 Current assets 35.3 16.4 17.0 68.7 40.6 21.1 15.2 76.9 Current liabilities (2.9) (14.6) (13.8) (31.3) (2.9) (41.5) (7.8) (52.2) Non-current liabilities (27.5) (38.0) (116.1) (181.6) (19.2) (53.1) (79.1) (151.4) Investments in joint ventures and associates 26.6 0.6 1.6 28.8 31.8 0.4 0.1 32.3

Financial commitments 2.2 3.5 11.6 17.3 5.8 3.5 4.7 14.0 Capital commitments 2.2 – 28.3 30.5 – 0.2 10.5 10.7

Net interest payable by joint ventures and associates in 2009 was £1.6 million (2008: £2.8 million payable). The applicable interest rates are income of 0.5% to 5.4% per annum (2008: 0.5% to 5.0%) and expense of 1.3% to 12.5% per annum (2008: 4.5% to 12.5%).

The financial commitments relate to Alcaidesa Holding SA and joint ventures and associates involved in PFI schemes and the capital commitments to ongoing construction works. All figures are the Group’s share.

Analysis of the total revenue, income, assets and liabilities of joint ventures and associates

2009 2008 Alcaidesa Other joint Alcaidesa Other joint Holding SA ventures Associates Total Holding SA ventures Associates Total £m £m £m £m £m £m £m £m Revenue 2.4 110.4 60.9 173.7 2.1 173.7 65.5 241.3

(Loss)/profit before tax (7.4) (1.4) 3.5 (5.3) (6.6) (2.6) (0.8) (10.0) Income tax 2.2 (0.4) (2.2) (0.4) 2.1 (0.2) (0.4) 1.5 (Loss)/profit for the year (5.2) (1.8) 1.3 (5.7) (4.5) (2.8) (1.2) (8.5)

Non-current assets 38.5 73.5 288.7 400.7 26.7 147.6 226.1 400.4 Current assets 70.7 36.8 133.3 240.8 81.1 48.4 55.2 184.7 Current liabilities (5.8) (33.4) (48.5) (87.7) (5.8) (88.9) (29.5) (124.2) Non-current liabilities (50.2) (75.3) (366.9) (492.4) (38.4) (106.1) (251.5) (396.0) Equity 53.2 1.6 6.6 61.4 63.6 1.0 0.3 64.9

Details of the principal subsidiary undertakings, joint ventures, jointly controlled operations and associates are shown in Note 24.

94 Costain Group PLC Annual Report 2009 / www.costain.com 13 Investments – continued Costain About Company

Investments in subsidiaries £m Cost At 1 January 2008 388.3 Additions 0.5 At 31 December 2008 388.8 At 1 January 2009 388.8 Additions 1.2 At 31 December 2009 390.0

Amounts written off At 1 January 2008, 31 December 2008 and 31 December 2009 275.5 Corporate Responsibility Corporate

Net book value At 31 December 2009 114.5 At 31 December 2008 113.3 At 1 January 2008 112.8

Additions principally relate to the increase in the cost of investment in subsidiaries by the equivalent amount of the share-based payment charge included in the consolidated income statement.

Details of the subsidiaries in which the Company has an interest are set out in Note 24. 14 Trade and other receivables Group Company

2009 2008 2009 2008 review Operational & Business £m £m £m £m Amounts included in current assets Trade receivables 98.1 94.3 – – Other receivables 9.8 9.5 – – Amounts due from customers for contract work 84.5 68.5 – – Prepayments and accrued income 6.8 4.9 0.2 0.6 Amounts owed by joint ventures and associates 2.7 3.1 – – Amounts owed by subsidiary undertakings – – 1.4 1.3 201.9 180.3 1.6 1.9 Amounts included in non-current assets Other receivables 12.7 6.0 – –

At 31 December 2009, amounts due from customers for contract work falling due within one year and other receivables falling due after more than one year included retentions of £21.1 million (2008: £16.3 million) relating to construction contracts in progress. Governance

The directors consider that the carrying amount of trade, other receivables and amounts owed by joint ventures and associates approximates to their fair value. Based on prior experience, the directors believe that the trade receivables are recoverable and, other than as disclosed in Note 25, there is no allowance for bad or doubtful debts (2008: £Nil).

The average credit period within trade receivables on amounts billed for construction work and on sales of goods is 36 days (2008: 38 days). The analysis of the due dates of the trade receivables was £76.5 million (2008: £50.9 million) due within 30 days, £16.4 million (2008: £42.8 million) due between 30 and 60 days and £5.2 (2008: £Nil million) due after 60 days.

Included in the trade receivables balance are debtors, with a carrying amount of £5.7 million (2008: £1.6 million), which are past due at the reporting date for which no provision has been made as there has been no significant change in credit quality and the amounts are considered recoverable. No collateral is held over these balances.

The aggregate amount of costs incurred plus recognised profits, less recognised losses, for all contracts in progress at the statement statements Financial of financial position date was £2,423.4 million (2008: £2,090.1 million). Progress billings and advances received from customers under open construction contracts amounted to £2,375.1 million (2008: £2,061.1 million). Advances for which work has not started, and billings in excess of costs incurred and recognised profits are included in credit balances on long-term contracts (Note 18).

Costain Group PLC Annual Report 2009 / www.costain.com 95 Notes to the financial statements continued

15 Cash and cash equivalents Cash and cash equivalents are analysed below, and include the Group’s share of cash held by jointly controlled operations of £36.0 million (2008: £34.2 million). Group Company 2009 2008 2009 2008 £m £m £m £m Cash and cash equivalents 120.8 147.3 26.3 66.7 Bank overdrafts (0.3) (0.4) – – Cash, cash equivalents and overdrafts in the cash flow statement 120.5 146.9 26.3 66.7

16 Interest bearing loans and borrowings Group 2009 2008 £m £m Current liabilities – Bank loans – 0.3 Total interest bearing loans and borrowings – 0.3

17 Financial instruments and risk management The Group’s centralised treasury function manages financial risk, principally arising from movements in foreign currency rates, interest rates and inflation rates and liquidity and funding risks, in accordance with policies agreed by the directors. To manage these risks, forward foreign currency sale and purchase contracts are used in respect of foreign currency requirements and interest rate and RPI swaps are used for PFI investments.

The Group does not enter into speculative transactions.

The Company does not have any forward foreign currency contracts or other derivatives.

