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    Engineering Tomorrow... today Costain Group PLC Annual Report 2013


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    Contents Strategic report Governance Financial statements 01 The spirit of innovation... 47 Chairman’s statement on corporate 86 Consolidated income statement 02 The history of Costain spans governance 87 Consolidated statement of a period of nearly 150 years 48 Board of Directors comprehensive income and expense 04 2013 highlights 50 Corporate Governance statement 88 Consolidated statement 06 Chairman’s statement 55 Audit Committee report of financial position 08 Chief Executive’s review 58 Nomination Committee report 89 Company statement of financial position 11 Business model 59 Directors’ remuneration report 90 Consolidated statement of changes 12 Business model – The Costain difference 77 Directors’ report in equity 24 Principal risks and uncertainties 81 Directors’ responsibilities statement 90 Company statement of changes in equity 26 Performing responsibly 82 Independent Auditor’s report to the 91 Consolidated cash flow statement 26 Divisional performance members of Costain Group PLC 92 Company cash flow statement 28 Engineering Tomorrow...‘in action’ 93 Notes to the financial statements 34 Corporate Responsibility 132 Five-year financial summary 34 Costain Cares 35 Relationships Other information 39 Our Environment 134 Financial calendar and other shareholder 41 The Future information 43 Finance Director’s review 136 Contact us KPI This icon has been used throughout the report and references our key performance indicators (‘KPIs’). Throughout the Annual Report, we have used the following icons to direct you to further information either in the report or elsewhere. Links to further information Find us online in this report. Our Annual Report 2013 is available in both printed form and within the ‘Investors’ section of the Costain website at www.costain.com/ investors. Effective communication with our shareholders is vital to our continued success Links to further information and we would welcome feedback on either or within our website. both versions of this Annual Report – email us at info@costain.com


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    Strategic report 01-45 Strategic report The spirit of innovation... 46-84 Governance Isambard Kingdom Brunel was the celebrated engineer of his era. His vision and pursuit of innovative engineering ideas revolutionised infrastructure in the nineteenth century. In the twenty-first century, Costain is driven by a similar passion to build a better world. We seek new ways to meet the complex challenges of today’s infrastructure programmes; engineering solutions that will benefit the UK for generations to come. 85-132 Financial statements Brunel had a fundamental impact on the world in which he lived and on the world in which we live today. At Costain, we share the Brunel spirit by Engineering Tomorrow. How we create value Focusing on six strategic priorities Our strategy for Our Engineering Tomorrow strategy sustainable growth can is designed to meet national needs by Operate safely, efficiently upgrading and maintaining the UK’s and responsibly be found on pages 11-23. infrastructure and aiding economic recovery 133-136 Other information and growth. Value is created by our drive Our vision... Continue to enhance is to be one of the UK’s top engineering solutions providers. for innovation and we are committed to customer insight We must be the best for technical, innovative and sustainable solutions. a constant quest for improvement. We are confident that our robust business model Behaviour... and our strategic focus will continue to Grow by broadening and we are committed to operating our business both sustainably and deliver shareholder value in the years ahead. integrating our services responsibly. We are focused on one simple but powerful message – ‘Costain Cares’. This is not a slogan: it is an attitude of mind. It is integral to everything we do and a touchstone against which we can evaluate and measure our performance. Costain Cares about relationships, our environment and the future. Additional information concerning our Engineering Tomorrow strategy can Develop best-in-class team be found at key locations in this report, specifically on pages 6, 8-9, 12-23, 28-33, Operations... we focus on intelligent solutions to meet national needs. As a Tier One 35, 40 and 42. engineering solutions provider, we provide front-end engineering consultancy, construction and ongoing care and maintenance services across market Create and deliver innovative sectors. We have two core operating and reporting divisions within our business, Infrastructure and Natural Resources. sustainable solutions Costain Cares and Our Values Infrastructure Natural Resources We care about all our stakeholders. Rail Highways Water Nuclear Process Power Waste Our set of values drives our behaviour and Working in collaboration Airports Oil & Gas provides the basis for all our decisions. Everyone at Costain is committed to being: Services Advisory and concept development • Customer focused Specialist design Programme management Complex project delivery • Open and honest Technology integration Asset optimisation and support • Safe and environmentally aware More detailed information about our strategic priorities can be found • Team players on pages 13-19 of this report. Delivering value to all our stakeholders Delivering a sustainable business through the development • Accountable of a strong and profitable forward order book. • Innovative – improving continuously and therefore the... • Natural choice Costain Group PLC Annual Report 2013 01


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    Strategic report The history of Costain spans a period of nearly 150 years Costain continues to be one of the UK’s leading engineering solutions providers, working to improve people’s lives by focusing on the issues you care about. Mulberry Harbours The Group was founded in Liverpool Wartime work included 26 aerodromes, part of in 1865 by Richard the Mulberry Harbours Costain, aged 26, and munitions factories. a jobbing builder from the Isle of Man. Festival of Britain Costain was the first UK contractor to win the Queen’s Award for Export Achievement, in 1971. Costain built the London Bridge Station Skylon and Dome A list of 101 interesting facts about Costain can of Discovery for the be found on its website: www.costain.com/ 1951 Festival of news Britain. 02 Costain Group PLC Annual Report 2013


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    01-45 Strategic report ort Costain regularly announces key stakeholder information on the ‘News’ section of its website: Costain voted Top 100 company www.costain.com/ news The Thames Barrier 4 December 2013 One of the UK’s leading engineering solutions providers, Costain, was placed 55th (joint place with Virgin Trains) in Britain’s ‘Most Admired’ league table, climbing up from last year’s 61st position. The table, comprising 247 top names including Rolls-Royce, Unilever, Marks & Spencer, Royal Dutch Shell, J Sainsbury and Coca-Cola Enterprises, was organised by Management Today magazine and sponsored by BSI. Costain was a founder member The league table was compiled by asking Britain’s largest public companies in 26 sectors to evaluate their peers. of the Channel Tunnel joint venture. Contract finalised with EDF C Costain awarded M6 – Heysham The 1,377 metre Tsing for Hinkley Point Nuclear LLink Road contract. Ma suspension bridge Power Station. built in consortium in Hong Kong is the world’ss longest combined road Costain award awarded five-year framework and rail bridge. contract for Network Rail. Costain to refurbish Hammersmith Flyover. Costain JV awarded Costain awarded £900 million Network a £400 million contract Rail contract. to redevelop London Bridge Station. Costain appointed to Thames Water AMP6 programme. Costain Group PLC Annual Report 2013 03


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    Strategic report 2013 highlights Strategy delivering results Financial highlights Revenue 2 Underlying operating profit 1, 3 KPI Adjusted profit from operations 1, 4 £m £m £m 1,200 30.0 40 1,061.1 1,022.5 27.4 35.0 986.3 934.5 960.0 24.1 24.5 30.8 900 22.5 22.0 30 29.4 17.4 23.6 600 15.0 20 20.8 300 7.5 10 0 0 0 09 10 11 12 13 09 10 11 12 13 09 10 11 12 13 Net cash balance KPI Adjusted earnings per share 1, 4 Dividend per share £m Pence Pence 160 48 44.1 12 11.5 144.3 140.1 10.75 39.7 10.0 120 120.5 36 36.4 9 9.25 105.7 31.1 8.25 80 24 23.0 6 57.7 40 12 3 0 0 0 09 10 11 12 13 09 10 11 12 13 09 10 11 12 13 1 2012 restated for revised IAS 19 Employee 2012 benefits accounting standard. 2013 (restated)1 2 Including share of joint ventures and associates. Revenue 2 £960.0m £934.5m 3 Underlying operating profit before Other items (amortisation of acquired intangible assets Operating profit and employment related and other deferred consideration and in 2013 £3.7 million one-off Underlying 3 £27.4m £24.5m costs associated with the offer for May Gurney Profit before tax Integrated Services plc) and in 2012 excludes the £2.8 million one-off costs resulting from Adjusted 4 £31.0m £28.1m pension scheme liability actions. Reported £12.9m £24.7m 4 Results stated before Other items (amortisation of acquired intangible assets and employment Basic earnings per share related and other deferred consideration and in Adjusted 4 44.1p 39.7p 2013 £3.7 million one-off costs associated with the offer for May Gurney Integrated Services plc Reported 18.8p 35.4p and non-cash impairment of £9.8 million on carrying value of assets in non-core Land Net cash balance £57.7m £105.7m Development activity in Spain). Dividend per share 11.5p 10.75p KPI This icon has been used throughout the report and references our key performance indicators (‘KPIs’). The Finance Director’s review can be found on pages 43-45. The financial statements can be found on pages 86-132. 04 Costain Group PLC Annual Report 2013


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    01-45 Strategic report 46-84 Governance Highlights • Underlying operating profit3 up 12% • Acquisition of EPC Offshore Ltd, to £27.4 million (2012: £24.5 million) a specialist oil and gas project • Increase of 10% in adjusted profit before management services company, and tax4 to £31.0 million (2012: £28.1 million) launch of Costain Upstream, to provide services across the life-cycle of upstream • Adjusted basic earnings per share4 offshore oil and gas assets increased by 11% to 44.1 pence (2012: 39.7 pence) • Recommended increase in final dividend for the seventh successive year, taking 85-132 Financial statements • Forward order book up 25% to the total for the year to 11.5 pence, £3.0 billion (2012: £2.4 billion): over a 7% increase on the prior year 90% of order book comprises repeat orders and over 90% lower risk cost- • Proposed firm placing and placing and reimbursable forms of contract open offer to raise circa £75 million (before expenses) to take advantage of the • £57.7 million year-end net cash balance growing number of opportunities available (2012: £105.7 million), reflecting the to accelerate the Group’s development anticipated transition to lower risk cost- in the medium and long term reimbursable contracts, reduced levels Andrew Wyllie, Chief Executive, reviews of advance payments and increasing the Group’s performance in more detail 133-136 Other information on pages 8-10. support services revenues Environmental and social highlights • Costain achieved the highest ranking, • In September, Costain, in conjunction Platinum Big Tick, in Business in the with BITC, hosted The Big Infrastructure Community’s (‘BITC’) annual benchmark Conversation at London’s City Hall of responsible business management, • In December, Costain was recognised the Corporate Responsibility Index at the prestigious NEF (The Innovation • We were delighted to be named in the Institute) Innovation Awards, receiving Climate Performance Leadership Index high commendations for the Most as one of the best performing companies Innovative Business Process and Most in the Carbon Disclosure Project’s annual Inspiring Business Leader categories FTSE 350 climate change report A more detailed review of the Group’s Corporate Responsibility performance can be found on pages 34-42. Costain Group PLC Annual Report 2013 05


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    Strategic report Chairman’s statement The opportunities in our marketplaces The Group’s net cash position at are substantial as investment by major 31 December 2013 was £57.7 million customers in transportation, energy and (2012: £105.7 million). This reduction water resources is expected to grow was expected given the Group’s rapid significantly, and supplier consolidation transformation and strategic focus on is anticipated to continue. In this major customers who utilise target cost, changing and competitive environment, cost-reimbursable contracts. Over 90% it is essential that Costain is able to of the order book now includes this demonstrate that it has the scale, lower risk form of contract, which is skills, experience and financial strength more suited to complex, long-term necessary to secure, and then deliver, projects. The lower net cash position a strong performance on these also reflects an increase in support increasingly large and complex contracts. service related activities, a reduction David Allvey in advance payments and a delayed Chairman The proposed under-written capital contract. raising will enable Costain to capitalise Overview and strategic update on these opportunities by demonstrating We were successful in securing a Costain has delivered another strong the Group’s financial capacity to number of major new contract awards performance. support a greater number of longer, and extensions to existing contracts. larger contracts, investing in innovation Consequently, the order book was up The Group has been transformed in and technology, financing bid costs 25% to £3.0 billion as at 31 December recent years and is now recognised for projects, funding increased working 2013, compared to the start of the year as one of the UK’s leading engineering capital requirements and, where (2012: £2.4 billion). solutions providers. The Group is part opportunities arise, adding further of a select group of companies with the expertise by acquisition, thereby Dividend integrated consulting, project delivery accelerating the Group’s development. In light of another successful and operational capability required to performance and our continuing meet the needs of major customers in Performance confidence in the long-term prospects a rapidly developing multi-billion pound Revenue, including the Group’s share for the Group, the Board is market. of joint ventures and associates, for the recommending a 7% increase in the year increased to £960.0 million final dividend, the seventh successive We recognise the changing dynamics (2012: £934.5 million), 30% of which year of increase. If approved, the of the UK marketplace, in which major was derived from support service related 7.75 pence per share (2012: 7.25 pence) customers are seeking to build strategic activities. Our focus on higher margin final dividend will be paid on 25 April relationships with fewer service providers activities led to an increase of 12% in 2014 to shareholders on the register involving larger, longer term contracts Group underlying operating profit of as at the close of business on 14 March incorporating a broader range of services £27.4 million (2012: £24.5 million). 2014. This would bring the total dividend across the full life-cycle of an asset. Adjusted profit before tax increased by for the full year to 11.5 pence per share 10% to £31.0 million (2012: £28.1 million). (2012: 10.75 pence), an increase of Through the successful implementation Adjusted basic earnings per share were 7% over the prior year. of our Engineering Tomorrow strategy, up 11% to 44.1 pence (2012: 39.7 pence). Costain now provides a range of Group pension scheme integrated consulting, project delivery The deficit on the Group’s legacy and operations and maintenance Costain Pension Scheme (‘CPS’) at services to blue-chip customers in the 31 December 2013 was £29.4 million UK’s infrastructure, energy and water net of deferred tax (2012: £40.0 million). markets. The Group has a well- The assumptions and sensitivities used respected brand, excellent reputation in the valuation of the pension scheme and strong track record of performance. are set out in the notes to the financial statements. In accordance with the requirement for a triennial review, another full actuarial valuation of the CPS is being carried out as at 31 March 2013. 06 Costain Group PLC Annual Report 2013


