Costain Regulatory News (COST)

Costain Group PLC

("Costain" or "the Group" or "the Company")

Results for the year ended 31 December 2017

1 March 2018

Costain, the smart infrastructure solutions company, announces another strong performance with an 18% increase in underlying1 operating profit and a recommended 10% increase in the dividend for 2017.

1. Before other items; amortisation of acquired intangible assets and employment related and other deferred consideration

2. Net cash balance is cash and cash equivalents less interest-bearing loans and borrowings

Highlights

Dr Paul Golby CBE, chairman, commented:

"Costain had another strong year with increases in revenue, profit and cash.

"Our performance is a direct consequence of our ongoing transformation and differentiation into the UK's leading smart infrastructure solutions company. This transformation keeps Costain relevant to our clients who are faced with ever greater urgency and complexity in meeting the UK's infrastructure needs, and who require our technology-led offering to help deliver their multi-billion pound programmes and service enhancements.

"As a result of our strong performance and our confidence for the future, I am pleased to announce the Board's recommendation to increase the total dividend for the year by 10% and I look forward to reporting on future progress."

There will be a presentation to analysts today at 09:00 at Instinctif Partners, 65 Gresham Street, London, EC2V 7NQ. To register your attendance please contact christine.galloway@instinctif.com

The Costain 2017 results film is available at www.costain.com

Notes to Editors (for further information please visit the company website: www.costain.com)

As a smart infrastructure solutions company, Costain helps to improve people's lives by deploying technology-led programmes to meet urgent national needs across the UK's energy, water and transportation sectors. We have been shaping the world in which we live for over 150 years.

The Group's 'Engineering Tomorrow' strategy involves focusing on blue chip clients in our chosen sectors, whose major spending plans are underpinned by strategic national needs, regulatory commitments or essential maintenance requirements.

Costain's 4,000 people, who are committed to high performance and safe delivery, are working on many high-profile contracts in the UK incorporating a broad range of innovative services across the whole life-cycle of our customers' assets and does so through the delivery of integrated consultancy, asset optimisation, technology and complex delivery services.

CHAIRMAN'S STATEMENT

I am pleased to report that Costain has delivered another strong performance in the year, with continued growth in both revenue and profit.

I have previously commented on Costain's position as a great British engineering success story with an outstanding brand and leading market positions. This has been reinforced further during the year by the ongoing strategic transformation of the business to establish a clearly differentiated position as the UK's leading smart infrastructure solutions company.

This transformation keeps Costain relevant to our clients, who are faced with ever greater urgency and complexity in meeting the UK's infrastructure needs, and who require our technology-led offering to help deliver their multi-billion pound programmes and service enhancements.

To maintain our competitive advantage, we are placing greater focus on smart thinking across everything we do, both internally and externally. We are always asking how we can do things better, quicker, faster, safer and more effectively. Above all, how we can add and deliver further value to our clients. A critical element of this will be our relentless pursuit of new skills and capabilities to ensure that we have the brightest people and the broadest range of services to meet our clients' increasingly urgent and complex needs.

Dividend

The Group has a progressive dividend policy, targeting an ongoing dividend cover of around two times underlying earnings, translating strong performance directly into shareholder returns.

Our performance this year, and our confidence in the opportunities for future growth, have resulted in the Board recommending a final dividend of 9.25 pence per share (2016: 8.4 pence) which, if approved, will be paid on 18 May 2018 to shareholders on the register as at the close of business on 13 April 2018. This represents an increase of 10% in the total dividend for the year to 14.0 pence per share (2016: 12.7 pence).

Governance

We measure the Board's effectiveness by holding an externally facilitated evaluation of Board performance every three years and take appropriate action where required.

In 2017, an external evaluation concluded that the Board is well-functioning and effective, and recommended agreed actions to help ensure the speed of transformation and organisational development is maintained. I am pleased that the evaluation also confirmed that we have a Board committed to the highest standards of governance.

Our Annual Report will set out and explain the processes we have put in place to deliver long-term success while also ensuring that the Company complies with all applicable laws and regulations and meets the requirements of our stakeholders.

Board and people

I was pleased to welcome Jacqueline de Rojas CBE to the Board as a non-executive director with effect from 20 November 2017. Jacqueline is a recognised and highly regarded technology leader in the UK and has brought an additional perspective to our Board as we continue to transform into the UK's leading smart infrastructure solutions company.