Capital management The capital base of the Group is driven by shareholder financing with very little in terms of external loans. The Board of directors (‘Board’) monitors the overall strength of the balance sheet, which is dependent on underlying contract performance and most significantly by changes arising from market movements in the Group’s defined benefit pension scheme. As a result of increases in the pension obligations during the year, at 31 December 2009, the Group had negative shareholders’ equity of £3.8 million. The Board’s policies include exploring options to manage the pension liability, the scheme was closed to future accrual during the year, and working to strengthen the Group by growing the business and improving profitability and the Business & Operational review describes the strategy for the Group and its operations. The Board seeks to maintain a significant level of cash balances. The Board also monitors the level of dividends to equity shareholders.

The Group operates Long-Term Incentive Plans and Save-As-You-Earn schemes, which offer management and participating employees the opportunity to acquire equity in the Company. Details of existing schemes are set out in note 20. The Board intends to continue these arrangements but has no plans to change their scale or participation significantly.

There were no changes to the Board’s approach to capital management during the year.

Liquidity and funding risk Ultimate responsibility for liquidity and funding risk rests with the Board, which has put in place a monitoring and reporting framework to manage funding requirements.

Liquidity risk is managed by monitoring actual and forecast short and medium term cash flows and the maturity profile of financial assets and liabilities and by maintaining adequate cash reserves. The nature and timing of the contract cash flows causes the cash balances to vary over the month with the balance usually highest at the month end.

The average month end cash balance during the year was £125.3 million (2008: £117.4 million).

Long-term contracting requires facilities to be in place to provide performance and other bonds, where necessary, to customers. Therefore, the Group is reliant on its ability to secure bank and surety bonds and monitors usage and regularly updates forecast usage of its banking and surety bonding facilities.

96 Costain Group PLC Annual Report 2009 / www.costain.com 17 Financial instruments and risk management – continued Costain About Liquidity and funding risk (continued)

Unsecured bonding facilities available Group and Company 2009 2008 £m £m Expiring within one year – 15.0 Expiring between two and five years* 290.0 285.0 290.0 300.0 * Element of above facilities available for borrowings 5.0 5.0

The facilities have financial covenants based on profit, tangible net worth and the level of cash balances, which are measured quarterly. Since the year end, the unsecured bonding facilities have been increased by £55 million to £345 million and their term extended to 30 September 2013. Responsibility Corporate

Credit risk The Group uses an external credit scoring system to assess a potential customer’s credit quality and will enter into a contract only if that assessment is satisfactory. Deposits in the United Kingdom are placed with the bank facility providers or, in jointly controlled operations, with banks agreed by the partners. Overseas deposits are placed with major banks operating in those countries. Transactions involving derivative financial instruments are with bank or insurance company counter-parties with high credit ratings, that are monitored regularly and with whom there are signed netting agreements. Given the high credit ratings of the banks and insurance companies used, management does not expect any counter-party will fail to meet its obligations.

At the year end date, there were no significant concentrations of credit risk. The maximum exposure to credit risk is represented by the carrying amount of each financial asset, including derivative financial instruments, in the statement of financial position. Further information on the exposure to credit risk is set out in Note 14.

Interest rate risk review Operational & Business The Group has cash balances in the United Kingdom and Overseas and bank borrowings Overseas. The largest constituent are United Kingdom balances denominated in pounds sterling. A 1% rise in interest rates would have increased the annual net interest income on cash balances by £1.3 million (2008: £1.2 million).

The only interest rate hedging currently undertaken by the Group is within PFI investments, where interest rate derivatives have been used as a means of hedging interest rate risk. The policy is to fix the interest cost on variable rate financing on specific projects by taking out floating to fixed interest rate swaps; these swaps are designated to the underlying debt obligations and are expected to be effective for cash flow hedge accounting purposes.

Inflation risk The Group’s PFI investments have entered into RPI derivatives as a means of hedging inflation risk over the concession period. An element of the unitary payment received as revenue is RPI linked and derivatives are used to hedge this potential movement in order to match the underlying fixed cost within the project. The proportion of revenue that is fixed will vary from project to project but will ensure that neither debt servicing nor shareholder returns vary too widely. Governance

Foreign currency risk Transactional currency exposures arise from sales or purchases by operating companies in currencies other than their functional currency. The current strategy is to hedge both committed and forecast foreign currency exposures, where applicable, and where the transaction timing and amount can be determined reliably and no natural hedge exists. Forward contracts are only entered into when a contractual commitment exists in respect of the foreign currency transaction and it is the policy to negotiate the terms of the hedge derivatives to match the terms of the hedged item to maximise hedge effectiveness.

At 31 December 2009, the net monetary assets denominated in currencies other than the functional currency of the operation involved were dollar denominated net liabilities of £0.1 million (2008: £0.1 million), US Dollar denominated net assets of £4.8 million (2008: £9.0 million) and Euro denominated net assets of £11.8 million (2008: £3.4 million) in members of the Group with sterling as their functional currency.

A 10% strengthening in the US Dollar would have worsened the results by £0.1 million (2008: improved by £0.1 million). A 10% strengthening in the Euro would have adversely impacted the results by £0.3 million (2008: adversely impacted by £0.3 million). statements Financial

Costain Group PLC Annual Report 2009 / www.costain.com 97 Notes to the financial statements continued

17 Financial instruments and risk management – continued Cash flow hedges (continued) At 31 December 2009, the Group held foreign currency contracts (84 purchase contracts (2008: 7) and 19 sale contracts (2008: 1)) designated as hedges of committed future purchases. The Group also held 3 foreign currency sale contracts (2008: Nil) as a hedge of a future receivable.

Forward exchange contracts, which hedge forecast transactions are classified as cash flow hedges and stated at fair value. These amounts were recognised as fair value derivatives. The terms of the foreign currency contracts match the terms of the commitments. There were no ineffective hedges at the year end (2008: Nil).

Foreign currency sale and purchase contracts outstanding at 31 December 2009 are summarised below. The carrying value represents the fair value of the contract; the contractual cash flows the sterling commitment.

2009 2008 Between Between Carrying Contractual Within one and Carrying Contractual Within one and 5 Amount cash flows one year 5 years Amount cash flows one year years £m £m £m £m £m £m £m £m Purchases (0.2) (98.5) (68.0) (30.5) 1.0 (6.0) (6.0) – Sales (0.2) 21.2 11.8 9.4 (0.1) 2.0 2.0 – (0.4) (77.3) (56.2) (21.1) 0.9 (4.0) (4.0) –

The expected impact on the income statement of the foreign exchange contracts is: 2010 loss £0.6 million, 2011 profit £0.4 million, 2012 and 2013 loss £0.1 million.

At 31 December 2009, the investment in PFI projects had entered into the following swaps, which are classified as cash flow hedges and are stated at fair value. There were no ineffective hedges at the year end (2008: Nil).