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    01-45 Strategic report The Board of Directors including their appointment date, skills and experience and external appointments can be found on pages 48-49. 46-84 Governance Proposed capital raising People Summary and outlook Costain has announced a proposed On 20 November 2013, we announced Costain has delivered another strong capital raising to enable the Group that Mr Samer Younis, a Non-Executive performance in 2013, with a forward to take greater advantage of the Director of Costain and the nominee of order book up 25% to £3.0 billion, and opportunities in its chosen markets and Mohammed Abdulmohsin Al-Kharafi & the Board is recommending an increase thereby accelerate the Group’s medium- Sons Co. W.L.L. (‘Kharafi’), had notified in the final dividend for the seventh and long-term growth prospects. the Board of his resignation as a Director successive year. of the Company with effect from The Group proposes to raise 30 November 2013. We would like to The Group has been transformed, approximately £70.3 million (net of thank Samer for his contribution during and is now one of the UK’s leading expenses) by way of a firm placing and his years of service. Tier One engineering solutions providers. placing and open offer of, in aggregate, Costain is established in a developing 33,382,068 new ordinary shares at an We were pleased to welcome to the market of a limited number of providers offer price of 225 pence per new Board Mr Ahmed Aly Samy, a nominee who can deliver the innovative integrated 85-132 Financial statements ordinary share. 11,111,112 new ordinary of Kharafi, as a Non-Executive Director consulting, project delivery and shares will be issued through the firm with effect from 30 November 2013. operations and maintenance services placing and 22,270,956 new ordinary Mr Samy, the Deputy Director General increasingly demanded by major shares will be issued through the placing Investment Affairs at Kharafi, is also customers. and open offer on the basis of 1 new a member of Costain’s Nomination ordinary share for every 3 existing Committee. The proposed capital raising alongside ordinary shares. these good results provides us with the We announced on 28 January 2014 opportunity to accelerate our growth The proceeds will be utilised: that Alison Wood would join the Board in the medium and long term in rapidly • to demonstrate to customers the as a Non-Executive Director with effect evolving markets, in which it is expected Group’s financial capacity to support from 1 February 2014. Alison is currently that over £400 billion will be spent the anticipated further increases in a Non-Executive Director at Cobham plc in the next ten years. contract size and duration; and Senior Independent Director at e2v technologies plc and was formerly 133-136 Other information • to invest in innovation and technology Non-Executive Director at BTG plc necessary to enhance the service and Thus Group plc. Alison will succeed offering to the customers; Mike Alexander as Chair of the • to finance bid costs associated with Remuneration Committee when he retires, as previously announced, on David Allvey a greater number of large-scale 31 March 2014. Chairman projects for which the Company is in a position to tender; 26 February 2014 There were a number of operational • to fund likely increased working capital management changes in the year and requirements arising from the move these are covered in the Chief Executive’s in the market towards target cost, review. cost-reimbursable contracts; • to provide flexibility to make selected On behalf of the Board, I would like in-fill acquisitions to complement to place on record our recognition and Costain’s existing capabilities as appreciation of the excellent colleagues opportunities arise; and we have at Costain who continue to • for general corporate purposes. play a major role in our success. The capital raising has been fully underwritten by Investec Bank plc and Liberum Capital Limited. Please see the separate announcement made by Costain for further details of the terms and conditions of the proposed capital raising. Costain Group PLC Annual Report 2013 07


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    Strategic report Chief Executive’s review This change in customer procurement In energy, it is estimated £110 billion approach, and associated supplier is to be invested by 2020 in new energy consolidation, along with the very infrastructure to meet the forecast substantial expenditure expected in energy supply capacity gap; and the next few years is creating a dynamic £50 billion is expected to be spent to marketplace which provides Costain address the UK’s nuclear waste legacy, with a tremendous opportunity to whilst the ongoing capital investment in accelerate the development of the North Sea oil and gas is at its strongest business. for over 30 years (£13 billion forecast in 2013). Market trends and developments The UK transport, energy and water In water, there remains an ongoing need markets are defined by significant and for asset performance improvements, Andrew Wyllie long-term planned expenditure increased water standards and a greater Chief Executive programmes underpinned by committed focus on the combination of capital regulated spend and essential capital and operating costs, with continued This has been another year of significant investment. The future opportunities in regulated investment planned. The progress in the transformation of Costain these markets are substantial. 5 year AMP6 period commencing in into a full engineering service provider for April 2015, is expected to include an major customers who continue to invest The UK Government, as set out in investment level similar to the £21 billion billions of pounds addressing essential their recent National Infrastructure invested over 5 years during AMP5. national needs. Plan, estimates that average annual infrastructure investment in the UK Alongside these planned levels of The development of new skills and has increased to £45 billion per annum infrastructure investment, our major capabilities, broadening the scope of compared to an average of £41 billion customers are consolidating their supply our activities, and the introduction of per annum between 2005 and 2010. chains as they seek to derive business new technology has ensured that we The National Infrastructure Plan has benefits by working in a more strategic were able to deliver a strong financial set out an overall investment of and collaborative manner with a performance and secure a 25% increase £224 billion to 2020 in an identified reduced number of preferred Tier One in our order book to £3.0 billion, of which pipeline of projects in the UK. engineering solutions providers, like over 90% is repeat business. We have Costain, who have the ability to satisfy increased to over £750 million the Rail remains a priority area of investment the full range of their service needs revenue secured for 2014 (2012: over for the UK Government, to stimulate for increasingly complex and large-scale £700 million secured for 2013) and economic growth, with a 14% increase projects. in excess of a further £2.2 billion of in demand for rail travel estimated for revenue secured for 2015 and beyond. the next five years. To address this The complex nature of the customers’ In addition, the Group has maintained demand, £38 billion has been allocated requirements also dictates that a target a strong preferred bidder position of to national rail networks in areas cost, cost-reimbursable form of contract over £400 million. It is encouraging to including electrification, track and is the most appropriate to be utilised. have started the new financial year with network upgrades. A further £43 billion Consequently, over 90% of our order such good long-term revenue visibility. has been allocated for High Speed 2. book is now comprised of this form of contract. Contracts of this form benefit Costain is now established as a leading In highways, the Chancellor promised from generally being lower-risk than Tier One UK engineering solutions in June 2013 the most extensive lump sum contracts, but they do tend to provider. programme of road building in over be associated with higher bid costs and 50 years. By 2020-21, the UK working capital requirements. The speed Through the implementation of our Government is expected to invest of the move to this form of contract is Engineering Tomorrow strategy, over £28 billion in enhancements and reflected in the cash flow movement we are focused on providing innovative maintenance of national and local roads. in the year. and cost-effective solutions to customers who are increasingly seeking more strategic relationships through larger and longer-term contracts in order to meet their complex requirements. 08 Costain Group PLC Annual Report 2013


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    01-45 Strategic report Scan this QR code to view the announcement interview with Andrew Wyllie. Additional information concerning our Engineering Tomorrow strategy can be found at key locations in this report, specifically pages 6, 8-9, 12-23, 28-33, 35, 40 and 42. 46-84 Governance The provision of an increasing range management tool was one such idea, Operating results of skills and services, along with our which is now being sold commercially The strong performance of the Group strong brand and reputation for excellent to rail and highways customers as an is reflected by a 12% increase in delivery, has enabled us to secure over addition to Costain’s range of services. Group underlying operating profit to £1.5 billion worth of large, integrated Other examples of new innovation and £27.4 million (2012: £24.5 million). and complex projects and contract technology being driven across our extensions during the course of the entire service offering include: COpath, The Infrastructure division in particular year, including: an asset intelligence resource which has had a very successful year, with an • a contract with EDF to design and gathers data intelligence on the increase in revenue, underlying operating deliver the water cooling systems behaviour and movement of people profit and order book. This strong for the new Hinkley Point C nuclear within major assets such as railway performance is a result of our previous power station; stations; carbon capture and storage focus on a number of opportunities technology; Nuclear Waste Management in the infrastructure markets now • the electrification upgrade of the Graphite Gasification; and GRAVITAS delivering excellent operating returns 85-132 Financial statements West Coast Mainline for Network Rail; offshore, which carries out research on for the Group. • the AMP6 programmes for Thames the design and construction of concrete Water and Severn Trent; gravity foundations for large offshore During the year, the Natural Resources wind turbines. division has continued its transformation • a number of contracts for Crossrail and the reduced profitability reflects including the design, fit-out and The wide range of new technology lower revenues, additional costs to commissioning of the railway systems; within the business was showcased for complete a small number of projects • delivery of the Front End Engineering customers at a successful innovation and restructuring and business Design (‘FEED’) for Centrica’s gas event held in September at the Darwin development costs including the terminal at Barrow, following Centre in the Natural History Museum deployment of new skills and capabilities successful completion of the design in London. under a strengthened leadership team. and construction of the Easington The transformation is now complete terminal for the York field; and Broadening our capabilities and the division finished the year with • a highways framework contract with through acquisition an increased order book and a high 133-136 Other information On 1 August 2013, we were delighted level of tendering activity. Transport for London including the to announce the acquisition of EPC Hammersmith Flyover strengthening Offshore, a specialist oil and gas project Significant developments in project. management services company, for an joint venture activities initial consideration of £10.6 million During the period, Costain completed Engineering Tomorrow strategy (including £1.0 million for excess cash). the sale of its minority shareholdings Our customers’ endorsement of Costain The acquisition is expected to be in three joint venture companies to as a Tier One provider and our market earnings enhancing to Costain in the Severn Trent PLC for a total consideration leading reputation is founded on our first full year of acquisition. of £12.0 million. Severn Trent will commitment to excellence in therefore become 100% owner of the engineering. Engineering Tomorrow Costain also announced the launch of three companies, which provide services is the Costain commitment to identifying, Costain Upstream, to provide services in the water sector. As a result of the developing and implementing innovative across the life-cycle of upstream transaction, Costain realised a profit solutions to major national needs. It is offshore oil and gas assets. Costain of £9.1 million in 2013. this that enables us to win large and long-term, strategic contracts involving Upstream will combine the capabilities of ClerkMaxwell, the oil and gas At the period end, the Group acquired highly complex work across the full engineering and support services the 27% interest from its partner life-cycle of our major customers’ assets. provider, which has more than doubled Serco Group plc in their Managed in size since its acquisition in 2011, and Motorway Technology joint venture We are increasing our investment in EPC Offshore, to increase the scale of arrangement for a cash consideration Research and Development, and we the Group’s services in the growing, of £2.4 million. The joint venture have initiatives in place to encourage high-value North Sea upstream oil and arrangement, in which Costain already and support entrepreneurial members gas market. held the remaining 73% interest, of staff to develop their ideas into has a place on the Highways Agency business opportunities. The ‘Mario’ asset framework to deliver new technology-led highways improvements. Costain Group PLC Annual Report 2013 09


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    Strategic report Chief Executive’s review continued The Group has reassessed the carrying ‘Costain Cares’ During the period, Alex Vaughan was value of the assets in its non-core Land Our customers place great emphasis appointed Managing Director of the Development activity in Spain, which is on the ‘good citizen’ credentials of their Natural Resources division, succeeding undertaken in a 50:50 joint venture with supply-chain partners. Increasingly, Mark Rogerson who left the Group to Santander Bank. As a consequence of customers insist that their Tier One pursue other opportunities. Tim Bowen continuing uncertainty regarding future providers share their corporate and replaced Alex Vaughan as Corporate market conditions in Spain, a non-cash social responsibility values, and failure Development Director. impairment has been taken against the to embrace this means non-qualification assets, the Group’s share of which is for tender lists. We passionately share The Future £9.8 million, reducing Costain’s total these values because we believe Costain has delivered another strong carrying value in the joint venture that investment in corporate social performance and demonstrated again to £26.6 million. responsibility capital is a vital investment that it has the right strategy to drive in the Group’s future success. profitable growth by responding to the Lapsed all-share merger with complex and fast-evolving requirements May Gurney Integrated Services plc Our ‘Costain Cares’ programme places of its blue-chip customers. (‘May Gurney’) responsible, effective and collaborative The Boards of Costain and May Gurney stakeholder relationships at the core of Our established status as one of the announced in March that they had everything we do, is a central part of our UK’s leading engineering solutions reached agreement on the terms of value proposition to customers and has providers, our increased order book a recommended all-share merger of a direct impact on the size and quality and our market-leading reputation for Costain and May Gurney (the ‘Proposed of our order book. innovation means that we are confident Merger’). of delivering further progress and being We received a further Platinum award able to take advantage of significant Following an offer from another party from Business in the Community, opportunities in our chosen sectors. in April, Costain announced that, having recognising our proactive commitment undertaken several months of detailed to mitigating the environmental and The proposed capital raising will enable due diligence, it did not believe that it social aspects of our operations. us to accelerate the rate at which we would be in the best interests of Costain address these opportunities, and will shareholders for Costain to amend the Costain places the highest priority thereby enhance the Group’s medium- terms of the Proposed Merger and that on the effective management of and long-term growth prospects, by it would not be making a revised offer for Safety, Health and Environment, and demonstrating the Group’s financial May Gurney. Accordingly, the Proposed the Group’s Accident Frequency Rate capacity to support a greater number Merger lapsed in accordance with (‘AFR’) was 0.12, which continues to of longer, larger contracts, investing in its terms. compare favourably with our major innovation and technology, financing Tier One peer group. We also received bid costs for projects, funding increased The Group incurred transaction pre-tax 16 Gold Awards from RoSPA, four working capital requirements and, costs of £3.7 million associated with the Gold Medals and two prestigious where opportunities arise, adding further May Gurney proposal and these have Orders of Distinction. expertise by acquisition. been expensed in the results and treated as a one-off non-trading item. Costain improved its position in the I look forward to reporting on further annual assessment by Management progress during the year. Today magazine of Britain’s Most Admired Companies, ranking 55th overall and improving to second place in the sector. Additional information Teamwork concerning our Costain The strong results generated by Cares strategy can be Costain in 2013 were delivered by our Andrew Wyllie found on pages 34-42 outstanding multi-disciplined team of Chief Executive and on our website: approximately 4,000. During the year, www.costain.com/ we increased once again our training 26 February 2014 responsibility and development programmes across the organisation so that we have the requisite skills and resources. There was a further increase in the number of apprentices across the Group. 10 Costain Group PLC Annual Report 2013