As part of our planned Board succession, James Morley will retire as a non-executive director of the Company, and as senior independent director, on 8 May 2018 after the conclusion of the Group's Annual General Meeting (AGM). Jane Lodge has been appointed to act as the Company's senior independent director with effect from the conclusion of the 2018 AGM. I would like to thank James for more than 10 years of dedicated service to Costain, during which time he has made a significant contribution, and wish him well for the future.

The success of any company is down to the quality of its leadership and the depth of talented and skilled people throughout the organisation. On behalf of the Board, I would also like to thank all Costain's people for their commitment, dedication and hard work. The strong result we have achieved this year would not be possible without them.

Corporate citizenship

Driven by our values, Costain takes seriously our wider corporate responsibility and the role the business plays in society. That corporate perspective is also integral to the development of long-term relationships with our blue-chip clients who increasingly place a demonstrable commitment to corporate responsibility high on their selection criteria for preferred suppliers.

Outlook

Our major clients, who are committed to spending billions of pounds to improve people's lives by enhancing the UK's energy, water and transportation infrastructures, are facing increasingly complex and urgent challenges. In response, and to help them meet those challenges better, we are transforming the business into the UK's leading smart infrastructure solutions company.

This transformation is an ongoing process and will ensure that our integrated offering of technology, consultancy, asset optimisation and complex delivery services, keeping Costain relevant to our clients as they deliver their multi-billion pound programmes and service enhancements.

The rapidly changing environment in which we operate presents new and attractive opportunities for Costain and we are well-positioned to take advantage of these. This, along with the good visibility we have over the medium-term, reinforces our confidence for the future and I look forward to reporting on further progress.

Dr Paul Golby CBE

Chairman

CHIEF EXECUTIVE'S REVIEW

I am pleased to report that Costain had another very good year.

We are fulfilling our purpose by improving millions of people's lives across the UK by deploying technology-based engineering solutions to address urgent national infrastructure needs in energy, water and transportation.

We have benefited from proactively aligning the business in a rapidly changing market environment and evolving client requirements, allowing us to differentiate Costain and deliver another strong trading result.

There is a revolution taking place in the use of technology and innovation across infrastructure which is having a profound impact on the market, and creating a wide range of exciting new opportunities for Costain. We are transforming Costain into the UK's leading smart infrastructure solutions company and are looking to the future with confidence.

Another strong trading performance

Results

Our performance reflects the rigorous implementation of the Costain Way business management system that sets out our policies and procedures which are applied consistently across the Group. This also governs our robust approach to assessing opportunities, as well as a continual monitoring of contract and operational performance.

Revenue, including the Group's share of joint ventures and associates, for the year increased 4% to £1,728.9 million (2016: £1,658.0 million).

Group underlying operating profit increased 18% to £48.7 million (2016: £41.1 million). The reported operating profit increased 27% to £44.3 million (2016: £34.9 million). The term 'underlying' throughout this document excludes other items; amortisation of acquired intangible assets and employment related and other deferred consideration.

Underlying profit before tax was £43.4 million (2016: £37.5 million), and underlying basic earnings per share increased to 34.8 pence (2016: 31.5 pence). Reported profit before tax was £38.9 million (2016: £30.9 million) and reported earnings per share were 31.1 pence (2016: 25.7 pence).

Although we have two core operating and reporting divisions within our business (Infrastructure and Natural Resources) we have continued to implement our 'One Costain' philosophy which enables us to constantly focus our resources on identifying and securing the most attractive business opportunities across the markets in which we operate. Further detail on our reporting divisions' performance is set out in the operational review.

Order book

Costain's strong market positions, reputation for innovation and wide range of integrated services enabled us to secure over £2 billion of new contract awards and extensions to existing contracts during the year. As announced in August, we were unable to agree final terms and conditions for the completion of the marine works contract at Hinkley Point C, and therefore £350 million was removed from the order book at that time.

Consequently, the Group's high-quality order book at 31 December 2017 was maintained at £3.9 billion (31 December 2016: £3.9 billion), providing good visibility for the Group's future performance.

The strategic nature of Costain's long-term client relationships has once again ensured that over 90% of the order book comprises repeat business.

As at 31 December 2017, the Group had secured over £1.1 billion of revenue for 2018 (31 December 2016: over £1.2 billion secured for 2017). In addition, the Group has a preferred bidder position of circa £400 million (2016: £500 million).