2009 2008 Between Between Within one and After 5 Within one and After 5 Total one year 5 years years Total one year 5 years years £m £m £m £m £m £m £m £m Interest rate swaps 10.3 0.4 1.5 8.4 16.6 0.6 2.5 13.5 RPI swaps 1.7 0.1 0.2 1.4 1.8 0.1 0.3 1.4 12.0 0.5 1.7 9.8 18.4 0.7 2.8 14.9 Less tax (3.4) (0.1) (0.5) (2.8) (5.1) (0.2) (0.8) (4.1) 8.6 0.4 1.2 7.0 13.3 0.5 2.0 10.8

These amounts (net of tax) were recognised within the value of the investment or within provisions, as appropriate, as fair value derivatives.

98 Costain Group PLC Annual Report 2009 / www.costain.com 17 Financial instruments and risk management – continued Costain About Financial liabilities and assets

Currency and maturity of financial assets 2009 2008 Between Between Within one and After 5 Within one and After 5 Total one year 5 years years Total one year 5 years years £m £m £m £m £m £m £m £m Cash and cash equivalents: Pounds sterling 112.8 112.8 – – 140.8 140.8 – – UAE Dirham 3.8 3.8 – – 4.2 4.2 – – US Dollar 0.6 0.6 – – 1.5 1.5 – – Euro 3.0 3.0 – – 0.1 0.1 – – Other 0.6 0.6 – – 0.7 0.7 – – Corporate Responsibility Corporate 120.8 120.8 – – 147.3 147.3 – – Loans to joint ventures and associates: Pounds sterling 2.5 0.5 1.9 0.1 1.4 – – 1.4 US Dollar 4.0 4.0 – – 5.6 5.6 – – Euro 8.8 – 8.8 – 3.4 – 3.4 – 15.3 4.5 10.7 0.1 10.4 5.6 3.4 1.4 Trade, other receivables and amounts owed by joint ventures and associates: Pounds sterling 122.2 109.5 12.7 – 111.1 105.1 6.0 – Other 1.1 1.1 – – 1.8 1.8 – – 123.3 110.6 12.7 – 112.9 106.9 6.0 – Total financial assets 259.4 235.9 23.4 0.1 270.6 259.8 9.4 1.4 Business & Operational review Operational & Business Currency and maturity of financial liabilities 2009 2008 Between Between Within one and Within one and Total one year five years Total one year five years £m £m £m £m £m £m Bank overdraft – Hong Kong Dollar 0.3 0.3 – 0.4 0.4 – Bank loan – Hong Kong Dollar – – – 0.3 0.3 – 0.3 0.3 – 0.7 0.7 – Trade and other payables: Pounds sterling 155.2 150.7 4.5 166.1 163.7 2.4 Other 6.9 6.9 – 6.6 6.6 – 162.1 157.6 4.5 172.7 170.3 2.4

Total financial liabilities 162.4 157.9 4.5 173.4 171.0 2.4 Governance

The bank loans and overdrafts are at a floating rate and are unsecured. Financial statements Financial

Costain Group PLC Annual Report 2009 / www.costain.com 99 Notes to the financial statements continued

17 Financial instruments and risk management – continued Reconciliation of trade and other receivables and trade and other payables to the balance sheet.

2009 2008 Current Non-current Current Non-current £m £m £m £m Trade and other receivables (as above) 110.6 12.7 106.9 6.0 Amounts due from customers 84.5 – 68.5 – Prepayments and accrued income 6.8 – 4.9 – 201.9 12.7 180.3 6.0

2009 2008 Current Non-current Current Non-current £m £m £m £m Trade and other payables (as above) 157.6 4.5 170.3 2.4 Credit balances on long-term contracts 19.9 – 29.2 – Accruals and deferred income 135.8 – 105.5 – 313.3 4.5 305.0 2.4

Certain of the comparative figures in this note have been revised to ensure consistency with the current year.

Effective interest rates of financial assets and liabilities 2009 2008 Financial assets: Cash and cash equivalents 0.0% to 4.0% 0.0% to 6.1% Loans to joint ventures and associates 9.0% to 11.5% 8.4% to 12.0%

Financial liabilities: Bank overdrafts 6.0% 6.0% Bank loans – 6.7%

The Company’s financial assets comprised cash at bank of £26.3 million (2008: £66.7 million) denominated in Pounds sterling and maturing within one year.

There are no significant differences between the carrying values of the Group’s and Company’s financial assets and liabilities and their fair values, except the fair value of loans carrying interest rates above 10% may be higher than their carrying values of £1.7 million (2008: £0.6 million).

100 Costain Group PLC Annual Report 2009 / www.costain.com 18 Trade and other payables Costain About Group Company 2009 2008 2009 2008 £m £m £m £m Current liabilities Trade payables 129.4 144.3 – – Other payables 23.9 22.0 – – Social security 4.0 3.7 – – Credit balances on long-term contracts 19.9 29.2 – – Accruals and deferred income 135.8 105.5 0.1 0.1 Amounts owed to joint ventures and associates 0.3 0.3 – – Amounts owed to subsidiary undertakings – – 57.9 95.9 313.3 305.0 58.0 96.0 Non-current liabilities

Other payables 4.5 2.4 – – Responsibility Corporate

At 31 December 2009, credit balances on long-term contracts included advance payments from customers of £12.6 million (2008: £23.8 million).

The directors consider that the carrying amount of trade payables, other payables, social security and amounts owed to joint ventures and associates approximates to their fair value.

Financial risk management policies are in place that seek to ensure that all payables are paid within their credit timeframes. 19 Provisions for other liabilities and charges Engineering & Void PFI Construction space investments Other Total Group £m £m £m £m £m

Current review Operational & Business At 1 January 2008 1.0 0.2 0.8 0.7 2.7 Provided – 1.4 2.2 0.4 4.0 Utilised – (1.0) – (0.2) (1.2) Transfer (0.8) – – – (0.8) At 31 December 2008 0.2 0.6 3.0 0.9 4.7 At 1 January 2009 0.2 0.6 3.0 0.9 4.7 Provided – 0.7 – 0.4 1.1 Utilised – (0.6) (3.1) (0.4) (4.1) Transfer – – 3.5 – 3.5 At 31 December 2009 0.2 0.7 3.4 0.9 5.2 Governance Financial statements Financial

Costain Group PLC Annual Report 2009 / www.costain.com 101 Notes to the financial statements continued

19 Provisions for other liabilities and charges – continued Engineering & Void PFI Construction space investments Other Total Group (continued) £m £m £m £m £m Non-current At 1 January 2008 0.7 0.4 2.9 1.0 5.0 Currency alignment – – – 0.5 0.5 Provided – – 1.9 0.4 2.3 Utilised (0.6) – – – (0.6) Transfer 0.8 – – – 0.8 At 31 December 2008 0.9 0.4 4.8 1.9 8.0 At 1 January 2009 0.9 0.4 4.8 1.9 8.0 Currency alignment – – – (0.2) (0.2) Provided – 0.1 0.6 0.3 1.0 Utilised (0.9) – (1.3) – (2.2) Transfer – – (3.5) – (3.5) At 31 December 2009 – 0.5 0.6 2.0 3.1