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    Strategic report 01-45 Strategic report Business model Our business model 46-84 Governance We are committed to growing our business in a controlled Our vision... is to be one of the UK’s top engineering solutions providers. manner across all our target We must be the best for technical, innovative and sustainable solutions. markets. We deliver this through our business model which enables us to deliver innovative engineering solutions for our clients and Behaviour... we are committed to operating our business both sustainably and their customers. responsibly. We are focused on one simple but powerful message – ‘Costain Cares’. This is not a slogan: it is an attitude of mind. It is integral to everything we do and a touchstone against which we can evaluate Our strategy and business and measure our performance. Costain Cares about relationships, model are underpinned by 85-132 Financial statements our environment and the future. strong leadership and robust processes across finance, risk management and operations, strong governance and very Operations... high standards of responsibility. we focus on intelligent solutions to meet national needs. As a Tier One engineering solutions provider, we provide front-end engineering consultancy, construction and ongoing care and maintenance services across market This approach delivers sectors. We have two core operating and reporting divisions within our sustainable growth, allowing business, Infrastructure and Natural Resources. us to meet our business goal of delivering value to all our Infrastructure Natural Resources stakeholders. Rail Water 133-136 Other information Highways Nuclear Process Power Waste Airports Oil & Gas Services Advisory and concept development Specialist design Programme management Complex project delivery Technology integration Asset optimisation and support Delivering value to all our stakeholders Delivering a sustainable business through the development of a strong and profitable forward order book. Costain Group PLC Annual Report 2013 11


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    Strategic report Business model continued The Costain difference 01 Creating value through our customer focused strategy Our strategy... Engineering Tomorrow... is our strategic commitment to identifying, developing and implementing innovative and sustainable solutions to meet major national needs. Additional information can be found online: www.costain.com/engineering-tomorrow 12 Costain Group PLC Annual Report 2013


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    01-45 Strategic report 46-84 Governance 02 Focusing on six strategic priorities Our strategic focus is to enhance our growth and market position by providing innovative and sustainable solutions to increasingly complex and large-scale national needs. The Group has been transformed in recent times to meet our customers’ continuously evolving requirements. Our Engineering Tomorrow strategy will ensure we remain competitive and continue to deliver shareholder value. 1: Operate safely, efficiently and responsibly 85-132 Financial statements The Health and Safety of our people Within the Company, there is both a In accordance with the requirements and everyone who is involved with corporate and an individual responsibility of the Companies Act 2006 (Strategic Costain remains our highest priority. to ensure that operations are managed and Directors’ Report) Regulations We demand that safety must be in a safe, healthy and environmentally 2013, the Group has adjusted its adhered to at all times to ensure that controlled manner. The common carbon reporting boundaries. we operate in an environment which measure in the construction sector for Emissions under this regulation cover is free from harm. measuring safety performance is the scope 1 and 2 emissions for all Costain AFR which measures the number of Group activities, including overseas We concentrate on solutions that serious workplace accidents reportable interests and joint ventures, in which deliver best value for customers. under the Reporting of Injuries, the Company has a 50% or greater This requires an unrelenting focus Diseases and Dangerous Occurrences financial stake. In 2014, we will on our customers’ costs and our own Regulations 1995 per 100,000 hours continue to expand our scope of operating procedures. 133-136 Other information worked. The Group’s AFR increased reporting to ensure that we incorporate We believe that responsible business in 2013 compared to 2012. We are all scope 1 and 2 emissions where is integral to delivering greater value to continuing to work to reduce the AFR Costain has a financial interest. our customers and all our stakeholders. in line with our aspiration towards Our commitment to delivering services zero accidents. Underlying operating profit KPI responsibly and sustainably is vitally Target: In line with business plan. important to the Group. We are CO2 equivalent emissions KPI focused on building a long-term sustainable business that creates economic, environmental and Target: To reduce our measure emissions. £27.4m social value. 2013 performance and KPIs 14,365 tonnes CO2e Emission 2013 £27.4m 2012 £24.5m 2011 £24.1m The level of underlying operating profit Accident Frequency Rate Total Scope 1 Scope 2 intensity KPI is a key measure of performance for (‘AFR’) CO2 the Group. The measure represents Target: To continually improve safety equivalent the results of the operating elements performance with a zero tolerance emissions of the Group’s performance and approach. (tonnes) 14,365 10,474 3,891 excludes sales of assets and joint CO2 ventures. The Group’s underlying equivalent 0.12 2013 2012 2011 emissions (tonnes/ £million) 14.85 operating profit in 2012 and 2013 increased as a result of the strong performance in the Group during each year. The increased profitability reflects 0.12 0.09 0.11 the Group’s continued focus on higher margin work. Costain Group PLC Annual Report 2013 13


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    Strategic report Business model continued The Costain difference 02 Focusing on six strategic priorities continued 1: Operate safely, efficiently and responsibly continued Net cash balance KPI Costain Way of working. The Costain Target: Maintain a net cash Way is faster, easier to access, easier balance at an appropriate level to search and is simplified to tell you to suit the business requirements. what you must do and how to do it, with guidance and tools. This £57.7m 2013 2012 2011 improvement will help manage and reduce risk and drive efficiencies across the business. £57.7m £105.7m £140.1m 2014 focus The Group has a positive net cash • Continue to reduce the Group AFR balance and close monitoring and and the All Accident Frequency Rate measurement of cash resources is (‘AAFR’) towards our goal of zero carried out as part of the performance harm: AFR 0.08, AAFR 2.1 measurement process. The reduced • Reduce measured carbon emissions positive position reflects a transition to intensity by 55% by 2020 (against over 90% of the order book being a 2009 baseline) lower risk, target-cost form of contract, • Launch our 2020 Costain Cares an increase in support services (Corporate Responsibility) Strategy activities and a delayed contract • Reduce non-operating and completion. operating costs Health and Safety Awards Risks Our strong Health and Safety performance was recognised by the • Health and Safety achievement of 35 RoSPA Awards, including two Orders of Distinction, • Operational delivery one President’s Award, four Gold • Failure of IT system Medals and 16 Gold Awards. Additional information relating to the principal risks and uncertainties can The Costain Way be found on pages 24 and 25. The Costain Way is Costain Group’s Business Assurance System, a risk-based, integrated management system that provides instructions and advice on how to promote best practice across the Group. The Costain Way updates and builds on the strength and success of its predecessor, Implementing Best Practice (‘IBP’), providing a new innovative approach. It contains the required standards, guidance, best practices and standard forms for all the activities undertaken by everyone across the Costain Group – the 14 Costain Group PLC Annual Report 2013


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    01-45 Strategic report 46-84 Governance 2: Continue to enhance customer insight The ability to understand the Customer satisfaction The Group’s divisional performance can be found on pages 26 and 27. challenges facing our customers is crucial if we are to strengthen and evolve our relationships with them. Continuing to enhance our customer 84% 2013 2012 2011 insight is one of our top priorities and 85-132 Financial statements it is by building strategic, long-term, 84% 84% 81% collaborative partnerships that we are best positioned to deliver innovative Customer innovation evening solutions to these customers. In September, the Darwin Centre at London’s Natural History Museum was Additional value is delivered to both host venue for a Customer Innovations customers and end users by operating Evening, showcasing exciting products efficiently with a strong focus on speed and developments that the Group has and agility and an uncompromising brought to fruition over the past year. attitude to safety. We recognise that talented, integrated and accountable The audience consisted of over project teams are fundamental to 60 customers and key stakeholders, maximising the opportunities presented who were able to talk to the Costain by unique customer insights. personnel behind the innovations, 133-136 Other information discovering the benefits of individual 2013 performance and KPIs innovations and how they could improve the performance of their business. Repeat business KPI Target: In line with business plan. 2014 focus +90% 2013 2012 2011 • Continue to build strategic relationships with our customers, gaining deeper insight into their business challenges +90% +90% +90% • Continue to strengthen our thought leadership position by ensuring we The Group’s strategy Engineering become the influential ‘voice of the Tomorrow is focused on providing industry’ in terms of sustainable innovative and cost-effective solutions infrastructure development to customers who are increasingly seeking more strategic longer-term Risks contracts in order to meet their complex requirements. Repeat business is, • Economic conditions therefore, an essential measure for • Winning new work the business. With over 90% repeat business, Costain has maintained • Operational delivery a strong pipeline of business Additional information relating to the development opportunities and we principal risks and uncertainties can be found on pages 24 and 25. continue to demonstrate the quality of our customer insight and relationship. Costain Group PLC Annual Report 2013 15


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    Strategic report Business model continued The Costain difference 02 Focusing on six strategic priorities continued 3: Grow by broadening and integrating our services We continue to deliver engineering Revenue 2014 focus services across the full asset life-cycle, Target: In line with business plan. from advisory and design to operations • Increase revenue and order book and maintenance. 19 11 across our six core service lines In 2013, we continued to broaden and • Organic growth and growth through 70 enhance our service offering. We have acquisition developed our value proposition across 2013 six core service lines in an increasingly Risks integrated offering to customers: 11% Advisory and design advisory and concept development, 70% Programme delivery • Economic conditions specialist design, programme 19% Operations and maintenance • Winning new work management, complex project delivery, • Operational delivery technology integration, asset Costain delivers engineering solutions • Acquisitions optimisation and support. across our customers’ full asset life-cycle, from advisory and design, Additional information relating to the 2013 performance and KPIs programme delivery to operations and principal risks and uncertainties can be found on pages 24 and 25. maintenance. The increasing range of Order book KPI skills and services across these activities Target: To build a strong order has enabled the Group to continue to book in line with strategy. increase the revenue derived from this broader range of services. £3.0bn 2013 2012 2011 Acquisition of EPC Offshore In August, Costain acquired EPC Offshore, a specialist oil and gas project £3.0bn £2.4bn £2.5bn management services company. EPC Offshore, a field development and The level of secured orders on which project management specialist providing work is to be carried out is a key client-side services to North Sea oil measure for achieving continued and gas companies, complements the profitability and growth. The order book acquisition of ClerkMaxwell in 2011. has increased compared to 2012 due These acquisitions strengthen our to the Group securing over £1.5 billion strategy, broadening our range of of new contracts and extensions. capabilities in response to requirements of major customers, increasing the scale of the Group’s services in the growing, high-value North Sea upstream oil and gas market. 16 Costain Group PLC Annual Report 2013


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    01-45 Strategic report 46-84 Governance 4: Develop best-in-class team Attracting, retaining and developing Diversity and inclusion KPI Investment in training the best people for Costain is key to Target: To value diversity and and development our success. inclusion in the workforce. We continue to grow and enhance our capability in line with our customers’ 19.0% £3.0m 85-132 Financial statements needs for the relevant skills for today female over 10,000 training days and tomorrow. By investing in a 2012: 7,988 training days diverse, knowledgeable and highly capable workforce, with transferable skills, we can be sure that we have 7.2% 2013 BAME 2012 2011 Big Infrastructure Conversation In September Costain, in conjunction a pipeline of talent throughout the with Business in the Community, business. 19.0% 19.4% 22.2% hosted the Big Infrastructure female female female Conversation, at London’s City Hall. 2013 performance and KPIs 7.2% BAME 8.0% BAME 6.6% BAME On the day, students, ambassadors, apprentices and trainees met business Staff turnover KPI 645 1 12 leaders and discussed their own Target: To provide initiatives and apprenticeship experiences, the working conditions in order to retain 2,743 6 120 importance of inspirational work key staff. experience and skills. 133-136 Other information UK employees Board Senior 8.5% For the industry leaders, there was management UK employees: 3,388, 645 are female also an opportunity to share best Board: one female out of seven practice about how businesses can 2013 2012 2011 Senior management: 12 females out tackle youth unemployment and to 8.5% 7.4% 7.0% of 132 listen to young people about their (Figures as at 31 December 2013) needs, hopes and ambitions for The retention of staff is fundamental the future, particularly in relation to delivering a quality service to Costain is an inclusive employer and to securing valuable career advice. customers. The Group undertakes a promotes equality and inclusion from number of important initiatives to retain recruitment and selection, through 2014 focus key staff, including actively facilitating training and development, to promotion, their career development. Clear action reward, recognition and retirement. • Broaden graduate, apprentice plans are in place to address issues The Group values the differences that and sponsorship pipelines to such as Health and Safety, reward, a diverse workforce brings to the new disciplines training and development and job organisation. The Group has monitored • Continue to develop transferrable satisfaction. The Group uses a the diversity profile of its employees, as skills across sectors ‘voluntary leavers’ turnover rate to a total population, over the last six years, • Talent management monitor staff retention. In 2013, our which shows a fairly consistent profile of female and Black, Asian and Minority • Unconscious bias training staff turnover increased slightly to 8.5%, but it continues to compare Ethnic (‘BAME’) employees. In 2013, Risks favourably to the industry average. there has been a slight decrease in the number of female employees to 19.0% • People and a decrease in BAME employees to 7.2% (employees who declared their Additional information relating to the ethnicity). In 2013, the Group has principal risks and uncertainties can be found on pages 24 and 25. expanded reporting to include women in senior positions within the Company. Costain Group PLC Annual Report 2013 17


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    Strategic report Business model continued The Costain difference 02 Focusing on six strategic priorities continued 5: Create and deliver innovative sustainable solutions We are focused on creating intelligent, Innovation Awards Risks sustainable solutions that improve In December, Costain was the performance of our customers’ recognised at the prestigious NEF • People businesses. We invest significantly in (The Innovation Institute) Innovation Additional information relating to the research, innovation and emerging Awards, receiving high commendations principal risks and uncertainties can technology to provide customers with in the Most Innovative Business Process be found on pages 24 and 25. new services that reduce impact on and Most Inspiring Business Leader Examples of Innovation can be found in the the communities we serve. By aligning categories. section titled Engineering Tomorrow... ‘in action’ on pages 6, 8-9, 12-23, 28-33, 35, our pipeline of innovation to our 40 and 42. The innovations included a science, customer challenge, we are able to technology, engineering and maths work closely with them through every (‘STEM’) game app aimed at raising stage of development. young people’s awareness of the construction and engineering industry 2013 performance and KPIs and the different career options available using a smartphone or tablet device, Number of patents and and COpath, an innovative passenger patents pending monitoring and measurement 31 2013 patents 2012 technology for use in the travel and transport industries. Both innovations earned Costain a runner-up award from the judging panel, 31 patents 36 patents which included the award sponsors (14 granted, 17 in EMC, BASF: The Chemical Company, application phase) National Grid and EDF Energy. The Group has realigned its patent 2014 focus portfolio to reflect the business’ focus. • Enhance relationships with our partners to identify, develop and implement innovation through our current contracts and provide new services to our customers • Identify funding and, through ‘open innovation’, transfer innovation from other sectors to create new business opportunities • Use advanced technology to create insights about the performance of our customer asset • Rethink contract delivery with our customers to deliver better outcomes 18 Costain Group PLC Annual Report 2013