Cash and banking facilities

Costain finished the year with an increased strong net cash position of £177.7 million (2016: £140.2 million) reflecting very good cash collection towards the end of the period. As previously, some of this increase will reverse during the year ahead. The average month-end net cash during the year also increased to £96.7 million (2016: £69.1 million).

During the year the Group increased total banking debt facilities, in place to support its future growth, from £155.0 million to £191.0 million and extended the term to June 2022.

A dynamic and rapidly changing market environment

Costain is playing a major role in meeting urgent national infrastructure needs, which are being driven by significant demographic, economic and social trends, across the UK's energy, water and transportation sectors.

We must deliver solutions, in highly regulated and legislated environments, that increase network capacity, improve customer service and ensure security of supply. Our solutions must also demonstrate value-for-money and be deliverable within clients' budgets.

In response to some of the challenges of the 21st century - including global warming, the impact of pollution on human health, the need for improved productivity, and the requirement to stimulate regional economic development - there is rapidly-building momentum across both central and local government to take the bold decisions which will improve both the country and peoples' lives.

Examples of some of the policy decisions taken in 2017 include:

This rapidly-changing environment is having a profound impact on all market participants, not least our clients and the demands they, in turn, are placing on Costain. This is creating a wide range of tremendous new opportunities for us as we look to deliver ever more innovative solutions to meet the challenges ahead.

Transforming Costain into the UK's leading smart infrastructure solutions company

As the pace of change continues to build, we are seeing an acceleration in the rate at which new opportunities are being created. The single biggest factor in our continuing success will be our ability further to embrace the revolution taking place in the use and deployment of technology. We have therefore been transforming Costain into the UK's leading smart infrastructure solutions company, embedding technology across everything we do and, while this transformation is ongoing, we are looking to the future with confidence.

This differentiation is making sure that Costain remains an essential choice for the strategic relationships required by our clients on their long-term collaborative multi-billion pound investment programmes. Our offering, comprising integrated technology, consultancy, asset optimisation and complex delivery services, keeps Costain relevant to our clients, and their rapidly changing requirements.

Our clients are required, often by consequence of a regulatory determination or enhanced legislation, to improve significantly the performance, capacity and service provided by the UK's energy, water and transportation infrastructure. Although billions of pounds are being invested, there is also a finite amount of money available, and therefore the heightened infrastructure performance also needs to be achieved through materially improved financial efficiency.

We believe that the only way that these potentially conflicting objectives can be achieved effectively is through the deployment of innovation and the revolution that is taking place in the use of technology is in every aspect of our service delivery. Examples of our recent activity include the Group's involvement in the operational trials of HGV platooning vehicles, the development of testbeds for connected and autonomous vehicles and asset optimisation for a number of water utilities.

Our clients are also developing long-term strategic relationships with suppliers who can mobilise the required range of innovative integrated services. These dynamic market trends are having a profound impact on the competitive environment and are driving supply-side consolidation.

That is why we are continuing to invest in our skills, services and capabilities both organically and by targeted acquisition to embed these across our entire contract portfolio and, consequently, why we are successfully developing and strengthening our long-term strategic supply chain relationships.

Smart people

The success of Costain is built on the strength and experience of our team.

During the year, we increased the number of people in the business working across consultancy and technology roles to 1,300 (2016: 1,200), representing over 30% of the total head count. Additionally, we now have over 800 chartered professionals across a wide range of disciplines, over 250 graduates working towards becoming chartered and over 120 apprentices on a structured development programme undergoing training across the business.

To ensure we continue to generate thought leadership on key issues, we have increased the number of PhD students we are sponsoring to 21. They are undertaking leading-edge research at renowned universities including Cambridge, Imperial College and Edinburgh.

Along with our engineering centre in Manchester, where over 300 of our people are based, we currently have research and development relationships with 15 leading universities and with which we continue to progress a number of patent applications.

Across the Group, there have been over 78,000 hours of training and development in the year, a significant increase year on year following the roll-out of several new e-learning programmes. A number of the members of the senior leadership team have participated in executive education programmes during the year at leading business schools including Stanford and INSEAD.

We continue to enhance our performance and service delivery by improving the diversity within our teams, including an increase to 18% of the number of women now in senior leadership roles.

Smart thinking

To keep differentiating Costain and develop our competitive advantage, we are ensuring that we deploy smart thinking across every aspect of the organisation and the way in which we do business, both internally and externally.