Funding obligations Other Total Company £m £m £m Current At 1 January 2008 0.3 0.2 0.5 Utilised – (0.2) (0.2) At 31 December 2008 0.3 – 0.3 At 1 January 2009 0.3 – 0.3 Transfer (0.2) 0.3 0.1 At 31 December 2009 0.1 0.3 0.4

Non-current At 1 January 2008 0.9 0.3 1.2 Provided 0.4 – 0.4 At 31 December 2008 1.3 0.3 1.6 At 1 January 2009 1.3 0.3 1.6 Transfer 0.2 (0.3) (0.1) At 31 December 2009 1.5 – 1.5

Group Engineering & Construction provisions were in respect of liabilities incurred on long-term contracts and should be utilised over the next year.

Void space provisions relate to costs of vacant properties and will be utilised over the next three years.

PFI investment provisions relate to interest rate and other swaps entered into, where the resulting carrying value of the investment is negative and an obligation exists to provide further funding. The provisions are expected to reverse over the lives of the concessions, which can extend up to twenty-nine years.

Other provisions, mainly comprise remedial costs and litigation provisions, most of which will be utilised over the next year and a provision for staff benefits payable to the staff of an overseas subsidiary company, which will be utilised over the next five years.

Company Provisions in the Company principally relate to funding obligations to a non-trading overseas subsidiary, which eliminates on consolidation.

102 Costain Group PLC Annual Report 2009 / www.costain.com 20 Employee benefits Costain About (a) Pensions A defined benefit pension scheme is operated in the United Kingdom and a number of defined contribution pension schemes are in place in the United Kingdom and Overseas. Contributions are paid by subsidiary undertakings and employees. The total pension charge in the income statement was £11.5 million, comprising £6.7 million included in operating costs and £4.8 million included in net finance expense (2008: £8.4 million, comprising £7.4 million in operating costs and £1.0 million in net finance expense); £7.7 million (2008: £6.9 million) was in respect of the defined benefit scheme and £3.8 million (2008: £1.5 million) was in respect of the defined contribution schemes.

The Company does not operate a pension scheme.

Defined benefit scheme The defined benefit scheme was closed to new members on 31 May 2005 and from 1 April 2006 future benefits were calculated on a Career Average Revalued Earnings basis. The scheme was closed to future accrual of benefits to members on 30 September 2009. A full actuarial valuation of the scheme was carried out at 31 March 2007 and was updated to 31 December 2009 by a qualified independent actuary. Responsibility Corporate

2009 2008 2007 £m £m £m Present value of defined benefit obligations (560.5) (435.8) (511.1) Fair value of scheme assets 455.8 385.6 460.5 Recognised liability for defined benefit obligations (104.7) (50.2) (50.6)

Movements in present value of defined benefit obligations: 2009 2008 2007 £m £m £m At 1 January 435.8 511.1 509.4 Current service cost 1.7 4.7 5.8 Past service cost 1.2 1.2 1.2 Business & Operational review Operational & Business Interest cost 28.2 29.3 25.8 Actuarial losses/(gains) 113.7 (94.6) (15.9) Benefits paid (23.1) (19.8) (19.5) Contributions by members 3.0 3.9 4.3 At 31 December 560.5 435.8 511.1

Movements in fair value of scheme assets: 2009 2008 2007 £m £m £m At 1 January 385.6 460.5 440.7 Expected return on scheme assets 23.4 28.3 26.7 Actuarial gains/(losses) 46.3 (105.1) (4.2) Contributions by employer 20.6 17.8 12.5 Contributions by members 3.0 3.9 4.3 Governance Benefits paid (23.1) (19.8) (19.5) At 31 December 455.8 385.6 460.5

Expense recognised in the income statement: 2009 2008 2007 £m £m £m Current service cost 1.7 4.7 5.8 Past service cost 1.2 1.2 1.2 Interest cost on defined benefit obligations 28.2 29.3 25.8 Expected return on scheme assets (23.4) (28.3) (26.7) Total 7.7 6.9 6.1 Financial statements Financial

Costain Group PLC Annual Report 2009 / www.costain.com 103 Notes to the financial statements continued

20 Employee benefits – continued (a) Pensions (continued)

Income statement classification of expense: 2009 2008 2007 £m £m £m Cost of sales 2.6 5.2 6.2 Administrative expenses 0.3 0.7 0.8 Finance income (23.4) (28.3) (26.7) Finance expense 28.2 29.3 25.8 Total 7.7 6.9 6.1

History of the scheme for the last five years: 2009 2008 2007 2006 2005 Experience gain/(loss) on scheme liabilities (£m) – – 6.5 – 10.2 0% 0% 1% 0% 2% Change in assumptions on scheme liabilities (£m) (113.7) 94.6 9.4 8.5 (48.3) 20% 19% 2% 2% (11%) Experience adjustments on scheme assets (£m) 46.3 (105.1) (4.2) 17.5 38.3 10% (27%) (1%) 4% 10% Total (loss)/gain (£m) (67.4) (10.5) 11.7 26.0 0.2 Cumulative (loss)/gain (£m) (62.8) 4.6 15.1 3.4 (22.6)

Fair value of scheme assets: 2009 2008 2007 £m £m £m Equities 211.5 201.1 262.2 High yield bonds 50.6 – – Government bonds 99.9 112.4 118.7 Corporate bonds 61.5 47.5 49.3 Absolute return funds and cash 32.3 24.6 30.3 Total 455.8 385.6 460.5

The pension scheme does not have any assets invested in the Group’s financial instruments or in property, or other assets, used by the Group.

Principal actuarial assumptions (expressed as weighted averages): 2009 2008 2007 % % % Discount rate 5.70 6.60 5.80 Expected rate of return on scheme assets 6.51 6.07 6.14 Future salary increases 3.50 2.85 3.40 Future pension increases 3.50 2.85 3.40 Inflation assumption 3.50 2.85 3.40

The expected rate of return on scheme assets is determined by reference to relevant indices. The overall expected rate of return is calculated by weighting the individual rates in accordance with the anticipated balance in the scheme’s investment portfolio.