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    01-45 Strategic report 46-84 Governance 6: Working in collaboration Partnering and collaboration form In 2013, the average key supplier a central part of our approach. Both performance score continued to are essential in delivering complex improve. The number of suppliers engineering and services. In a market achieving Costain Blue standard (80% where collaboration continues to or above) in a single quarterly review deliver value, Costain focuses on increased to 255 from 171 in 2012, 85-132 Financial statements developing strategic partnerships to a 49% increase. support the development of broader +90% services and technology. 2013 performance and KPIs of contracts are lower risk Supply chain performance KPI cost-reimbursable Target: Average key supplier performance score of greater than 50%. Collaborative Business Relationships: BS11000 70% Costain has developed a best practice process in which relationships can be formed and developed between 133-136 Other information 2013 2012 2011 organisations of any size, for mutual 70% 69% 65% additional benefit. The process is accredited to BS11000 (Collaborative The Group has a number of key Business Relationships) which is a suppliers and is reliant on their procedural framework introduced in performance in carrying out its 2010 by the British Standards Institute. business. Consequently, an internal Costain is a foundation member of performance measurement tool is used the Institute of Collaborative Working. to assess the performance of key suppliers on a regular basis against a 2014 focus number of indicators including Health and Safety, programme, commercial • To be recognised as the UK’s leading and quality performance. The result exponent of BS11000 of the assessment is shown as a percentage score which allows • To deliver shared benefits through comparison against previous scores ‘game-changing’ relationships and other suppliers. The assessment • To increase our revenue from alliance/ and results are then used as a basis framework contracts for discussion with each strategic and preferred supplier of their performance Risks and to put in place, where necessary, actions to improve performance or, • Economic conditions if appropriate, reduce the amount of • Operational delivery work performed by a supplier. Additional information relating to the principal risks and uncertainties can be found on pages 24 and 25. Costain Group PLC Annual Report 2013 19


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    Strategic report Business model continued The Costain difference 03 Our market focus The sectors in which the Costain Group is active have, in total, a targeted investment spend of more than £70 billion per annum for the immediate future. Below is a summary of activity in those Costain sectors: Water The Airports Commission’s shortlisted Power alternatives vary in cost from £13 billion £11bn total to £112 billion. Despite these challenges, the UK has more seats available and serves more destinations on a daily £3.9bn total Potential Addressable basis than any other European country. Potential Addressable £4.6 billion £2.6 billion The debate is no longer whether we £1.8 billion £700 million need new runways and infrastructure, The recent submission of water but when and where. The UK’s challenge is to secure a company business plans to OfWat sustainable energy future whilst at the for the sixth asset management cycle Highways same time replacing power generation reflects a continued commitment to capacity and ageing infrastructure. spend in the sector. The regulator’s focus on total expenditure (‘totex’) provides the opportunity to grow into higher value services. £6.3bn total For energy to be truly sustainable, solutions must ensure that they meet carbon reduction targets and minimise the impact of rising consumer prices. Potential Addressable £3.2 billion £2 billion In 2012, private sector investment in Airports energy rose to £11.6 billion, representing In June 2013, the Chancellor promised around 10% of the UK’s capital £3.2bn total the biggest programme of road building in over 50 years. The Government will invest over £28 billion in enhancements investment, or equivalent to building 20 Olympic stadiums.1 This level of investment is expected to continue Potential to and maintenance of national and local and will include renewables, new £1 billion roads to: add extra lanes to the busiest technologies, smarter networks motorways, identify and fund solutions and demand-side controls. Around Aviation investment continues to be an to tackle some of the most notorious £110 billion of investment is anticipated area of intense public debate with the and longstanding road hotspots in the by 2020. Airports Commission Interim report, country, upgrade the national non- 1 Source: Powering the UK – Investing in future published on 17 December 2013, motorway network; repair the national growth, EY 2013. supporting the need for further and local road network; and transform investment in developing capacity the Highways Agency into a publicly- in the sector and suggesting that without owned corporation. this it will cost users and providers of airport infrastructure £18-£20 billion and the wider economy £30-£45 billion. Existing investment remains high to support the intensity of use on our existing infrastructure which sees Heathrow at capacity and London Gatwick expected to reach the same point by 2020. 20 Costain Group PLC Annual Report 2013


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    01-45 Strategic report 46-84 Governance Nuclear Process Rail £6bn total £17.4bn total Potential Addressable Potential Addressable £2.8 billion £1.5 billion £9.5 billion £5.4 billion With all but one of the UK’s current Rail investment in the UK continues 85-132 Financial statements reactors retiring over the next to be robust as outlined in the National ten years, there remains significant Infrastructure Plan 2013. This remains decommissioning opportunities from a priority area of investment for the £49.5 billion investment pledged by Government to stimulate economic the Nuclear Decommissioning Authority growth, with a 14% increase in demand for the clean-up of its sites. This goes for rail travel estimated for the next five hand-in-hand with the Government’s aim years. To address this, £38 billion has to deliver 16GW of new nuclear capacity been allocated for national rail networks by 2030, presenting further opportunities in areas including electrification, track for Costain’s already mature and and network upgrades and the established position in the UK market. proposed High Speed 2. Oil & Gas Information concerning the Group’s activities in these £27bn 133-136 Other information sectors are described on total pages 26 and 27. Additional information together with Potential Addressable examples of our work can £1.8 billion £600 million be viewed on our website: www.costain.com/ Sustained activity and growth in the engineering-tomorrow UK market are set to continue. In 2020, we will still rely on oil and gas for 70% of our energy requirements as a nation. With an enhanced market need for asset maintenance and decommissioning, Costain also has opportunity to convert successes in Front End Engineering and Design (‘FEED’) activity into engineering, procurement and construction management contracts. The launch of Costain Upstream highlights the Group’s commitment to capitalise on the substantial growth in the UK market, with a two-fold increase in the number of exploration wells expected in the next two years. Costain Upstream will leverage its already established market position to become a trusted supplier of choice across whole-life services. Costain Group PLC Annual Report 2013 21


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    Strategic report Business model continued The Costain difference 04 Our business divisions We have two core operating and reporting divisions within our business: Infrastructure Natural Resources The Infrastructure division delivers engineering The Natural Resources division delivers solutions for principal infrastructure providers in: engineering solutions in: Rail Water A leading provider of multi-disciplinary projects for Network A leading provider of capital framework and maintenance Rail, Crossrail and LUL. Currently delivering major projects framework programmes under the current AMP5 principally focused on transportation hubs, most recently arrangements. Providing water services to commercial at London Bridge, Reading and Bond Street. and industrial customers. Highways Nuclear Process Delivering major programmes for the Highways Agency, Major frameworks and capital schemes delivered across Welsh Government and local authorities. Maintenance a number of the UK’s strategic assets. under the current MAC contracts and Early Contractor Involvement works. Waste Delivering major waste schemes in the UK. Power Focusing on thermal generation, new nuclear, offshore wind, Oil & Gas transmission and distribution. Currently delivering major Developing and implementing solutions for the upstream tunnelling works for National Grid. and downstream oil and gas and chemical sectors in the UK and Middle East. Airports Delivering programmes of work across airport assets Additional information relating to the Natural Resources division at Heathrow, Gatwick and Manchester. can be found on pages 26-27. Additional information relating Costain regularly announces key stakeholder to the Infrastructure division information in the ‘News’ section of its website: can be found on page 26. www.costain.com/news 22 Costain Group PLC Annual Report 2013


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    01-45 Strategic report 46-84 Governance 05 Our service lines 06 Delivering shareholder value To reflect our value proposition Adjusted profit before tax £m KPI and as we continue to broaden our Target: In line with business plan. services and enhance our product range, we have evolved our business 40 architecture to meet the changing 30 27.9 28.1 31.0 25.5 needs of our major blue-chip customers. 20 18.1 We deliver integrated solutions across 10 six service lines. 85-132 Financial statements 0 09 10 11 12 13 Advisory and concept development The development of solutions and options for our customers’ most pressing problems. Adjusted profit before tax is a key measure for the Group and incorporates interest, including the lAS 19 pension Specialist design interest. The adjusted profit before tax in 2013 increased Complex and niche engineering solutions. due to a strong underlying performance in the Group. Programme management The operational and commercial management of programmes Dividend Pence per share pence of complex inter-related projects. 12 11.5 Complex project delivery 10.75 133-136 Other information 10.0 9 9.25 The engineering and mangement of the delivery of large 8.25 complex infrastructure projects. 6 Technology integration 3 Providing a service through technology to manage, connect 0 and transform infrastructure assets. 09 10 11 12 13 Asset optimisation and support Long-term contracts to operate and maintain physical infrastructure assets. Costain has delivered another strong performance in 2013 and our confidence in the Group’s future is reflected in the Board’s decision to increase the final dividend for the seventh consecutive year. Together with our strong order book and increase in profits, we are continuing to deliver shareholder value. Costain Group PLC Annual Report 2013 23


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    Strategic report Principal risks and uncertainties Managing risk through our business This section highlights the principal risks and uncertainties facing the Group. The Board formally reviews the material risks and ensures The table below lists the principal risks and uncertainties facing that these are appropriately managed by the management the Group at the date of this Report. This list is not intended team. The Board retains the ultimate responsibility for the to be exhaustive. Some risks have not been included in this Group’s risk management framework, including reviewing section on the basis that they are not considered to be its effectiveness. It has, however, delegated responsibility material or are not presently known to the Board. for annually reviewing the overall effectiveness of the risk management programme to the Audit Committee. The internal audit function provides assurances to the Audit Committee of the effectiveness of the internal control procedures through completion of the annual audit plan, which takes into account current business risks. Risk and Impact Mitigation Economic conditions The Group focuses on targeting and working with blue-chip customers whose • Change in Government policy spending plans are driven by national need, regulatory commitments or essential on spending. maintenance requirements. • Loss of material contract. The Group also regularly monitors the pipeline of opportunities available and • Failure of customers/subcontractors/ develops relationships with customers across a range of markets in both the suppliers/joint venture partners. private and public sectors. The Company seeks to ensure that it is not over-reliant on any one subcontractor, supplier or joint venture partner. In addition, the Company maintains a list of preferred subcontractors and suppliers which is reviewed regularly. The Company also undertakes financial monitoring of subcontractors and suppliers and endeavours to maintain a dialogue with them in order to identify any issue or cause for concern. The Company has in use an external audit system to ensure compliance by its preferred and strategic suppliers. Winning new work Target cost contracts tend to have less advantageous cash flow characteristics • Working capital impact of moving but they benefit from generally being lower-risk than lump sum contracts. away from fixed price contracts Costain has defined delegated authority levels for approving all tenders. towards target cost. All significant contracts are subject to review by the Investment Committee. • Failure to estimate accurately risks, To mitigate the cost risk, experienced and qualified staff are used to prepare bids, costs, contractual terms. which are subject to internal review and approval before submission. During the • Competition and failure to win work. life of the contract, regular project manager’s report meetings and end forecast meetings take place to discuss safety, progress, quality, cost, financial performance, risk, etc. The Company’s strategy of targeting blue-chip customers with committed long-term capital and operational spending plans will enable us to continue to pursue and win work less affected by the downturn. The Company’s ongoing drive, both organically and by acquisition, to broaden its skills and services, along with its strong brand and excellent reputation for delivery, will also provide us with a competitive edge. 24 Costain Group PLC Annual Report 2013


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    01-45 Strategic report The overall effectiveness of the Group’s risk management programme can be viewed in the Audit Committee report on pages 55-57. 46-84 Governance Risk and Impact Mitigation Operational delivery Work on site is audited by in-house specialists and reports prepared so that • Cost overruns, time overruns, corrective action, where required, can be taken. A senior executive is responsible disallowed costs. for overall quality issues, the updating of best practice and ensuring compliance. • Design faults. The senior executive is also responsible for reviewing and updating the Company’s procedures in line with the changing business. • Procurement delay or failure. • Failure to obtain/renew insurance or refusal of claim by insurers. Health and Safety Costain has detailed Health and Safety policies in place. Regular Health and • Major incident exposing an Safety visits by experienced professionals and on-site training take place to inadequate safety regime. reduce the risk of human error. Any breaches in procedures are reported quickly and acted upon as appropriate. Employees are encouraged to take responsibility 85-132 Financial statements for safety in their work areas. A Health and Safety committee also meets monthly to develop a consistent approach and consider best practice. People The Company has in place a well-developed succession planning process Failure to attract, develop and which is regularly monitored. This process includes carrying out ‘talent reviews’ retain highly skilled management and encouraging ongoing development at all levels. The Company seeks to or personnel may limit the Group’s actively engage with employees through engagement surveys and its Employee ability to grow the business as Consultative Committee. anticipated. Pay and conditions of employment are also regularly reviewed against the prevailing market and benchmarked against competitors to ensure that the Company remains competitive at all levels. Pension liabilities The valuation under lAS 19 for the scheme as at 31 December 2013 valued 133-136 Other information The Group operates a defined the scheme’s assets at £592.5 million and liabilities of £629.7 million. benefit scheme which was closed An actuarial valuation of the scheme as at 31 March 2010 was concluded during to new members from 1 June 2005 2010 and Costain agreed a deficit recovery plan with the Trustee. A full actuarial and was closed to future accrual on valuation is being carried out as at 31 March 2013. 30 September 2009. The current deficit on the scheme is £37.2 million (before The value of the deficit recognised in the Group’s balance sheet pursuant to deferred tax). If the market value of the lAS 19 is dependent on certain critical assumptions, including mortality rates, scheme’s assets decline in relation to pension increases, investment returns and inflation and is likely to vary from year its assessed liabilities, the Group may be to year. required to increase its cash contributions to cover funding shortfalls, which could The Company reviews the options regarding what actions Costain can take have an adverse impact on the Group’s to mitigate its long-term risk and consults professional advisers as necessary. operational results. Acquisitions Full due diligence is carried out before any acquisition is made. Integration plans Failure to integrate successfully an are put in place and managed by a dedicated team. acquired business or recognise and mitigate new and related risks could have a damaging impact on the Group’s future revenue and profits. Failure of IT systems A senior executive is responsible for the IT systems and has a suitably qualified Failure of IT systems, inability to team in support. Critical areas are subject to testing and include rapid recovery manage and/or to integrate IT systems, as well as sound data backup procedures. Online security training is provided as well as the failure to store key for safe usage and storage of documentation. documentation securely, could cause financial loss to the Group and expose the Company to breaches of legislation and fines. Costain Group PLC Annual Report 2013 25