The Costain ethos is always to ask how we can do things better, quicker, faster, safer and more effectively, deploying innovation and technology at every appropriate opportunity.

Just some examples of the result of smart thinking deployed across the seven elements of our business model include:

Operational review

Under our 'One Costain' operating model the Group has two core operating and reporting divisions within the business: Infrastructure and Natural Resources.

Infrastructure

The division, which operates in the highways, rail and nuclear markets, delivered another solid performance in the year. The full year revenue (including share of joint ventures and associations) increased to £1,379.7 million (2016: £1,276.1 million and underlying operating profit was £52.2 million (2016: £56.6 million). The margin in the year was 3.8% (2016: 4.4%), which is just below our 4% - 5% target range, reflecting a high level of bid costs and the timing of returns on contracts. We expect the division's margin to return to the target range in 2018.

The forward order book for the division has increased to £3.0 billion (2016: £2.9 billion) and the level of tendering activity remains high.

Highways

Costain is a leading player in the highways market and has again delivered a wide range of strategic highway programmes in the year which have made a considerable contribution increasing network capacity, reducing congestion, and improving the movement of people and goods across the UK.

We are providing a range of consultancy services for Highways England including commissions to support the roll out of their Building Information Modelling programme, customer experience enhancement, HGV platooning studies and several strategic impact studies.

During the year we have continued to provide asset management services to Highways England through their Asset Support Contracts on Area 4 (Kent and Sussex) and Area 12 (Yorkshire and Humberside) in addition to our maintenance and response contract for Area 14 (the North East). Our first local authority integrated services contract for East Sussex County Council continues to perform well, achieving efficiency savings and record customer feedback through our digitalised approach and award-winning customer experience centre.

We have successfully completed a number of capital schemes on programme and within budget including the A556 Knutsford to Bowden Link, the A5-M1 Link and the A160/A180 Port of Immingham. We are leading Highway England's largest ever contract, the A14 upgrade, and we continue to provide innovative solutions across the Smart Motorway Programme, currently delivering four schemes on the M1 corridor.

We continue to progress the technically-complex A465 Heads of the Valleys road upgrade for the Welsh Government. We are in a process with our client to resolve the impact from additional scope on the cost and programme, which we anticipate being agreed in line with our estimated outcome on the project.

In addition, for the Welsh Government, we are delivering the refurbishment and technology system fit out on the critical M4 Brynglas Tunnel, the All Wales Technology contract and continue to provide professional services in support of the M4 Corridor around Newport which is currently going through public inquiry.

Rail

Costain has continued to contribute to improving the UK's rail infrastructure providing much needed capacity enhancement at London Bridge Station for Network Rail. Over one million passengers a week now experience the enlarged concourse and benefit from an enhanced service experience. 

In Scotland's central belt, the first electrified rail link between Edinburgh and Glasgow has been successfully commissioned allowing new faster passenger trains to meet the growing transport needs in the region. We are pleased to have secured the extension contract that will see the electrification of the Stirling, Dunblane and Alloa route.

Good progress has been made in the year on Crossrail, Europe's largest infrastructure programme, where Costain is playing a leading part in delivering this much-needed boost to London's rail capacity. Track construction is now complete and on our railway systems contract we are focusing on delivering the remaining power and ventilation works to support the planned commissioning of the Elizabeth Line in 2018. Our contracts at Paddington and Bond Street station continue to progress well. Costain is also supporting Network Rail through the Crossrail Anglia contract which connects Crossrail to the existing mainline between Liverpool Street and Shenfield.

On HS2 we have been awarded further contracts including two of the main civil engineering works contracts on the Southern section of this high-speed railway. This includes section 1 and 2 main works contracts taking the railway from Euston out to the edge of Greater London. This complements the enabling works contract, previously secured, for the same sections which are also progressing well.

The upgraded Bond Street underground station was opened as planned in time for the Oxford Street Christmas shopping season.

Nuclear

Costain continues to play an important role in nuclear new-build and decommissioning, ensuring security of supply of new nuclear power, a vital component of the UK's commitment to delivering sustainable low carbon energy sources.

We have secured a range of significant consultancy contracts during the year including the major construction and programme management appointment for the development of one of AWE's nuclear facilities. In addition, we have deployed a team of experienced nuclear professionals across EDF's UK reactor fleet to support their project control capabilities.