Weighted average life expectancy from age 65 as per mortality tables used to determine benefits at 31 December 2009 and 31 December 2008 is: 2009 2008 Male Female Male Female (years) (years) (years) (years) Currently aged 65 20.3 23.2 20.3 23.1 Non-retirees 21.3 24.1 21.3 24.0

104 Costain Group PLC Annual Report 2009 / www.costain.com 20 Employee benefits – continued Costain About (a) Pensions (continued) The discount rate, inflation and pension increase and mortality assumptions have a significant effect on the amounts reported. Changes in these assumptions would have the following effects on the defined benefit scheme:

Pension Pension liability cost £m £m Increase discount rate by 0.25%, decreases pension liability and increases pension cost by 21.2 0.1 Decrease inflation and pension increases by 0.25%, decreases pension liability and pension cost by 18.2 1.0 Increase life expectancy by one year, increases pension liability and pension cost by 15.5 0.9

The Group expects to contribute approximately £19.0 million (2008: £16.7 million) to its defined benefit scheme in the next financial year. Corporate Responsibility Corporate Defined contribution schemes Several defined contribution pension are operated. The total expense relating to these plans was £3.8 million (2008: £1.5 million).

(b) Share-based payments The amounts recognised in the income statement, before income tax, for share-based payment transactions with employees is £1.1 million (2008: £0.6 million).

Long-term incentive plans (‘LTIP’) The following outstanding grants arrange for the grant of shares to executive directors and senior management at an exercise price of £1 per individual grant. They have been valued using a Black-Scholes valuation model assuming a 2% dividend yield on the 2009 schemes (2% on the 2008 schemes, 0% pre-2008) and 20% volatility. The expected volatility for the share option arrangements uses historical volatility, determined by the analysis of daily share price movements over the past three years, as a basis for estimating the future volatility. In 2007, the EPS targets and entitlements in respect of all the outstanding grants were adjusted to take account of the capital raised in that year and the increased number of shares in issue. Business & Operational review Operational & Business Deferred share bonus plan (‘DSBP’) The following outstanding grant arranges for the grant of shares to executive directors and senior management. A nil-cost option will be granted to participants on a sliding scale between 0% and 100% pro rata to achieving Group Earnings before Interest and Tax (EBIT) of £19.0 million – £21.5 million for the year ended 31 December 2009. The number of shares to which a participant will be entitled will be calculated on the basis of the monetary value of the deferred bonus divided by the average closing share price for the Group during the month of December 2009. The deferred bonus award will vest on the second anniversary of the date of grant provided participants are in employment with the Company and not under notice of termination (either given or received) on the date of vesting.

Arrangement LTIP 2007 LTIP 2007 LTIP 2008 LTIP 2008 LTIP 2009 DSBP 2009 Date of grant 18 April 2007 14 June 2007 21 April 2008 21 April 2008 7 April 2009 7 April 2009 Number of instruments initially granted 1,054,901 4,139,642 2,453,607 10,489,905 7,583,743 4,619,202 Share price at date of grant 51.0p 48.8p 25.0p 25.0p 23.0p 23.0p

Contractual life 4 Years 4 Years 2.5 Years 2.5 Years 2.75 Years Governance Vesting conditions: – Period of service 3 Years 3 Years 3 Years 3 Years 3 Years 3 Years – EPS targets 3.27p to 3.27p to 3.09p to 3.09p to 2.10p to n/a 3.71p 3.71p 3.43p 3.43p 2.75p (see above) – Year shares issued 2010 2010 2010 2010 2011 2012 Settlement Shares Cash Shares Cash Shares Shares Normally exercisable in periods to 17 April 2017 13 June 2017 20 April 2018 20 April 2018 6 April 2019 6 April 2019 Expected option life at grant date 4 Years 4 Years 3 Years 3 Years 3 Years 3 Years Risk-free interest rate 4.50% 4.50% 3.85% 3.85% 4.31% 4.31% Fair value per granted instrument determined at the grant date 8.4p 7.1p 23.7p 18.7p 21.8p 21.8p Number of ordinary shares – 2008 1,210,107 4,369,058 2,453,607 10,030,937 – – Number of ordinary shares – 2009 1,210,107 4,083,295 2,453,607 8,789,220 7,339,788 4,468,462 Financial statements Financial

Costain Group PLC Annual Report 2009 / www.costain.com 105 Notes to the financial statements continued

20 Employee benefits – continued (b) Share-based payments (continued) During the year, five participants in the LTIP’s left the employ of the Group and ceased to participate in the 2009 LTIP, the 2009 DSBP, the 2007 cash LTIP and the 2008 cash LTIP (2008: two participants left the employ of the Group). The only new grants in the year were the 2009 LTIP and the 2009 DSBP.

The options outstanding at the year end have a weighted average contractual life of 1.7 years (2008: two years).

Save As You Earn Plans (‘SAYE’) The following outstanding SAYE plans, have been valued using a Black-Scholes valuation model assuming 2% dividend yield on the 2009 schemes (2% on the 2008 schemes, 0% pre-2008) and 20% volatility. The expected volatility for the share option arrangements uses historical volatility, determined by the analysis of daily share price movements over the past three years, as a basis for estimating the future volatility. In 2007, the exercise price and entitlements in respect of all then outstanding grants were adjusted to take account for the capital raised in that year and the increased number of shares in issue.

SAYE 2007 SAYE 2007 SAYE 2008 SAYE 2008 Arrangement 3 Year 5 Year 3 Year 5 Year Date of grant 18 May 2007 18 May 2007 23 May 2008 23 May 2008 Number of instruments initially granted 5,854,721 4,132,235 12,838,252 7,594,368 Exercise price 33.3p 33.3p 19.6p 19.6p Share price at date of grant 47.75p 47.75p 24.50p 24.50p Contractual life 3 Years 5 Years 3 Years 5 Years Vesting conditions: – Service period 3 years 5 years 3 years 5 years – Savings requirements Yes Yes Yes Yes – Settlement Shares Shares Shares Shares Normally exercisable in periods to 31 December 31 December 31 December 31 December 2010 2012 2011 2013 Expected option life at grant date 3 Years 5 Years 3 Years 5 Years Risk-free interest rate 4.50% 4.50% 3.85% 3.85% Fair value per granted instrument determined at the grant date 11.27p 12.63p 6.40p 7.08p Number of ordinary shares – 2008 3,175,048 1,910,779 12,293,449 7,318,692 Number of ordinary shares – 2009 2,727,848 1,640,339 11,155,875 6,755,716

Summary of LTIP and SAYE Plans Number and weighted average exercise prices of share options issued under all LTIP (including DSBP) and SAYE Plans

LTIP SAYE Total Price Number Price Number Price Number (p) (million) (p) (million) (p) (million) Outstanding at 1 January 2008 39.8 12.6 29.5 18.7 33.6 31.3 Forfeited during the year 38.1 (3.1) 30.8 (8.9) 32.7 (12.0) Exercised during the year – – 17.8 (3.7) 17.8 (3.7) Granted during the year 20.7 12.9 19.6 20.4 20.0 33.3 Outstanding at 31 December 2008 28.6 22.4 22.9 26.5 25.5 48.9 Forfeited during the year 44.4 (6.3) 24.5 (2.6) 38.6 (8.9) Exercised during the year – – 21.2 (0.1) 21.2 (0.1) Granted during the year 23.0 12.6 – – 23.0 12.6 Outstanding at 31 December 2009 24.9 28.7 22.7 23.8 23.9 52.5

Exercisable at the end of the period – – 29.3 1.5 29.3 1.5

The share options exercised during the year related to the SAYE 2004 5 year Plan, which matured in December 2009.