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    Strategic report Performing Responsibly Divisional performance In Rail, the division experienced growth in both revenues and We continue to focus and prioritise order book. Significant milestones were reached on the major our Group-wide resources, and our London Bridge Station redevelopment contract, and works at Reading Station and on the complex Bond Street upgrade customer-aligned divisional structure, project continued to progress well. The Group continues to on identifying the most attractive new be a major partner to Crossrail, securing its eleventh contract with this customer during the year for Paddington New Yard. business opportunities across the sectors The Group’s investment in developing its programme in which we operate. management and rail engineering capabilities continues to yield benefits. During the year, three railway systems Infrastructure contracts for Crossrail were secured and these are progressing well, as is the delivery of the West Coast Main Line power upgrade contract for Network Rail. Costain is The Infrastructure division, which incorporates activities also involved in providing consultancy services for HS2. in the Highways, Rail, Power and Airports sectors, experienced another year of profit growth as customers invested in In Power, the Group is now a major contract partner in the upgrading and renewing the UK’s infrastructure assets. construction of the new Hinkley Point C nuclear power station in Somerset, providing the design and delivery of the water Revenue was £560.6 million (2012: £494.9 million) whilst cooling systems. During the year, Costain was also awarded a adjusted profit from operations rose over 30% to £31.4 million place on UK Power Networks’ £40 million power transmission (2012: £23.5 million) as we delivered excellent performance framework contract. The Group also consolidated its position across the division including the award of gain-share on a as a leading player in power station maintenance, with work number of contracts. The order book for the division has being carried out for SSE, E.ON and Scottish Power. Good grown to £1.9 billion (2012: £1.5 billion) and the level of progress continued to be made on the London Cable Tunnels tendering activity remains high, particularly in the highways, project for National Grid, as part of its investment to upgrade rail and power sectors. the power infrastructure in the South-East. In Highways, Costain is benefiting from the development Costain continues to be active in the Airports sector, where of its innovative technology offering, developing and delivering there is growing pressure to increase the capacity of the UK’s complex solutions for the Welsh Government’s All-Wales aviation infrastructure to accommodate economic growth. Technology framework and the Highways Agency. The Group The Group is a Tier One supplier on the Heathrow Framework continues to be a leading supplier to the Highways Agency, and at Manchester Airport. with a large portfolio of design, construction and maintenance projects for this customer. During the period, some major projects, such as the M1 J10-13 Managed Motorway and Walton Bridge across the Thames, were completed, whilst Natural Resources a new contract to deliver the A160/A180 Port of Immingham The Natural Resources division, encompassing the Water, Oil Improvement scheme in North Lincolnshire was secured. & Gas, Nuclear Process and Waste sectors, was established The Group’s three Managing Agent Contracts (‘MACs’) all in November 2012, combining most of the Energy & Process performed well with one of them, the five-year highway and Environment Divisions and some support service activities maintenance contract for the East Midlands, being awarded previously in Infrastructure. a two-year contract extension. During the year, the MAC10 contract came to the end of its term and was renewed with Customer spend in this market is underpinned by regulatory another party. and legislative requirements and we expect this to grow over the medium and long-term to meet the energy and water Costain was also awarded a place by Transport for London needs of the UK’s rapidly growing population. (a new customer for the Group) on its Early Contractor Involvement (‘ECI’) and Construction framework, worth Revenue (including share of joint ventures and associates) approximately £200 million overall. The Group’s first project in the division for the year was £397.6 million (2012: £437.7 within this framework, the Hammersmith Flyover strengthening million), with adjusted profit from operations, including project, is now well underway. £9.1 million profit on sale of interest in associates, of £12.8 million (2012: £19.5 million including £10.5 million profit on sale of interest in joint venture). The reduction in revenue reflected the prioritisation of resources towards attractive opportunities for growth across the Group. Operating profits 26 Costain Group PLC Annual Report 2013


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    01-45 Strategic report 46-84 Governance in this division declined in the period as a result of those lower In Waste, the Group is completing the PFI contract for the revenues, additional costs to complete a small number of Greater Manchester Waste Disposal Authority, which utilises projects, and restructuring and business development costs a range of sophisticated waste management technologies. including the deployment of new skills and capabilities under Of the 46 waste facilities under the contract, 36 have reached a strengthened leadership team. The division finished the year final acceptance, three are seeking to obtain final acceptance, with a forward order book of £1.1 billion (2012: £0.9 billion). six are currently in the post-completion (warranty) period and one remains to be completed. Design faults have been In Oil & Gas, Costain announced during the year the launch identified at four sites, including the site that remains to be of Costain Upstream, which combines the ClerkMaxwell and completed, and remedial work and testing is ongoing in EPC Offshore businesses, the latter was acquired in August. respect of that site. Costain is in discussions with relevant Costain Upstream will provide engineering and advisory contract counterparties and the Group’s insurers regarding services in the upstream oil and gas market, where there the issues that have arisen and expects a successful are significant opportunities to secure work in this high-value, outcome to discussions. highly specialised area. 85-132 Financial statements Elsewhere in the sector, the Group continued to deliver high Land Development complexity projects for blue-chip customers: the Easington Our non-core Land Development activity in Spain undertaken contract for Centrica was completed, and significant progress in a 50:50 joint venture with Santander Bank continued to be was made on the Barrow Terminal Optimisation project for subject to challenging market conditions. The joint venture the same customer; the scheme is expected to be complete has a portfolio of in excess of 500 hectares of land in Southern by 2015. Spain with varying levels of planning approval and, although the Spanish economy is showing some early signs of The Group is continuing to deliver support services for the Oil improvement, there remains considerable uncertainty as to and Pipelines Agency (‘OPA’), implementing a programme of when significant recovery will be achieved. As a consequence upgrades and improvements in performance across OPA’s of continuing uncertainty regarding future market conditions, network of jet fuel pipelines and storage facilities. a non-cash impairment has been taken against the assets, the Group’s share of which is £9.8 million, reducing Costain’s Work in Nuclear Process was dominated by the achievement total carrying value in the joint venture to £26.6 million. 133-136 Other information of all major contractual milestones on two very significant projects. The Evaporator D construction project at Sellafield As anticipated, no significant land sales were completed saw the successful delivery of the final module-920 in October, in the year, and revenue was £1.8 million (2012: £1.9 million) and the Fuel Element Debris (‘FED’) dissolution construction and the loss after tax was £2.1 million (2012: £2.3 million), at Bradwell entered into the final construction and full-time excluding the exceptional asset writedown outlined in commissioning phases. In addition, as one of two suppliers the previous paragraph. to the Magnox framework contract, additional facilities were delivered and continue to be maintained. It is expected that Our activities have continued to focus on our leisure businesses the sector’s frameworks within the Nuclear Decommissioning of golf courses and our 624-berth yacht marina adjacent to Authority (‘NDA’) estate will continue to bring repeat-order Gibraltar, both of which have reported improving revenue business into the Group’s overall portfolio. streams, particularly in the marina where our new boat repair yard is in demand and is assisting in raising marina occupancy. In Water, 2013 saw significant bidding activity associated with the next five-year Asset Management Programme cycle (‘AMP6’) and Costain secured the sector’s first AMP6 contract for Thames Water, whilst also retaining a place on the Severn Trent Water AMP6 programme. The Group has also prequalified for further AMP6 long-term contract opportunities. Costain has continued the successful delivery of its AMP5 framework contracts with Northumbrian Water, Southern Water, United Utilities, Severn Trent and Welsh Water whilst also continuing to deliver large capital wastewater treatment schemes for Liverpool and Brighton & Hove, the latter of which won Major Project of the Year at the 2013 British Construction Industry Awards. Costain Group PLC Annual Report 2013 27


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    Strategic report Performing Responsibly continued Engine Tomorr ‘in action’ 28 Costain Group PLC Annual Report 2013


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    01-45 Strategic report ering ow... Engineering Tomorrow is the Costain strategy aimed at identifying, developing and implementing innovative solutions to meet the UK’s major national infrastructure needs. Costain has implemented a number of schemes which will enhance the quality of project delivery, develop the skills and ideas of its people and provide cost-effective solutions, all in support of Engineering Tomorrow. The strategy relies on sharing knowledge and applying best practice across the Costain Group. Costain places high priority on innovation and this can be seen in the Company’s technological and organisational initiatives, in addition to skills-based training and the determination to be more socially responsible, at all times, to the needs of Costain stakeholders. The following pages provide examples of Engineering Tomorrow... ‘in action’ Costain Group PLC Annual Report 2013 29


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    Strategic report Performing Responsibly continued Engineering Tomorrow... ‘in action’ Additional information about Engineering Tomorrow can be found online: www.costain.com/ engineering-tomorrow CO2 Engineering Tomorrow... Engineering Tomorrow... ‘in action’ ‘in action’ A new approach to Tracking passenger flows carbon capture through rail hubs Carbon capture – reducing the amount of CO2 Problem: How to accurately measure passenger pumped into the atmosphere – is vital to help control usage of a railway station where many travellers use climate change. it only to change trains and therefore never pass through the gatelines? Current carbon capture technology requires the installation of massive solvent scrubbing ‘absorber’ Answer: Costain has applied its COpath solution, columns. provided in partnership with Path Intelligence, which uses sensors to detect signals emitted by mobile The visual impact of these is considerable – less so phones carried by passengers using the station. with coal-fired power stations, much of whose existing The sensors allocate an anonymised designation infrastructure is tall, but a major problem with ‘low-rise’ to each telephone and record its movements, creating gas-fired stations. a detailed picture of passenger flows. Costain is collaborating with Edinburgh University Costain has pioneered COpath’s first use in the UK on novel designs of absorber column with an emphasis rail sector. It allows station and airport operators to on modularisation. understand passenger movements and behaviours to, among other things, reduce congestion and The project is looking at fundamental modelling such increase non-fare revenues. as the flow of gases and liquids. It is thought that alternative column designs will also involve shorter Its successful trial at one station has led to installation construction time, be easier to upgrade in the future, contracts for several more. and possibly more cost-effective. Results of the year-long project will be published by mid-2014. 30 Costain Group PLC Annual Report 2013


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    Operate safely, efficiently 01-45 Strategic report and responsibly Continue to enhance customer insight Grow by broadening and integrating our services Develop best-in-class team Create and deliver innovative sustainable solutions Working in collaboration Engineering Tomorrow...‘in action’ Smart motorways Sometimes, innovation is about behaviours and not “The innovation that we can be the most proud of is just new technology. working together,” says Highways Programme Director Tony Scutt. “I’ve been in meetings where six contractors In 2009, Costain entered a partnership agreement to were sharing ideas for the benefit of everyone. Getting develop what are now known as ‘smart motorways’. that behavioural change of collaboration is the real ground-breaking part of this contract.” This is a way of creating more capacity from the existing road network at a fraction of the cost of building This collaborative programme approach has led to new lanes. Motorists can use the hard shoulder as a the Department for Transport’s 20% efficiency savings permanent running lane or when instructed by signals target against the Highways Agency’s project estimates on overhead gantries. being exceeded. Costain Group PLC Annual Report 2013 31


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    Strategic report Performing Responsibly continued Engineering Tomorrow... ‘in action’ Additional information about Engineering Tomorrow can be found online: www.costain.com/ engineering-tomorrow Engineering Tomorrow... ‘in action’ Bridging the gap with a robot tug Using miniature robot ‘tugs’ to help rig new cables between electricity pylons high across roads or railways is not new. But getting approval for their use in a fraction of the normal three to four years, is. And Engineering Tomorrow... that’s what Costain anticipates in 2014. The battery-powered, remotely-controlled tug system ‘in action’ developed by Costain and subcontractor partner TLI is designed to eliminate the large, expensive scaffolding structures normally required before initial ropes and pulley blocks can be strung between pylons. Once in place, new cables can be hauled through the pulleys. Managing Mobicloud to improve Getting the tug approved involves considerable site efficiency methodology and effective planning to prove the tug’s safety. Mobicloud is a European Union-funded project to Far faster than traditional methods of rigging new develop a ‘corporate app store’ – part of the EU’s cables, Costain believes this could potentially save its Competitiveness and Innovation Framework client several hundred thousand pounds in 2014 alone. Programme. It is deployed in both Android and IOS tablets that are planned to connect to Costain’s corporate systems via a cloud-hosted platform; the Group believes it is one of the leaders in deploying the system in the construction industry. Mobicloud’s first development with Costain is a site diary app that allows engineers to record details or events as they happen while out on site. This aids accuracy and saves time. A joint effort with Sheffield University is underway to develop further apps to estimate volumes and to replace traditional paper-based survey books. The ultimate aim is to have a suite of apps bespoke to Costain. 32 Costain Group PLC Annual Report 2013


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    Operate safely, efficiently 01-45 Strategic report and responsibly Continue to enhance customer insight Grow by broadening and integrating our services Develop best-in-class team Create and deliver innovative sustainable solutions Working in collaboration Engineering Tomorrow... ‘in action’ Cutting the cost of carbon capture Costain’s heritage of gas processing expertise is being directed towards a new avenue. Research is underway to remove CO2 from a new generation of coal-fired power plants by processing the gas stream at low Engineering Tomorrow... temperature to separate the CO2 in liquid form. This approach has been patented by Costain and ‘in action’ holds out the promise of reducing the substantial costs currently associated with carbon capture, which is a major front in the battle to minimise climate change. If less costly methods of removing CO2 can be developed, the likelihood of implementation by public or private sector energy producers is increased. BIM brings down barriers among project team If successful, the fruits of this research will be available in the 2020s. Getting designers and site personnel to talk the same language can be problematic. At the upgrade of London Bridge Station, Costain and Building Information Modelling (‘BIM’) are solving that problem. BIM involves creating an intelligent, virtual 3D model of a facility. At London Bridge design consultants and specialist subcontractors are sharing highly-detailed 3D models. This enables collaborative reviews of progress. Engineers concerned about measurements on a project document, for example, can now simply send a screenshot taken from the model to the designer asking for confirmation of its accuracy. The team is also in the process of piloting an innovative mobile form-filling app solution that will allow site engineers to complete multiple forms electronically using iPads. This will reduce the need for paper forms on site. Costain Group PLC Annual Report 2013 33