The final commissioning phase on the complex Evaporator D at Sellafield was completed, and the new facility was handed over to the operations team and is now providing a long-term solution for the reduction in Highly Active Liquor stocks. This facility is a key component in the UK's nuclear waste reduction and decommissioning programme and its successful completion has enhanced Costain's reputation in the market. We continue to support this client through our Decommissioning Delivery Partnership Framework contract across several decommissioning, engineering and construction contracts.

For EDF NNB at Hinkley Point C we concluded our obligations on the Marine Cooling Water contract at the year end. We have also completed the infrastructure works on Junction 23 and 24 of the M5 for this project. We continue to deliver the large temporary aggregate jetty on the site which has been impacted by a number of technical issues and is due to be completed in 2018.

Natural Resources

The Natural Resources division, which operates in the water, power and oil and gas markets, returned to profitability with an underlying operating profit of £4.8 million (2016: £8.6 million loss). Revenue (including share of joint ventures and associations) was £343.9 million (2016: £377.3 million).

The significant improvement in the performance reflects growth in the water sector and the successful consensual termination of the legacy Greater Manchester Waste PFI contract. However, the margin was impacted by the timing and quantum of returns across a number of contracts and a lower contribution from oil and gas operations, where we have retained skills and capabilities in anticipation of an expected improvement in market conditions. The division is progressing towards a medium term underlying target margin of 4%-5%.

The division has a forward order book of £0.9 billion (2016: £1.0 billion).

Water

The Group is now in year three of the AMP6 five-year programmes for Thames Water, Severn Trent and Southern Water with a focus on improving and maintaining water quality standards, supply resilience and meeting anticipated demographic shifts. These programmes are performing well and are using the full range of integrated capabilities available in the Group to deliver improved customer service, innovative solutions and achieve significant total whole life expenditure efficiency savings.

Costain is improving water quality and resilience of supply through the delivery of the Shieldhall Tunnel for Scottish Water in Glasgow, reducing flooding issues in the city's wastewater network. This is one of the largest infrastructure investments in Scotland and the main tunnel drive was successfully completed in October and the associated works are progressing well. Commercial discussions continue with the client regarding some programme, scope and cost changes on the contract.

The Thames Tideway project, on which the Group is delivering the east section, is progressing well and will form an integral part of the modernisation of London's Victorian sewerage system and significantly improve water quality in the River Thames, providing capacity to cope with the demands of the city well into the 22nd century.

Bid activity for AMP7 is well underway, with several clients seeking contracts with early engagement from the supply chain to help develop robust business plans ahead of AMP7 formally commencing in 2020.

Power

Ensuring that the UK has a secure and resilient energy mix is another area of national need in which Costain is playing a key role.

The contract for the upgrade of National Grid's Peterborough and Huntingdon compressor stations is progressing well. This programme of work is part of National Grid's Emissions Reduction Project to ensure that both compressor stations comply with the Industrial Emissions Directive and Pollution Prevention and Control regulations. The project will also increase system resilience and reduce overall risk on the National Transmission System by replacing ageing assets with modern, efficient equipment.

Costain is providing the project services to deliver the replacement of the Humber Estuary Crossing for National Grid. The River Humber pipeline is a strategically important asset, connecting the gas import facility at Easington on the Yorkshire coast and which provides 70-100 million cubic metres of natural gas per day, to the national network. Costain also continues to provide asset management services and programme management services for Interconnector Contracts with National Grid.

Oil and Gas

The Hydrochloric Acid Dosing Plant Construction Contract and Condensate Mercury Removal System for Total's Edradour-Glenlivet facility continue to progress to programme with key shut down activities completed to plan.

Costain's programme management services to Ithaca on the Stella field development continue to programme, as well as the ongoing support services to Total and Phillips 66 at their Immingham refineries.

In the period, we have secured new contracts for our gas process technology service offering, together with our first decarbonisation contract, and several strategic development consultancy services.

The ongoing market conditions continue to be uncertain, recognising an increase in new business opportunities during 2017 as clients restructure their operations and investment projects to accommodate prevailing market conditions. However, several clients continue to defer investment decisions for key programmes.

Greater Manchester Waste PFI

We announced in September 2017 that all the conditions to the consensual termination of the legacy Greater Manchester Waste contract were satisfied. In accordance with the terms of the consensual termination, Costain fully demobilised its remaining activities and settled all of its obligations under the contract within the provisions we have previously taken for the project.