106 Costain Group PLC Annual Report 2009 / www.costain.com 21 Share capital Costain About 2009 2008 Nominal Nominal Number value Number value (millions) £m (millions) £ Authorised share capital – Ordinary shares of 5p each 1,014.8 50.7 1,014.8 50.7

Shares in issue at beginning of year – Ordinary shares of 5p each, fully paid 633.4 31.7 628.9 31.4 Issued in year (see below) 0.9 – 4.5 0.3 Shares in issue at end of year – Ordinary shares of 5p each, fully paid 634.3 31.7 633.4 31.7

During the year, the Company issued 22,566 ordinary shares under the five-year 2004 Save As You Earn plan which matured in December 2009. The Company also issued 330,328 ordinary shares in May 2009 and 529,756 ordinary shares in October 2009 under the scrip dividend scheme. Corporate Responsibility Corporate All shares rank pari passu regarding entitlement to capital and dividends.

The share options outstanding at the year end are detailed in Note 20. Details of the performance conditions and the options granted to executive directors are given in the Directors’ remuneration report. 22 Contingent liabilities Group Company 2009 2008 2009 2008 £m £m £m £m Under guarantees of bank overdrafts and loans to subsidiary companies – – 0.3 0.7

Group Certain subsidiary undertakings have entered into cross-guarantees for overdraft facilities made available to the Group. At 31 December 2009, these liabilities amounted to £Nil (2008: £Nil). review Operational & Business

There are also contingent liabilities in respect of: • creditors of jointly controlled operations, which are less than the book value of their assets; • performance bonds and other undertakings entered into in the ordinary course of business; and • legal claims arising in the ordinary course of business.

It is not anticipated that any material liabilities will arise from the contingent liabilities other than those provided for in these financial statements.

Company The Company has guaranteed the obligations of the subsidiary companies that are participating employers of The Costain Pension Scheme, the defined benefit pension scheme in the United Kingdom. At 31 December 2009, the total potential liability was £104.7 million (2008: £50.2 million) as disclosed in Note 20. Governance Financial statements Financial

Costain Group PLC Annual Report 2009 / www.costain.com 107 Notes to the financial statements continued

23 Other financial commitments Group Capital commitments 2009 2008 £m £m Property, plant and equipment – 1.8

The capital commitments in 2008 related to the purchase of tunnelling machinery.

Operating lease commitments Leases as lessee 2009 2008 Other Other Land and operating Land and operating buildings leases buildings leases £m £m £m £m Future aggregate minimum lease payments under non-cancellable leases are as follows: No later than one year 4.8 2.1 5.0 2.0 Between one and five years 14.2 2.1 15.5 1.5 Later than five years 11.5 – 12.9 – 30.5 4.2 33.4 3.5

Leases as lessor Land and buildings 2009 2008 £m £m Future aggregate minimum lease income under non-cancellable leases expiring: No later than one year 1.4 1.6 Between one and five years 3.5 5.2 Later than five years 0.2 0.4 5.1 7.2

Company The Company does not have any other financial commitments (2008: £Nil).

108 Costain Group PLC Annual Report 2009 / www.costain.com 24 Principal subsidiary undertakings, jointly controlled entities, associates and jointly controlled operations Costain About

Percentage of Country of Activity equity held incorporation Subsidiary undertakings Costain Ltd Engineering, Construction and Maintenance 100 UK Costain Abu Dhabi Co WLL Process Engineering 49 UAE Costain Building & Civil Engineering Ltd Engineering and Construction 100 UK Costain Engineering & Construction Ltd Holding and Service Company 100 UK Costain Oil, Gas & Process Ltd Process Engineering 100 UK Richard Costain Ltd Service Company 100 UK

Issued share Percentage capital of equity Country of Reporting Activity £m held incorporation date Responsibility Corporate Jointly controlled entities Alcaidesa Holding SA Land Development 11.2 50 Spain 31 Dec Arden Partnership (Derby) Holdings Ltd Operation of Hospital – 50 UK 31 Dec Arden Partnership (Leicester) Holdings Ltd Operation of Hospital – 50 UK 31 Dec Arden Partnership (Lincolnshire) Holdings Ltd Operation of Hospital – 50 UK 31 Dec Brighton & Hove 4Delivery Ltd Civil Engineering – 40 UK 31 Mar China Harbour-Costain Mexico S de RL de CV Civil Engineering – 50 Mexico 31 Dec Costain Petrofac Ltd Process Engineering – 50 UK 31 Dec 4Delivery Ltd Civil Engineering – 40 UK 31 Mar

Associates Coast to Coast Holdings Ltd Asset Management 0.5 20 UK 31 Mar C2C Services Ltd Asset Management – 20 UK 31 Mar

Integrated Bradford LEP Ltd Construction and Operation of Schools – 40 UK 31 Dec review Operational & Business Integrated Bradford SPV One Ltd Construction and Operation of Schools 0.1 29 UK 31 Dec Integrated Bradford SPV Two Ltd Construction and Operation of Schools 0.1 44 UK 31 Dec Lewisham Schools for the Future LEP Ltd Construction and Operation of Schools 0.1 40 UK 31 Mar Lewisham Schools for the Future SPV Ltd Construction and Operation of Schools – 40 UK 31 Mar Lewisham Schools for the Future SPV 2 Ltd Construction and Operation of Schools – 40 UK 31 Mar Prime Care Solutions (Kingston) Holdings Ltd Operation of Hospital – 40 UK 31 Dec

The equity capital of the above are held by subsidiary undertakings with the exception of Richard Costain Ltd and Costain Engineering & Construction Ltd.

Costain Abu Dhabi Co WLL has been treated as a subsidiary undertaking due to Costain having power to influence and control the composition of the board of directors.

All undertakings operate mainly in the country of incorporation, with the exception of Costain Building & Civil Engineering Ltd, Governance which operates outside the United Kingdom.