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    Strategic report Corporate Responsibility Costain Cares We are committed to delivering projects and services responsibly and sustainably. Ensuring that we meet our customers’ and society’s needs while managing the social, environmental and economic issues that impact our business either directly or through our supply chain. Through stakeholder engagement and by assessing our impacts and level of influence, we have identified key priorities that are material to our business. Costain Cares, our Corporate Responsibility strategy and vision to build a longer-term sustainable business that creates economic, environmental and social value, was launched in 2011. Costain Cares is based on three fundamental pillars: Relationships Our Environment The Future We encourage open, honest and We operate in the built environment, We play an important role in the respectful communication. We believe where we meet national needs for provision of infrastructure vital for in strong, long-lasting relationships that strategic investment in infrastructure. the UK economy. The benefits of are mutually beneficial. We will: We compete in the economic investment in infrastructure today will • provide a working environment where environment, where we must deliver be felt for many years to come. We will: the health of our people is protected, value for customers and shareholders. • be one of the UK’s top engineering their wellbeing is enhanced and We have to deliver responsibly to the solutions providers; everyone returns home safely at the natural environment for the benefit of everyone. We will work with our • provide a sustainable return on end of the working day; investment for our shareholders; customers and supply chain to, • support the local communities in where possible: • invest in innovation to provide which we operate, ensuring we leave solutions to tomorrow’s challenges; a lasting legacy; • reduce our impact on climate change; • conserve natural resources through • work with our customers and supply • attract, retain and develop the best chain to develop skills to respond to people for the Costain Group; effective waste management, minimising water consumption and future needs within our sector; and • provide sustainable solutions and the sustainable sourcing of materials; and • contribute to economic growth highest standards of service for our by supporting our supply chain, customers; and • protect and enhance the environment. including small and medium-sized • operate a collaborative, responsible enterprises. supply chain where our partners support us in delivering efficient, innovative, sustainable solutions. A detailed review of our approach to Corporate Responsibility can be found on our website: www.costain.com/responsibility 34 Costain Group PLC Annual Report 2013


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    01-45 Strategic report 46-84 Governance Costain Cares... ‘in action’ Vulnerable road users Relationships Following nationwide concern about the safety of cyclists and pedestrians on our streets, particularly in London, we introduced a number of measures in order to play our part in addressing this very serious issue. The measures include Health and Safety The Health and Safety of our workforce remains our overriding priority. During Engineering enhancements to the specification of vehicles rated greater than 3.5 tonnes, requirements with 2013, we continued to focus on promoting a positive Health and Safety Tomorrow... regard to registration with the Fleet 85-132 Financial statements Operators Registration Scheme and culture where everyone is supported to work safely and encouraged to take ‘in action’ recommendations with regard to driver training. Adoption of these responsibility for keeping themselves leading-edge standards aims to and others free from harm in the reduce the risk to vulnerable road workplace. We continued to develop users whilst also improving the our already robust Health and Safety safety standards of transport and systems in order to further improve construction vehicles, thereby our performance on our sites and Additional examples of Engineering Tomorrow... ‘in action’ contributing towards making our in our offices. can be found on pages 28-33. roads a safer place. Accidents and incidents In January 2013, we received a Leadership Health and wellbeing Prohibition Notice in respect of We recognise the importance of visible insufficient cover over exposed pipelines and engaging Health and Safety 133-136 Other information across the traffic route on one of our leadership. Two successful Health and sites. Following the issue of the notice, Safety Leadership Impact days were a comprehensive action plan was drawn held across the business in May and up and agreed with the regulator to October. Led by the two Managing address the shortfalls identified. Directors, the most senior personnel from across the business visited over Please see page 13 for details of the 40 sites in order to engage with site Group’s Accident Frequency Rate. personnel, reinforce Costain’s Health and Safety message, and demonstrate The health and wellbeing of our people We have developed and implemented commitment from the highest level. a new toolkit for the investigation is of vital importance to us. In order of serious accidents and incidents to improve the management of health based on the Swiss Cheese model. and wellbeing at project level, a new The new methodology has not only key role of site Health Champion has significantly improved the identification been created. In addition, the site of underlying and root causes of Health, Safety and Environmental accidents/incidents, but has also Management Plan has been enhanced enhanced the communication of and now includes a specific Health lessons learnt across our business. section with the aim of ensuring that health issues are given the correct level of consideration in all relevant aspects of project management. Costain Group PLC Annual Report 2013 35


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    Strategic report Corporate Responsibility continued Costain Cares During 2013, we ran two Company-wide Community engagement Group charitable donations wellbeing campaigns. During the first Our projects develop and implement £000 quarter of the year, a pedometer community engagement plans, which challenge was initiated as a means of identify socio-economic issues specific 200 171 173+ encouraging our workforce to become to the local community and actions 150 more active in a fun and sociable way. when Costain can work in partnership 135 The second week-long campaign was with the community to have a positive 100 95 95 during October and focused on how impact. 50 to maintain a healthy heart. Furthermore, our commitment to offering ‘wellbeing’ As an associate member of the 0 09 10 11 12 13 medicals to all staff continued. Considerate Constructors Scheme, we are committed to the principles set out In order to improve the competency of in the Considerate Constructors Code We continue to support various charities key members of our workforce, we ran of Considerate Practice. In 2013, a local to our operations and via the a one-day bespoke Health course at number of our projects were recognised Costain Community Chest, where small venues across the country. The course, by the scheme. We received three Gold donations are made by the Company to attended by our supervisors and health Awards, five Silver Awards, 10 Bronze support employee charity involvement. champions, provides guidance on how Awards and two of our projects were In 2013, we donated over £173,500 to to manage the key health issues on runners-up in the Most Considerate Site worthy causes. our sites. Award. The awards recognise sites’ excellent standards of consideration Through our employee volunteering We continued to support the Public towards their neighbours, their policy, we provide our employees with Health Responsibility Deal, a workforce and the environment. Award the opportunity to develop and share Department of Health initiative to winners are selected from the top skills while making a valuable improve public health and tackle health performing 10% of sites registered under contribution to local communities. inequalities. In addition to honouring the Scheme. our public pledge with regard to staff Employment, education and skills medicals, our Group SHE Director Charitable giving and volunteering We work with a range of partners and became a member of the Construction Costain is pleased to be a patron of organisations to offer employment and Sub-committee, which developed and The Prince’s Trust, the youth charity that training opportunities in the communities launched a collective pledge on behalf helps change young lives, and a where we operate. of the construction/civil engineering member of the Trust’s Construction and industry in October. A number of leading Business Services Leadership Group. In 2013, we became a ‘Champion’ construction companies, including The Trust works with 13- to 30-year-olds business supporting a joint initiative Costain, have signed up to this pledge, who have struggled academically, have between BITC and the Department for aimed at managing the causes of been in care, are long-term unemployed Work and Pensions, the ‘Generation occupational disease and taking action or have been in trouble with the law. In Talent’ programme. The aim of the to improve the health and wellbeing of 2012 Costain, in collaboration with programme is to help businesses scale their workforces. CITB-ConstructionSkills, the National up the number of unemployed young Skills Academy for Construction and people they recruit. It has a growing Communities The Prince’s Trust, secured Employee number of large UK employers (90+ so We recognise that our work affects the Ownership of Skills (‘EOS’) funding to far) who have found that by making small communities in which we operate. How provide 100 opportunities for young changes to their recruitment process we manage our relationships and work people to undertake the Trust’s three- they can make more jobs available to with local communities and other week ‘Get into Construction’ programme talented unemployed young people. stakeholders is vital. We are committed during 2013–2014. We are on target to to developing and maintaining excellent deliver this commitment. relations with local communities. 36 Costain Group PLC Annual Report 2013


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    01-45 Strategic report 46-84 Governance Our people Developing our people To ensure that we continue to develop We are focused on attracting, In June, we launched ‘Find My Future’, and grow the Costain capability, we developing and retaining the best people a series of career mapping tools are active in attracting new talent to the and creating an environment where designed to support both managers business. We have continued to expand people can fulfil their true potential. and employees with career development our award-winning graduate scheme discussions. The tools include career which includes 11 diverse disciplines, Building a diverse workplace inspiration and advice from leaders from our traditional roots in civil Costain is an inclusive employer and within Costain, a master schedule of engineering, quantity surveying, and promotes equality and inclusion from current and planned job roles, career chemical engineering, to English and recruitment and selection, through maps detailing possible career paths, business management. In 2014, we training and development, to promotion, and self-coaching tools to support will broaden this further to encompass reward, recognition and retirement. We employees to explore and discover technology disciplines such as computer are fully committed to the elimination of many more opportunities beyond the and data science. We increased our unlawful and unfair discrimination and traditional vertical promotion routes. graduate intake to 61 in 2013, bringing 85-132 Financial statements we value the differences that a diverse We will continue to develop further our total cohort to 129. We have also workforce brings to the organisation. We career paths in preparation for our 2014 significantly expanded our apprentice support our supply chain and encourage career development reviews. programmes. We recruited a further its active commitment to our approach 31 apprentices in 2013 across on equality and inclusion. During 2013, we promoted 316 13 disciplines ranging from accountancy employees and transferred over 400 to track and signalling engineering and We have monitored our diversity profile employees into different sectors or business administration. Since the for the last six years, which shows a disciplines within the business, creating relaunch of our apprentice programme fairly consistent profile of female and new opportunities for individuals to in 2008, we have recruited 92 Black, Asian and Minority Ethnic broaden their experience, skills and apprentices and have a current (‘BAME’) employees. capabilities. completion rate of 83%. In 2014, we will introduce higher apprenticeships Details of our diversity statistics can be found on page 17. We continued to invest in training and and continue to broaden our schemes development for all our employees, to cover project controls and BIM. 133-136 Other information delivering over 10,000 training days in In 2012, Costain became a member 2013. We successfully led a consortium of Business in the Community’s bid to secure EOS funding, enabling us Opportunity Now campaign to share to develop and deliver enhanced training ideas with other industries to improve to our supply chain. Our focus for 2014 the attraction and retention of women in is to refresh our suite of management, the workplace. In 2013, we strengthened leadership and executive development our commitment by becoming programmes. We will be complementing signatories to Opportunity Now’s Project our strong focus on project management 28-40, a pioneering study into the development delivered through our experiences of women in the workplace. Academy. The focus of the study is to gain valuable insight and identify actions aimed at Please see page 41 for improving the attraction and retention of more information about women. Our focus in 2014 is to deliver our work developing skills unconscious bias training and to for the future. continue to address the gender balance in the Group. Costain Group PLC Annual Report 2013 37


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    Strategic report Corporate Responsibility continued Costain Cares Employee engagement and involvement Reward and recognition Paddington Station Crossrail... Engaging effectively with our people is In February 2014, we hosted our was awarded the Green Line crucial to the success of our business. Achieving Excellence Awards to Award under the Crossrail The views of our employees are recognise and celebrate the outstanding Green Line Recognition Scheme, extremely important and we want our performance and contributions of our a unique and intelligent way for project people to feel valued, listened to and people and our supply chain. teams to increase their environmental rewarded. We maintain a strong performance. communication network and employees Customers are encouraged to discuss with Our aim is to provide sustainable, Supply Chain management matters of interest and innovative solutions and the highest We understand the economic, issues affecting the day-to-day standards of service to our customers. environmental and social impacts operations of the Group. Employees We constantly strive to improve our of our procurement activities and are kept informed of the financial and performance and actively seek feedback are committed to the responsible economic factors affecting the from our customers. In 2013, we have management of our supply chain. Company’s performance, and other been widely recognised for our We ask our suppliers to share our matters of concern to them as sustainability performance from various values and standards and to support employees, in various ways. These external bodies, including: us in delivering efficient, innovative, include regular updates from the Chief sustainable solutions. In turn, we are Executive and other senior managers, Port Talbot, Harbour Way... committed to engaging and supporting a Costain online news service, personal achieved a CEEQUAL our supply chain to ensure compliance, briefings and emails. Senior managers (Civil Engineering Environmental continual improvement and the also visit sites and discuss with Quality Assessment) Excellent Award achievement of mutual goals. employees matters of current interest and won the Best Conceptual Design and concern to them and the business. category, in the 2013 Brownfield Briefing Supply chain engagement Employees also have the opportunity Awards, for the remediation works We continue to prioritise supply chain to provide feedback and ask questions undertaken as part of the construction engagement. In December, we hosted at the annual staff roadshows which of the Harbour Way Scheme. The a supply chain engagement event, take place around the country. Our project was also highly commended ‘Engagement and Opportunities with established Employee Consultative in the Best Reuse of Material category. Costain’, in Newport, South Wales. Committee convenes three times a year The aim of the event was to increase and on an ad hoc basis throughout the Farringdon Station supply chain diversity. Speakers year, to discuss matters impacting the redevelopment included Dafydd Hughes, Head of the business, in order that the views of Following the project’s 2012 Construction Sector, Welsh Government employees can be taken into account CEEQUAL Excellent Award, it was and Alan Kay, Group Technical and in making decisions likely to affect their awarded an Outstanding Achievement Operations Director, Costain. In addition interests. The Company operates an Award for Ecology and Biodiversity and to this event, our projects hosted a employee share plan (the ‘SAYE’ was highly commended in the Historic number of local ‘meet the buyer’ events scheme) which encourages and Environment category. The project also across the country. supports the ownership of shares in won the Sustainable Excellence Award Costain and a further grant was made at the Network Rail Partnership Awards In April 2014, we will host our fourth under this scheme during the course for its collaborative approach to supply chain conference at Warwick of 2013. delivering sustainable outcomes. University, which will be attended by senior representatives from our supply Following the acquisitions of Welsh Water Coed Dolwyd chain partners and senior management ClerkMaxwell, Promanex and EPC Service water reservoir from Costain. The conference offers Offshore and some significant TUPE scheme... a chance for suppliers to hear about the movements in and out of the business won the Green Apple Wales National future of working with Costain. during 2012 and 2013, we took the Gold Award, in recognition of the positive decision not to repeat our engagement environmental impact and best practice survey in 2013 but to focus on work carried out on the site. developing a new survey in 2014. This will re-benchmark engagement data and develop and implement targeted improvement plans through our Employee Consultative Committee. 38 Costain Group PLC Annual Report 2013