Alcaidesa

Costain owns the Alcaidesa group, which incorporates the operating assets of two golf courses, an associated consented parcel of land and the 624-berth marina concession, adjacent to Gibraltar.

Revenue in the year was £5.3 million (2016: £4.6 million). While there has been an improvement in the trading returns from the operations and some early improvement in market conditions in Spain for this non-core activity, the overall result has been impacted by a foreign exchange loss arising from an adjustment to the Group's hedging position. The loss before tax was £1.4 million (2016: £0.7 million loss).

Costain Cares

The management of Safety, Health and Environment is a core value at Costain. The Group's Accident Frequency Rate (AFR) in the year was 0.07, which is our best-ever performance and compares well with our industry peer group.

We also received a total of 18 RoSPA awards in 2017 including one Patron's Award, one President's Award and two Gold Medals.

Notwithstanding this industry leading safety performance, the Group still had a number of serious safety incidents in the year, including high-potential near-miss events, which reinforced the need for continuous learning, vigilance and improvement in our safety performance.

We remain committed to further improvement in our safety performance and are implementing a strategy to reduce by a further 50% the number of incidents in the business by the end of 2018.

Our clients place great emphasis on the good citizen credentials of their strategic supply chain partners. Given the profile of their businesses and the nature of the activities we undertake, how we deliver our services is as important to them as what we do. Increasingly, clients insist that their tier-one providers share their corporate and social responsibility values and failure to do this would mean a failure to pre-qualify for future work.

During the year we have been placing an increased emphasis on the health and wellbeing of the Costain team. Initiatives include recognising and supporting improved mental health, encouraging flexible working and fundamentally re-evaluating traditional working practices.

From April 2017, the government has introduced gender pay gap reporting for all companies with more than 250 employees. We fully support this legislation as we believe it will help businesses to tackle gender equality in the workplace.

We have conducted an in-depth review into our employee remuneration and are confident that men and women are paid equally for doing equivalent roles across our business. Our gender pay gap however is 23.8% as a result of having fewer women in senior leadership positions. We are working hard to address this and are confident that as we make progress in our gender balance, our gender pay gap will decrease. For more information please download our report from our website www.costain.com.

The Costain Charitable Foundation is the focus of the range of charitable and community work we undertake, both individually and as a Group. I am pleased to report that we raised over £200,000 for charitable causes in 2017.

Outlook

Costain delivered a strong performance in a dynamic and rapidly changing market environment. Our clients are facing increasingly complex challenges and we have transformed our business to ensure that we remain relevant to them in meeting those challenges.

We have an exciting opportunity ahead to grow our business. To realise it, we will continue to invest in our people and innovative technologies to ensure that we maintain our offering comprising integrated technology, consultancy, asset optimisation and complex delivery services.

The current year has started well and we continue to look forward to the future with confidence.

Andrew Wyllie CBE

Chief Executive

CHIEF FINANCIAL OFFICER'S REVIEW

This review brings together the key financial metrics of the Group and sets out the matters of financial significance.

Overview

In 2017, the Group had another year of strong financial performance with increases in revenue and profit and finished the year with an excellent net cash position. This performance reflects the effective implementation of the Group's focused strategy which has continued to deliver good financial results over several years.

In addition, the Group continues to attract good support from its banking partners and has enhanced and extended its debt facilities during the year.

Revenue, including share of joint ventures and associates, was £1,728.9 million for the year to 31 December 2017 (2016: £1,658.0 million). Reported revenue, excluding share of joint ventures and associates, was £1,684.0 million for the year to 31 December 2017 (2016: £1,573.7 million).

The Group generated an 18% increase in underlying operating profit to £48.7 million (2016: £41.1 million). The increased profit reflects the Group's focus on long-term repeat orders with blue-chip clients.

Profit before tax, before other items, for the year was £43.4 million (2016: £37.5 million). Basic earnings per share, before other items, amounted to 34.8 pence (2016: 31.5 pence).

Reported profit before tax for the year was £38.9 million (2016: £30.9 million). Reported basic earnings per share were 31.1 pence (2016: 25.7 pence).

The results of the Group's operating divisions are considered in the divisional review section and are shown in the segmental analysis in the financial statements.

Other items

To aid understanding of the underlying performance of the Group, throughout the Annual Report underlying operating profit and underlying profit before tax have been used. These measures exclude 'other items' which are acquisition related charges including amortisation of intangible assets and deferred consideration treated as an employment expense. These 'other items' are shown in a separate column in the consolidated income statement.