All holdings are of ordinary shares except Richard Costain Ltd, where Costain Group PLC holds 100% of the ordinary and preference shares.

A full list of Group companies will be included in the Company’s annual return. Financial statements Financial

Costain Group PLC Annual Report 2009 / www.costain.com 109 Notes to the financial statements continued

24 Principal subsidiary undertakings, jointly controlled entities, associates and jointly controlled operations – continued Percentage of Country of Activity equity held incorporation Major jointly controlled operations A-one+ Integrated Highway Services – MAC 7 Engineering & Maintenance 33 UK A-one+ Integrated Highway Services – MAC 10 Engineering & Maintenance 25 UK A-one+ Integrated Highway Services – MAC 12 Engineering & Maintenance 33 UK Costain- Joint Venture – M1 Widening and A5/M1 Link Civil Engineering 50 UK Educo UK Joint Venture – Bradford Schools Construction 50 UK Galliford-Costain-Atkins Joint Venture – United Utilities Civil Engineering 42 UK Costain- Joint Venture – A14 Civil Engineering 50 UK Costain-Laing O’Rourke Joint Venture – Farringdon Civil Engineering 50 UK Costain-Laing O’Rourke Joint Venture – Kings Cross Eastern Range Civil Engineering 50 UK Lafarge-Costain Joint Venture Civil Engineering 50 UK Stream Three Joint Venture – Costain-VWS (UK) Ltd Civil Engineering 50 UK

25 Related party transactions Group A related party relationship exists with its major shareholders, subsidiaries, joint ventures and associates, jointly controlled operations and with its directors and executive officers.

Sales of goods and services 2009 2008 Joint Joint ventures Jointly ventures Jointly and controlled and controlled associates operations Total associates operations Total 2009 £m £m £m £m £m £m Services of Group employees 18.9 37.0 55.9 15.9 26.5 42.4 Construction services and materials 59.2 0.1 59.3 94.8 0.5 95.3 78.1 37.1 115.2 110.7 27.0 137.7

There were no sales of goods and services to major shareholders during the year (2008: £Nil).

The amount due from a major shareholder of £6.7 million has been fully provided against since 2006. It relates to work carried out under a subcontract. Discussions among all the parties continue but recovery is uncertain.

Balances with joint ventures and associates are disclosed in Notes 14 and 18. Balances with jointly controlled operations are eliminated on consolidation.

Major shareholders Mohammed Abdulmohsin Al-Kharafi & Sons WLL and York Place Limited are regarded as related parties of the Company.

Transactions with key management personnel The Directors of the Company and their immediate relatives control 0.1% (2008: 0.1%) of the voting shares of the Company.

In addition to their salaries, in respect of the executive directors and executive officers, the Group provides non-cash benefits and contributes to defined contribution pension plans. Until 30 September 2009, the Group contributed to a defined benefit plan in respect of the majority of the executive officers.

Executive officers also participate in the Group’s LTIP and SAYE plans, which are detailed in Note 20.

110 Costain Group PLC Annual Report 2009 / www.costain.com 25 Related party transactions – continued Costain About The compensation of key management personnel, including the directors, is as follows: Group 2009 2008 £m £m Directors’ emoluments 1.6 1.5 Executive officers’ emoluments 2.8 2.6 Post retirement benefits 0.3 0.2 Share-based payments 0.2 0.1 4.9 4.4

The above amounts are included in employee benefit expense (Note 5).

Company

The Company has no transactions with related parties other than the charge in relation to share-based payments (Note 20) (2008: Nil). Responsibility Corporate 26 Significant areas of judgement and estimation The estimates and underlying assumptions used in the preparation of these financial statements are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

The Group believes the most critical accounting policies and significant areas of judgement and estimation arise from the accounting for defined benefit pension schemes under IAS 19 Employee benefits, the accounting for long-term contracts under IAS 11 Construction contracts and assessments of the carrying value of land.

Defined benefit pension schemes require significant judgements in relation to the assumptions for inflation, future pension increases, investment returns and member longevity that underpin the valuation. Each year in selecting the appropriate assumptions, the directors take advice from an independent qualified actuary. The assumptions and resultant sensitivities are set out in Note 20. Business & Operational review Operational & Business The majority of the Group’s activities are undertaken via long-term contracts and these contracts are accounted for in accordance with IAS 11, which requires estimates to be made for contract costs and revenues. In many cases, these contractual obligations span more than one reporting period. Also, the costs and revenues may be affected by a number of uncertainties that depend on the outcome of future events and often need to be revised as events unfold and uncertainties are resolved.

Management bases its judgements of costs and revenues and its assessment of the expected outcome of each long-term contractual obligation on the latest available information, this includes detailed contract valuations and forecasts of the costs to complete. The estimates of the contract position and the profit earned to date or the forecast loss are updated regularly and significant changes are highlighted through established internal review procedures. The impact of any changes in accounting estimates is then reflected in the ongoing results.

The construction contracts undertaken by the Group may require it to perform extra or change order work and 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. In assessing the result to be Governance included in the financial statements for each contract, the directors consider the status of negotiations with the customer and the reliability with which the estimated recoverable amounts can be measured.

Alcaidesa Holding SA, one of the Group’s equity accounted joint ventures, operates in the Spanish real estate market and holds land and property within current and non-current assets. At 31 December 2009, a review of the net realisable value of each of the company’s land holdings was undertaken, including the use of external valuations, and provisions, if considered necessary, have been reflected in these financial statements. Financial statements Financial

Costain Group PLC Annual Report 2009 / www.costain.com 111 Five-year financial summary

2009 2008 2007 2006 2005 £m £m £m £m £m Summarised consolidated income statement Revenue (Group and share of joint ventures and associates) 1,061.1 996.0 877.9 886.3 773.2 Less: Share of joint ventures and associates (67.7) (93.4) (130.3) (137.9) (95.1) Group revenue 993.4 902.6 747.6 748.4 678.1

Group operating profit/(loss) 22.0 19.5 9.7 (58.4) 8.7 Profit on sales of investments – – 2.7 3.6 – Profit on sales of interests in joint ventures and associates 2.0 2.7 3.2 – 3.5 Amounts written off loans to associate – – – (2.7) – Share of results of joint ventures and associates (3.2) (3.9) 0.9 (7.0) 13.4 Profit/(loss) from operations 20.8 18.3 16.5 (64.5) 25.6 Finance income 26.0 34.8 29.6 26.7 23.5 Finance expense (28.7) (30.0) (26.3) (23.9) (24.1) Net finance income/(expense) (2.7) 4.8 3.3 2.8 (0.6) Profit/(loss) before tax 18.1 23.1 19.8 (61.7) 25.0 Income tax (3.5) (4.9) (3.8) 7.7 (1.4) Profit/(loss) for the year attributable to equity holders of the parent 14.6 18.2 16.0 (54.0) 23.6