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    01-45 Strategic report Costain regularly announces key stakeholder information on the ‘News’ section of its website: www.costain.com/news. Your opinions, views and questions about Costain matter to us. Please contact us via the home page of our website: www.costain.com 46-84 Governance Sustainable procurement ourselves the target of reducing carbon We also submit our data annually to the Sustainable procurement for Costain emissions intensity by 55% by 2020. Carbon Disclosure Project (‘CDP’) – an means leading socially, environmentally The Climate Change Steering Group independent, not-for-profit organisation and economically responsible continued to co-ordinate Costain’s that aims to increase transparency and procurement to deliver value and approach to climate change and to promote climate change data as a factor benefits to stakeholders. We have demonstrate clear, visible leadership, in business, policy and investment adopted the UK Government’s Flexible to ensure that the Company is managing decisions. Framework as the method through its impacts and maximising potential which we will develop our approach opportunities in providing low-carbon We were delighted to be named in the and measure our progress. In support solutions to our customers. Climate Performance Leadership Index of this commitment, we have updated (‘CPLI’) as one of the best performing our sustainable procurement policy In 2012, we achieved external companies in the Carbon Disclosure and developed a guidance document, accreditation of our carbon footprint Project’s annual FTSE 350 climate ‘Delivering Sustainable Procurement’, to CEMARS (‘Certified Emissions change report. We achieved a score of 85-132 Financial statements for our procurement staff and our Measurement and Reduction Scheme’) 84A, highlighting the positive impact the current and future suppliers. In addition, certification. The CEMARS standard company has made in measuring and to ensure our procurement teams includes independent verification of our driving down its greenhouse gas approach sustainable procurement in emissions data and a yearly review to emissions. We are also the only FTSE a uniform manner, we have developed ensure we continue to deliver reductions SmallCap company to achieve band and piloted a sustainable procurement in our emissions. We have successfully ‘A’ status in 2013, and only the second training module. The sustainable renewed this accreditation in 2013. small-cap company to achieve an ‘A’ procurement module will be rolled out Our method of reporting is in accordance band rating since the ratings were to all our commercial and procurement and certified to ISO 14064-1. To date, introduced in 2009. teams in 2014. we have achieved a 30.1% reduction in emission intensity against our 2009 Resource management baseline, demonstrating that we are We continue to drive down the amount on track to meet our 2020 target of of waste going to landfill, and we strive a 55% reduction in emission intensity. towards zero waste to landfill. In June, 133-136 Other information a Waste Reduction & Recycling campaign was implemented Company- Our In addition to this footprint we also report in accordance wide to coincide with National Recycling Week, the aim to reduce the quantity Environment with the requirements of the Companies Act 2006 of waste produced on our projects and in our offices and to ensure that We continue to successfully manage (Strategic and Directors’ recycling is maximised. our impact on the environment through Report) Regulations 2013. implementation of our Environmental Please see page 13. Management System, which is certified to ISO 14001:2004. We continue to CO2 equivalent emissions focus on reducing the risk of any direct tCO2e per £m turnover/’000 tCO2e impact on the environment, and have widened our focus to assess and 40 37.27 39.53 40 minimise the indirect impact of our 30 28.22 29.30 28.65 30 activities. 20 20 Climate change 10 10 We remain committed to reducing our 0 0 measured carbon emissions. In 2013, 09 10 11 12 13 we published our first Climate Change Strategy, which clearly sets out our Q Scope 3 – Other indirect emissions (employee QScope 1 – Direct emissions arising from our vision to be a leading provider of business travel, emissions from water usage operations (fuel combustion, Company-owned and waste disposed to landfill) or leased vehicles) low-carbon solutions whilst also setting Q Scope 2 – Indirect emissions arising from QEmissions intensity (tCO2e/£M) an exemplary standard of how the electricity consumption Company should manage and reduce Figures are reported in accordance with ISO14064-1:2006 and reflect UK operations within Costain's direct operational control. its own greenhouse gas emissions and those of its customers. We have set Costain Group PLC Annual Report 2013 39


  • Page 42

    Strategic report Corporate Responsibility continued Costain Cares Construction waste removed from site ’000 tonnes of waste/tonnes per Engineering £100,000 turnover Tomorrow... 600 450 51,554 8 6 ‘in action’ 6.3 31,001 300 27,066 4 4.9 4.9 24,391 20,337 150 3.3 3.3 2.9 2 2.8 2.9 2.8 2.1 0 0 09 10 11 12 13 identified as suitable habitat for Harbour Way, Port Talbot the Small Blue Butterfly (a UK QQ Tonnes of waste removed from site QTonnes per £100,000 turnover Biodiversity Action Plan species) Figures are reported in accordance with WRAP Waste The Harbour Way dual carriageway were also moved prior to Measurement and Reporting Guidance. Turnover figures reflect operations reporting waste. 2009–2011 figures relate links the M4 Junction 38 to Port construction and additional to UK operations excluding MAC joint ventures and 2011 Talbot and its docks. The route acquisitions. 2012 figures reflect all operations but exclude replacement habitat was provided our MAC 10 joint venture and Alcaidesa operations and passes through an area of the Port along the scheme corridor. Over the associated turnover. Talbot Steel Works site which has an 15,200 new trees and shrubs were extensive historical legacy and is planted in the landscaping scheme Waste diverted from landfill an area of land that was grossly % and a Sustainable Urban Drainage contaminated from previous heavy System (‘SUDS’) was incorporated industrial uses. Through the into the drainage design with 100 95 84 89 93 implementation of a remediation planted swales and ponds to 75 67 strategy and a material management provide additional habitat and plan, an estimated 23% saving in reduce flood risk. 50 CO2e was realised through 25 techniques such as the remediation The project’s achievements were 0 and reuse of previously contaminated recognised by winning a CEEQUAL 09 10 11 12 13 soils, and sourcing fill materials Excellent Award as well as Best locally. Conceptual Design in the Brownfield Figures are reported in accordance with WRAP Waste Measurement and Reporting Guidance. Turnover figures Briefing Awards. reflect operations reporting waste. 2009–2011 figures Prior to construction over 1,800 relate to UK operations excluding MAC joint ventures Additional examples of and 2011 acquisitions. 2012 figures reflect all operations reptiles were translocated to new Engineering Tomorrow... ‘in action’ but exclude our MAC 10 joint venture and Alcaidesa receptor sites. Areas of grassland operations and the associated turnover. can be found on pages 28-33. We have successfully increased our Environmental incident Our reported environmental incidents total waste diverted from landfill to 95% frequency rate and the associated environmental compared to 93% in 2012 and 87% of Number of environmental incidents incident frequency rate (‘EIFR’) in 2013 construction waste diverted from landfill per 1,000,000 man hours remained at 0.28. We have, however, compared to 85% in 2012. reduced the number of significant and 0.4 minor incident compared to 2012. Protecting the environment 0.3 0.280 0.280 We recorded four significant incidents We are committed to minimising our compared to seven in 2012 and 0.2 impact on the environment ensuring, 0.156 0.137 76 minor incidents compared to where possible, that our activities do not 0.1 0.077 78 in 2012. result in damage and that we reduce our 0.0 overall environmental incidents year on 09 10 11 12 13 No major incidents were reported year. We ensure that all environmental in 2013 and no environmental incidents are reported and investigated prosecutions, cautions or notices were to capture lessons and prevent received. We have received no recurrence. environmental prosecutions, cautions or formal notices since 2004. 40 Costain Group PLC Annual Report 2013


  • Page 43

    01-45 Strategic report 46-84 Governance Training During 2012–2013, Costain took a lead role developing a CITB-accredited environmental training course, the Site Environmental Awareness Training Scheme, (‘SEATS’), which was launched by Group SHE Director, Peter Fisher, in February. Costain is a registered training provider for SEATS and we intend to rollout SEATS as a mandatory requirement for all site supervisors and managers. During the year, we have trained a total of 143 Costain employees and 95 sub-contractors, and three 85-132 Financial statements courses have already been run as part of Costain’s supply chain academy. The Future We have also joined forces with innovative The site is regularly updated with careers website ‘plotr’ to encourage more vacancies for work experience, In 2013, we underlined our continued young people to consider a career at apprenticeships and graduate training commitment to sustainable development Costain. ‘Plotr’ is an online careers positions, as well as forthcoming by signing the Welsh Government’s service for 11- to 24-year-olds that is free employment events and seminars. Sustainable Development Charter. for young people, parents and teachers Signing the Charter is a voluntary to use. Founded in 2011, ‘plotr’ is a Supply chain academy commitment to making sustainability not-for-profit Community Interest In 2012, we launched the Costain supply central to business, promoting and Company that combines input from chain academy, an initiative that aims delivering environmental, social and careers advisers, youth organisations, to support and develop small and 133-136 Other information economic wellbeing through decisions teachers, leading technology and social medium-sized enterprises. To date, and operations, and sharing the learning media companies and hundreds of 45 suppliers have been through the from that journey. young people to create an innovative academy, where representatives attend and informative careers advice platform. 19 learning modules covering business Developing skills for the future Working with ‘plotr’ we have created the administration, commercial and financial We recognise the importance of ‘Costain Career World’ to represent the best practice, insurance, Health and engaging with schools, colleges and sectors the Company operates in and Safety, behavioural safety and quality. universities to ensure we attract young included 11 job roles to demonstrate the We are pleased with feedback received talent into our organisation, build a various careers available within the to date and are planning to support sustainable pipeline of talent for the Group. The jobs are a mix of entry-level a further 30 suppliers through the future and support local communities and aspirational roles and the site offers academy in 2014. where we operate. Through our advice about how you get started, what Engineering Futures programme, skills are needed, what qualifications are we aim to raise the awareness and required and what salary might be aspirations of young people to find out expected. There are also short video more about careers in engineering and clips of Costain employees talking about related industries. We have over their role, how they got started, what 100 ambassadors across the Group their key skills are, what they love about who volunteer their time to go into their job and, as with all jobs, what the schools to inspire young people in biggest challenges are. Science, Technology, Engineering and Maths (‘STEM’) subjects. In addition, we offer inspirational work experience to young people, aiming to make their experience of the world of work more accessible and meaningful. Costain Group PLC Annual Report 2013 41


  • Page 44

    Strategic report Corporate Responsibility continued Costain Cares Our performance Costain achieved the highest ranking in Engineering BITC’s annual benchmark of responsible business management, the Corporate Tomorrow... Responsibility Index (‘CR Index’). The CR Index is the UK’s leading and most in-depth voluntary benchmark of ‘in action’ Corporate Responsibility. It has been run by Business in the Community for over a decade to help companies: accurately measure and manage all aspects of their social and environmental performance; shape how they integrate and improve The Big Infrastructure Corporate Responsibility throughout their business operations, and benchmark Conversation themselves against competitors. In September Costain, in conjunction A new banding in the Index for 2013, with Business in the Community, Platinum Big Tick, is designed to hosted The Big Infrastructure challenge leading companies with Conversation at London’s City Hall. ‘stretch questions’ on topics such as On the day students, ambassadors, their long-term planning and the unique apprentices and trainees met youth unemployment and to listen contribution their business can make business leaders and discussed their to young people about their needs, to create transformational change and own apprenticeship experiences, hopes and ambitions for the future, a sustainable economy. the importance of inspirational particularly in relation to securing work experience and skills. For the valuable career advice. Achieving Platinum Big Tick status industry leaders, there was also an Additional examples of means that Costain can demonstrate opportunity to share best practice Engineering Tomorrow... ‘in action’ that it is thinking about how global mega about how businesses can tackle can be found on pages 28-33. trends, such as population growth and resource scarcity, are affecting the future Costain Cares: our 2020 vision strategy of the business. The banding is In 2011, we launched our Corporate an indication that it is making long-term Responsibility strategy, Costain Cares, investments to improve or launch new setting out our vision for 2014. This year, environmentally and socially sound we will undertake a full review of our products and services, and is 2014 vision, report on our achievements embedding responsible values and, in an aim to ensure continual throughout the workforce. improvement, launch our 2020 vision. Business in the Community Corporate Responsibility Index performance and band thresholds % 100 97 93 95 95 90 88 80 70 Additional information concerning 60 our Costain Cares strategy can 50 be found online: www.costain.com/ 09 10 11 12 13 responsibility Q Bronze ≥ 70.00% Q Silver ≥ 79.76% Q Gold ≥ 89.76% Q Platinum ≥ 94.76% In 2011, BITC renamed the CR Index 2010 as CR Index 2011 to reflect the year the results were published. 42 Costain Group PLC Annual Report 2013


  • Page 45

    01-45 Strategic report Finance Director’s review 46-84 Governance In 2013, the Group sold its minority The results of the Group’s shareholdings in three joint venture operating divisions are considered companies as part of the continued in the Divisional performance section disposal of its PFI equity portfolio, for an (pages 26 and 27) and are shown in aggregate consideration of £12.0 million. the segmental analysis in the financial The Group realised a profit of £9.1 million statements (pages 101 to 103). as a result of the sale. Acquisitions The Group has reassessed the carrying In August 2013, the Group acquired value of the assets in its non-core Land the 100% share capital of EPC Offshore Development activity in Spain, and as Limited for an initial consideration of a consequence of continuing uncertainty £10.6 million (including £1.0 million for regarding future market conditions, excess cash). EPC Offshore Limited Tony Bickerstaff a non-cash impairment has been taken is a field development and project 85-132 Financial statements Finance Director against the assets, the Group’s share management specialist providing of which is £9.8 million. client-side services to North Sea oil This review brings together the key and gas companies and enhances the financial metrics of the Group and sets In 2012, the Group transferred two PFI Group’s skills and capabilities in the out the matters of financial significance. investments into The Costain Pension North Sea upstream oil and gas market. Scheme (‘CPS’) at an agreed value of Further consideration may be payable The Group generated a 12% increase £20.3 million which resulted in a profit on depending on the financial performance in underlying1 operating profit to £27.4 the transfer of £10.5 million. In addition, of the business in the financial years million (20122: £24.5 million) on Group during 2012 the Group implemented an ending 31 December 2014, 2015 and revenue, including share of joint ventures Enhanced Transfer Value and Pension 2016 and the retention of certain key and associates, of £960.0 million for Increase Exchange offers to the employees in 2016. This performance the 12 months to 31 December 2013 members of the CPS which resulted in consideration is subject to a minimum (2012: £934.5 million). The increased a one-off accounting cost of £2.8 million of £2.0 million and a maximum of profitability reflects the Group’s in the year. £14.4 million. 133-136 Other information continued focus on higher margin work. During the year, the Group secured At the period end, the Group acquired Profit before tax, before other items3, a number of new contracts and the 27% interest from its partner for the year ended 31 December 2013 extensions and the Group’s order book Serco Group plc in their Managed increased to £31.0 million (20122: £28.1 stood at £3.0 billion (31 December 2012: Motorway Technology joint venture million). Basic earnings per share, before £2.4 billion). arrangement for a cash consideration other items3, amounted to 44.1 pence of £2.4 million. The joint venture (20122: 39.7 pence per share), reflecting As a result of the Group’s ongoing agreement, in which Costain already increased profits and a tax timing benefit. strategic focus on major blue-chip held the remaining 73% interest, Reported basic earnings per share were customers who increasingly utilise a has a place on the Highways Agency 18.8 pence (20122: 35.4 pence). target cost based form of contract, our framework to deliver new technology-led net cash position includes a lower level highways improvements. of advanced payments typically paid on 1 Underlying operating profit is before Other items lump sum contracts. Additionally, our In accordance with accounting (amortisation of acquired intangible assets and employment related and other deferred increasing emphasis on support service standards, any deferred consideration consideration and in 2013 £3.7 million one-off related activities and changing industry for acquisitions that is related to costs associated with the offer for May Gurney cash flow trends, together with the cash employment is expensed in the income Integrated Services plc) and in 2012 excludes flow implications of a delayed contract, statement over the period of deferment. the £2.8 million one-off costs resulting from pension scheme liability actions. accounted for the reduction in net In 2013, employment related and other 2 Restated for revised IAS 19 Employee benefits cash to £57.7 million (December 2012: deferred consideration amounted to accounting standard. £105.7 million). We expect these trends £2.8 million (2012: £1.7 million), the 3 Other items are the amortisation of acquired intangible assets of £1.8 million will continue to be reflected in a lower increase from the prior period is due to (2012: £1.7 million), employment related and average net operating cash position. an increase in the expected performance other deferred consideration of £2.8 million of a previous acquisition, including a (2012: £1.7 million) and in 2013 the £3.7 million one-off costs associated with the offer for deferred consideration element not related May Gurney Integrated Services plc and the to employment. This expense is shown non-cash impairment of £9.8 million on carrying value of assets in non-core Land Development activity in Spain. Costain Group PLC Annual Report 2013 43