Net Finance Expense

Net finance expense amounted to £5.7 million (2016: £4.2 million). The interest payable on bank overdrafts, loans and other similar charges was £4.2 million (2016: £3.3 million) and the interest income from bank deposits and other loans and receivables amounted to £0.4 million (2016: £0.6 million). In addition, the net finance expense includes the interest cost on the net liabilities of the pension scheme of £1.8 million (2016: £1.1 million) and £0.1 million (2016: £0.4 million) unwind of discount on deferred consideration. The interest payable element of the net finance expense includes £2.3 million (2016: £2.1 million) for the cost associated with the arrangement of the Group's banking facilities and the fees for the committed bonding facilities.

Tax

The Group's effective rate of tax was 16.2% of the profit before tax (2016: 14.6%). The lower than normal rate of tax arose owing to prior year adjustments in respect of Research and Development tax relief and the reversal of timing differences including the use of tax losses not previously recognised as deferred tax assets.

Dividend

The Board has recommended a final dividend for the year of 9.25 pence per share (2016: 8.4 pence per share) to bring the total for the year to 14.0 pence per share (2016: 12.7 pence per share).

In accordance with the pension deficit recovery plan agreed with the Trustee of The Costain Pension Scheme (CPS), the Group will make an additional cash contribution to the pension scheme to match the total deficit contribution to the total amount of dividends paid to shareholders.

Shareholders' equity

Shareholders' equity increased in the year to £154.0 million (2016: £99.6 million). The movements are detailed in the consolidated statements of comprehensive income and expense and changes in equity in the financial statements. The increase in the year includes a positive movement following the re-measurement of the Group's legacy pension scheme defined benefit obligations to reflect current market-based assumptions.

New accounting standard - IFRS15

The new accounting standard, IFRS15 revenue recognition, will be applicable to Costain's financial statements in 2018. Full details of the impact of the standard are included in a note to the 2017 financial statements. In summary, the main impact arises from the Group having a small number of long-term frameworks which have separate performance obligations within them and under IFRS15 must be accounted for as separate contracts rather than one long-term framework contract. Application of IFRS15, which has no impact on the Group's cash flow, will reduce the net assets of the Group by £4.6 million on 1 January 2018. As the frameworks complete, which is anticipated to be by 2020, it is forecast that this amount will be generated and therefore reverse this impact on net assets.

Pensions

As at 31 December 2017, the Group's pension scheme deficit in accordance with IAS19, was £23.9 million (2016: £73.5 million). The scheme deficit position has reduced significantly in the year due to returns on assets greater than assumed, a fall in liabilities arising from favourable experience over the period since the last triennial valuation and company contributions.

The table below sets out the key details of the pension scheme deficit calculation:

In accordance with the pension regulations a triennial actuarial review of the Costain defined benefit pension scheme was carried out as at 31 March 2016. In February 2017, an updated deficit recovery was agreed with the scheme Trustee resulting in cash contributions of £10.0 million for the 12 months to 31 March 2017 and then £9.6 million per annum (increasing annually with inflation) until the deficit is cleared, which would be in 2031 on the basis of the assumptions made in the valuation and agreed recovery plan.

In addition, as previously implemented, the Group will continue to make an additional contribution so that the total deficit contributions match the total dividend amount paid by the Company each year. Consequently, the total amount of contribution is anticipated to be at the same overall level to that under the previous plan. Any additional payments in this regard would have the effect of reducing the recovery period in the agreed plan.

Cash flow and borrowings

The Group has a positive cash balance, which was £248.7 million as at 31 December 2017 (2016: £210.2 million) which included cash held by joint operations of £87.8 million (2016: £68.1 million). The Group had borrowings of £71.0 million (2016: £70.0 million).

The increase in the net cash position reflects positive operating cash flow and working capital, in particular benefiting from the timing of substantial contract receipts at the year-end. These positive movements have been partially offset by dividend payments and pension deficit contributions made during the year. The average month-end net cash balance during 2017 was £96.7 million (2016: £69.1 million).

Order Book

During the year, the Group secured several new contracts and extensions and the Group's order book was maintained at £3.9 billion (31 December 2016: £3.9 billion). The new accounting standard, IFRS15 revenue recognition, sets out a basis for reporting a company's 'backlog' which is a form of order book although different to the Group's reported order book figures. In 2018, the backlog in accordance with IFRS15 will be reported as part of the Group's overall order book.