Earnings/(loss) per share – basic 2.3p 2.9p 3.6p (13.2)p 5.8p Earnings/(loss) per share – diluted 2.3p 2.9p 3.5p (13.2)p 5.7p

Dividends per ordinary share Final 0.55p 0.50p 0.50p – – Interim 0.275p 0.25p – – –

Summarised consolidated statement of financial position Property, plant and equipment 11.5 7.7 3.5 5.7 5.9 Intangible assets 1.0 1.8 2.7 3.4 3.5 Investments in equity accounted joint ventures and associates 44.1 42.7 40.1 35.1 35.4 Other non-current assets 47.3 24.9 27.9 40.7 41.3 Total non-current assets 103.9 77.1 74.2 84.9 86.1 Current assets 325.1 329.2 285.7 219.4 243.7 Total assets 429.0 406.3 359.9 304.3 329.8

Current liabilities 320.5 312.1 273.2 280.1 238.8 Pension liability 104.7 50.2 50.6 68.7 99.3 Other non-current liabilities 7.6 10.4 8.7 10.7 14.2 Total liabilities 432.8 372.7 332.5 359.5 352.3

Equity attributable to equity holders of the parent (3.8) 33.6 27.4 (55.2) (22.5)

112 Costain Group PLC Annual Report 2009 / www.costain.com Financial calendar and other shareholder information

Financial calendar* Unsolicited mail Full year results 10 March 2010 The Company is legally obliged to make its share register Annual Report mailing 1 April 2010 available to the general public. Consequently some shareholders Ex-dividend date for final dividend 21 April 2010 may receive unsolicited mail, including correspondence from Final dividend record date 23 April 2010 unauthorised investment firms. Shareholders who wish to limit Interim Management Statement 6 May 2010 the amount of unsolicited mail they receive can contact: Annual General Meeting 6 May 2010 Final dividend payment The Mailing Preference Service (subject to shareholder approval) 21 May 2010 Freepost (LON20771) Half-year end 30 June 2010 London W1E 0ZT Half-year results 2010 25 August 2010 Interim Management Statement October 2010 Shareholder information Financial year-end 31 December 2010 The Company’s Registrar is Equiniti, Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA. For enquiries regarding * The financial calendar may be updated from time to time throughout the your shareholding, please telephone 0871 384 2250. You can year. Please refer to our website www.costain.com for up-to-date details. also view up to date information about your holdings by visiting the shareholder website at www.shareview.co.uk. Please ensure Scrip dividend scheme that you advise Equiniti promptly of a change of name or address. A scrip dividend scheme will be offered in respect of the dividend. Those shareholders who have already elected to join ShareGift the scheme will automatically have their dividend sent to them The Orr Macintosh Foundation (ShareGift) operates a charity share in this form. donation scheme for shareholders with small parcels of shares whose value makes it uneconomic to sell them. Details of the Shareholders wishing to join the scheme for the dividend (and scheme are available on the ShareGift website www.sharegift.org. all future dividends) should return a completed mandate form Equiniti can provide stock transfer forms on request. Donating to the Registrar, Equiniti by 29 April 2010. Copies of the mandate shares to charity in this way gives rise neither to a gain nor a form and the scrip dividend brochure can be downloaded from loss for Capital Gains Tax purposes. This service is completely the Company’s website www.costain.com or obtained from free of charge. Equiniti by telephoning 0871 384 2268.

Analysis of Shareholders Designed and produced by The College www.thecollege.uk.com Accounts Shares % Costain photographers Mike Doherty: pages 15, 19 (‘Blue Hat’ Institutions, companies, scheme), 21 (Apprentices and trainees), 27, and 38. Phil Starling: individuals and nominees: pages 10/11, 17, 23 (‘Friends of Felixstowe’) and 37 (Highways). Shareholdings 100,000 and more 236 582,714,762 91.87 Ian Routledge: pages 04/05, 06/07, 17, 21 (Academy of excellence), 30, 32 and 46/47. Additional photography Alastair Fyfe Photography: Shareholdings 50,000-99,999 200 13,995,172 2.21 pages 08/09 and 17. www.webbaviation.co.uk: pages 12/13, 17 and 39 Shareholdings 25,000-49,999 32811,282,9721.78 (Hydrocarbons & Chemicals). Venture Wales: page 23 (‘Cooking up Shareholdings 5,000-24,999 1,689 18,499,780 2.92 Success’). www.aerial-images.co.uk: page 19 (Awareness days). Shareholdings 1-4,999 10,545 7,756,027 1.22 Beaumont & Cowling (Sheffield) Ltd: page 25 (Reducing carbon emissions). Veena Cornish www.veenacornish.co.uk: page 33. Gavin 12,998 634,248,713 100.00 Stacey: page 36 (Water). Philip Lane Photography: page 36 (Waste). www.airshots.co.uk: page 36 (Marine). Image courtesy of Network Rail: Secretary page 37 (Rail). Michael Metherell/Costain: page 37 (Airports). © NDA: Clive L Franks page 39 (Nuclear). Gustavo Ferrari, Pro Light Studio: page 46 (Samer G. Younis). All other images provided by the Costain Group PLC. Registered Office The Annual Report is printed by an FSC (Forest Stewardship Council), Costain House, Vanwall Business Park, Maidenhead, ISO 14001 and Carbon Neutral certified printer using vegetable oil Berkshire SL6 4UB based inks. (ISO 14001 is a pattern of control for an environmental management system against which an organisation can be credited by a third party. FSC ensures there is an audited chain of custody from Telephone 01628 842444 the tree in the well-managed forest through to the finished document www.costain.com in the printing factory.) [email protected] This Report has been printed on Revive 50:50 gloss paper and Soporset Company Number 1393773 Premium Offset Paper. Revive uses 25% de-inked post-consumer waste, 25% unprinted pre-consumer waste and 50% virgin fibre and Registrar Soporset, wood fibre from fully sustainable forests. Both papers have Equiniti, Aspect House, Spencer Road, Lancing, FSC certification. West Sussex BN99 6DA If you have finished reading the Annual Report and no longer wish to retain it, please pass it on to other interested readers or return it Telephone 0871 384 2250 to Costain Group PLC or dispose of it in your recycled paper waste. Calls to this number are currently charged at 8 pence per minute Thank you. from a BT landline. Other telephony provider costs may vary. This Annual Report is available at: www.costain.com

Costain Group PLC Annual Report 2009 / www.costain.com IBC Costain Group PLC Costain House Vanwall Business Park Maidenhead Berkshire SL6 4UB www.costain.com