  • Page 46

    Strategic report Finance Director’s review continued separately in the income statement Shareholders’ equity A full actuarial valuation of the CPS was under ‘other items’ to aid the user of the Shareholders’ equity increased in last performed by the Scheme Actuary financial statements in understanding the the year to £43.3 million (2012: £31.8 as at 31 March 2010 and a recovery plan underlying performance of the Company. million). The profit for the year amounted agreed with the Trustee of the Scheme. to £12.5 million and other comprehensive A full actuarial valuation is being carried Interest income of £4.2 million. The movements out as at 31 March 2013. Net finance expense amounted to are detailed in the consolidated £4.0 million (20122: £2.7 million). The statements of comprehensive income Cash flow and borrowings interest payable on bank overdrafts and and expense and changes in equity The Group has a positive net cash other similar charges was £2.6 million in the financial statements. balance, which was £57.7 million as at (2012: £1.8 million) and the interest 31 December 2013 (2012: £105.7 million) income from bank deposits and other On 27 February 2014, the Group and included £26.6 million of borrowings loans and receivables amounted to announced a proposed £70.3 million (2012: £1.7 million) and cash held £0.7 million (2012: £1.0 million). In (net of expenses) capital raising which, by jointly controlled operations of addition, the net finance expense if approved at the extraordinary £25.6 million (2012: £29.6 million). includes the interest cost on the net general meeting on 17 March 2014, liabilities of the pension scheme of will increase the level of shareholders As set out in the consolidated cash flow £2.1 million (20122: £1.9 million). equity significantly in 2014. statement and explained above, during the year, the Group had an operating Tax Pensions cash outflow, together with outflows The Group’s effective rate of tax As at 31 December 2013, the Group’s for payment of dividends and matching was 3.1% of the profit before tax pension scheme deficit in accordance pension deficit contributions. The (2012: 6.5%). The lower than normal with IAS 19, net of deferred tax, was average month-end net cash balance rate of tax arose owing to tax relief on £29.4 million (2012: £40.0 million). during 2013 was £50.7 million (2012: the sale of shareholdings in PFI assets, The scheme deficit position has reduced £103.4 million). Research and Development tax relief primarily as a result of the return on claims, timing differences, not previously assets and Company contributions Key risks and uncertainties recognised as deferred tax assets, exceeding the increased liabilities The principal risks and uncertainties and the effect on the brought forward arising from changes in the financial of the business, and the factors deferred tax balances of the reduced assumptions. which mitigate these risks, are set out on rate of corporation tax of 21% from pages 24 and 25. The Board proactively 1 April 2014. In February 2012, the Group announced monitors these risks and the Chairman’s two further actions being taken to statement and the Chief Executive’s Dividend manage the obligations in the CPS. review in these financial statements The Board has recommended a final The first of these was the transfer of the include consideration of uncertainties dividend for the year of 7.75 pence per Group’s interest in two PFI investments affecting the Group. share (2012: 7.25 pence per share) to into the CPS at an agreed value of bring the total for the year to 11.5 pence £20.3 million which was completed on Contract bonding and per share (2012: 10.75 pence per share), 22 February 2012 and resulted in an banking facilities an increase of 7%. accounting profit on the transfer of The Group’s long-term contracting £10.5 million. The second action was business is dependent on it being able Subject to finalisation of the 31 March the implementation of Enhanced to supply performance and other bonds 2013 actuarial review, as in previous Transfer Value (‘ETV’) and Pension as necessary. This means maintaining years, the Group will make an additional Increase Exchange (‘PIE’) offers to the adequate facilities from banks and surety cash contribution to the pension scheme members of the CPS. The ETV and bond providers to meet the current and equal to the amount of dividend paid PIE exercises resulted in a reduction projected usage requirements. During to shareholders. in the scheme liabilities and assets of the period, the Group increased its approximately £35 million and in a contract bonding and banking facilities one-off accounting cost of £2.8 million to £495 million and extended the expensed in 2012. maturity date to 30 June 2017 with its relationship banks and surety companies. 44 Costain Group PLC Annual Report 2013


  • Page 47

    01-45 Strategic report Costain financial statements can be found on pages 86-132. 46-84 Governance Treasury Interest rate risks and exposure The Group’s treasury and funding The Group enters into financial activities are undertaken by a centralised instruments, where necessary, for two treasury function. Its primary activities main purposes: to finance its operations are to manage the Group’s liquidity, and, in its project finance investments, funding and financial risk, principally to manage interest rate risks arising arising from movements in interest rates from its operations and its sources of and foreign currency exchange rates. finance. Various financial instruments (for example, trade receivables and The Group’s policy is to ensure that trade payables) arise directly from the adequate liquidity and financial resources Group’s operations. are available to support the Group’s growth development, while managing The main exposure to interest rate these risks. The Group’s policy is not fluctuations within the Group’s 85-132 Financial statements to engage in speculative transactions. operations arises from surplus cash, Group Treasury operates as a service which is generally deposited with the centre within clearly defined objectives Group’s relationship banks, and bank and controls and is subject to periodic borrowings. Within the investments in review by internal audit. joint ventures and associates, interest rate movements will affect the value of Liquidity risk any swaps that may be entered into and The Group finances its operations are classified as cash flow hedges and primarily by a mixture of working capital, this will impact the Group’s equity. funds from shareholders, retained profits and borrowings. The Directors regularly Going concern monitor cash usage and forecast usage The Directors have acknowledged the to ensure that projected financing needs guidance ‘Going Concern and Liquidity are supported by adequate cash reserves Risk: Guidance for Directors of UK 133-136 Other information or bank facilities. Companies 2009’ published by the Financial Reporting Council in October Foreign currency exposure 2009. The Directors have considered Translation exposure: the results of the the Group’s financial requirements, Group’s overseas activities are translated its current order book and future into sterling at rates approximating to opportunities and its available bonding the foreign exchange rates ruling at the facilities. Having reviewed the latest dates of the transactions. The balance projections, including the application sheets of overseas subsidiaries and of reasonable downside sensitivities, investments are translated at foreign the Directors believe that the Group exchange rates ruling at the balance is well placed to manage its business sheet date. risks successfully despite the current uncertain economic outlook. Accordingly, Transaction exposure: the Group has the Group continues to adopt the going small transactional currency exposures concern basis in preparing these arising from subsidiaries’ commercial financial statements. activities overseas and from overseas supply purchases for business in the UK. Where appropriate, the Group requires its subsidiaries to use forward currency contracts to minimise any currency exposure unless a natural hedge exists elsewhere within the Group. Tony Bickerstaff Finance Director 26 February 2014 Costain Group PLC Annual Report 2013 45


  • Page 48

    Governance This section explains our corporate governance and decision-making processes. We detail the committees and our accountability and audit procedures. In this section 47 Chairman’s statement on corporate governance 48 Board of Directors 50 Corporate Governance statement 55 Audit Committee report 58 Nomination Committee report 59 Directors’ remuneration report 77 Directors’ report 81 Directors’ responsibilities statement 82 Independent Auditor’s report to the members of Costain Group PLC Additional information about our governance can be found online: www.costain.com/responsibility 46 Costain Group PLC Annual Report 2013


  • Page 49

    Governance 01-45 Strategic report Chairman’s statement on corporate governance 46-84 Governance Dear Shareholder At Costain, we take corporate governance very seriously and are committed to robust corporate governance practices and accountability. The Board considers that the principles set out in the UK Corporate Governance Code are central to the effective management of the business and to maintaining the confidence of investors. David Allvey The Board is responsible for providing strong leadership 85-132 Financial statements Chairman to the Costain Group and effective leadership is realised through collaboration between the Board and the executive “The Board is team. My role as Chairman is to ensure that we harness the experience and knowledge of the Directors and drive a culture committed to of continual improvement in standards, decision-making, policies and accountability. achieving the highest standards A key strength of our Board lies in its diversity across a range of measures, including skills, experience, gender of governance. This and nationality. We further strengthened our Board with the overview sets out appointments of Ahmed Samy and Alison Wood. Alison will become the Chair of the Remuneration Committee on 133-136 Other information our approach to 1 April 2014 when Mike Alexander will retire from the Board. effective leadership The Board has also continued to undertake wide-ranging and best practice.” discussions on key strategic issues, which included a number of Board workshops attended by members of the Executive Board and third-party advisers. Discussions were focused on developing our Engineering Tomorrow strategy included the ongoing consideration of potential acquisitions and investments. A business plan for 2014–2016 was approved in December 2013. The Board is ultimately responsible for the success of Costain and we are committed to the highest standards of corporate governance to enable us to continue to achieve our vision of being one of the UK’s leading engineering solutions providers. David Allvey Chairman 26 February 2014 Costain Group PLC Annual Report 2013 47


  • Page 50

    Governance Board of Directors Experienced leadership David P Allvey (68) Andrew Wyllie (51) James Morley (65) FCA, ATII 3 FREng, MBA, BSc, CEng, BSc, FCA 1 2 3 Non-Executive Chairman FICE, CCMI Senior Independent Director Chief Executive Appointment: November 2001 Appointment: January 2008 Appointment: September 2005 Skills and experience: David Allvey was Skills and experience: James Morley appointed Chairman in January 2008 Skills and experience: Andrew Wyllie served as Chairman of the Audit Committee prior to which he was Chairman of the was appointed Chief Executive in September from January 2008 until the end of October Audit Committee. With a career that started 2005. He was previously Managing Director 2012 and was appointed as the Senior in civil engineering and subsequently as a of Taylor Woodrow Construction Ltd Independent Director at the start of January Chartered Accountant, his previous roles (2001–2005) and a member of the Taylor 2013. He is a Chartered Accountant with include Group Finance Director for BAT Woodrow plc Executive Committee. Andrew some 27 years’ experience as a board Industries plc, Barclays Bank plc and joined Taylor Woodrow in 1984 and worked member of both listed and private Chief Operating Officer for Zurich Financial on major contracts in Africa, the Middle East, companies. Previous roles include Chief Services, member of the UK Accounting the Far East and the UK. Operating Officer of Primary Group Ltd Standards Board, member of the (2006–2007), Group Finance Director of International Accounting Standards Insurance External appointments: Non-Executive Cox Insurance Holdings plc (2002–2005), Group, Non-Executive Director of Thomas Director of Scottish Water. Group Finance Director of Arjo Wiggins Cook plc (2007–2012), Senior Non-Executive Appleton plc (1999–2001), Group Executive Director of Intertek Group plc (2002–2011), Director Finance of Guardian Royal Exchange Senior Non-Executive Director of William Hill plc (1990–1999), Deputy Chief Executive plc (2002–2011), Senior Independent and Finance Director of Avis Europe plc Director of Friends Life FPG Limited (formerly (1976–1989), Non-Executive Director of the Friends Provident Group plc) (2009–2011) Bankers’ Investment Trust plc (1994–2008), and Chairman of Arena Coventry Ltd Non-Executive Director of WS Atkins plc (2006–2012). (2001–2009), Non-Executive Director of Trade Indemnity Group plc (1991–1996) External appointments: Senior and Non-Executive Chairman of Acumus Ltd Independent Director of Friends Life Group plc, (2011–2012). Non-Executive Director of Clydesdale Bank Anthony O Bickerstaff (49) plc and National Australia Group Europe FCCA External appointments: Non-Executive Limited. Director of The Innovation Group plc, Finance Director Clarkson plc, Speedy Hire plc, and BMS Appointment: June 2006 Associates Ltd. Skills and experience: Tony Bickerstaff is Finance Director and has been since June 2006. Tony has extensive knowledge of the construction and support services sectors both in the UK and overseas. He is responsible for all aspects of the financial management of the Group as well as playing a major role in the Group’s strategic and operational development. Previously, Tony was with the Taylor Woodrow Group, which Former Director he joined in 1982. He held a number of senior Mr Samer Younis retired as a Non-Executive Director with effect from 30 November 2013. management and financial positions in The responsibilities of Taylor Woodrow including Finance Director the Directors have been Notes of Taylor Woodrow Construction Limited. set out on page 81. 1 Member of the Remuneration Committee. Prior to becoming Finance Director, he was 2 Member of the Audit Committee. Divisional Operations Director in charge of 3 Member of the Nomination Committee. Taylor Woodrow Group’s PFI projects. 48 Costain Group PLC Annual Report 2013

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