Contract bonding and banking facilities

The Group has in place banking and bonding facilities from banks and surety bond providers to meet the current and projected usage requirements. In December, the Group increased its banking facilities to £191.0 million and extended the maturity date to 25 June 2022 with its relationship banks. These facilities are made up of a £131 million revolving credit facility and a £60.0 million term loan.

In addition, the Group has in place committed and uncommitted bonding facilities of £320.0 million. In December, the committed element of the bonding facility was reduced to £45.0 million from £125.0 million lowering the carrying cost of the facilities and reflecting the low level of utilisation, which on the 31 December 2017 was only £5.0 million. Utilisation of the total bonding facilities on the 31 December 2017 was £108.0 million and has not been higher than £161.0 million in the last three years.

Treasury

The Group's treasury and funding activities are undertaken by a centralised treasury function. Its primary activities are to manage the Group's liquidity, funding and financial risk, principally arising from movements in interest rates and foreign currency exchange rates.

The Group's policy is to ensure that adequate liquidity and financial resources are available to support the Group's growth development, while managing these risks and not to engage in speculative transactions. Group Treasury operates as a service centre within clearly defined objectives and controls and is subject to periodic review by internal audit.

Liquidity risk

The Group finances its operations primarily by a mixture of working capital, funds from shareholders, retained profits and borrowings. The directors regularly monitor cash usage and forecast usage to ensure that projected financing needs are supported by adequate cash reserves or bank facilities.

Foreign currency exposure

Translation exposure: the results of the Group's overseas activities, mainly non-core activities in Spain, are translated into sterling at rates approximating to the foreign exchange rates ruling at the dates of the transactions. The balance sheets of overseas subsidiaries and investments are translated at foreign exchange rates ruling at the balance sheet date. The Group holds a currency hedge against the assets held in its Spanish subsidiary.

Transaction exposure: the Group has transactional currency exposures arising from overseas supply purchases for business in the UK and from subsidiaries' commercial activities overseas. 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.

Interest rate risks and exposure

The Group enters into financial instruments, where necessary, to finance its operations. Various financial instruments (for example, trade receivables and trade payables) arise directly from the Group's operations.

The main exposure to interest rate fluctuations within the Group's operations arises from surplus cash, which is generally deposited with the Group's relationship banks, and bank borrowings against which the Group holds the appropriate hedging arrangements.

Anthony Bickerstaff

Chief Financial Officer

Principal Risks and Uncertainties

This section highlights the principal risks and uncertainties facing the Group together with the key mitigating activities that have been put in place to manage those risks.

Risk Management Framework

During 2017 we continued to take steps to evolve and enhance our risk management processes, further embedding into business as usual activity and leading to a better understanding of the principal risks and opportunities we face. Focus has been placed on consistent assessment of risk, ensuring measures are in place to monitor risks and to facilitate informed decision making.

The Group Risk and Assurance team oversee and provide practical guidance on the implementation of risk management across the company. Processes are incorporated into day to day activity and governance systems. This team also leads the process to review and assess risk, focusing on the strategic objectives of the Group which supplements the processes already established at contract level, providing a consistent approach to risk management across the company.

Principal Risks

The Board has undertaken a robust assessment of the principal risks facing the Group, including the controls in place to manage these risks and mitigation plans to further reduce the impact to within our risk appetite.

The principal risks and uncertainties facing the Group and its ability to achieve its strategic objectives are set out below.

Overall the Board has assessed that the risk profile of the Group is broadly in line with the 2016 position with some small movements in individual risks. The number of principal risks considered by the Board to be those which would have the greatest impact on the achievement of strategy remains nine. However, to better recognise and monitor these risks there have been some changes to how they are reported:

Going concern

The Group's business activities and the factors likely to affect its future development, performance and position

will be set out in the Strategic Report of the Annual Report and Accounts for the year ended 31 December 2017. The financial position of the Group, its cash flows, liquidity position, borrowing and bonding facilities, use of financial instruments and hedging activities, exposure to credit risk and its objectives, policies and processes for managing its capital and financial risk will be described in the Financial review section of the financial statements and in Note 18 to the financial statements.

The directors have acknowledged the guidance in respect of going concern published by the Financial Reporting Council. The directors have considered these requirements, the Group's current order book and future opportunities and its available bonding facilities. Having reviewed the latest projections, including the application of reasonable downside sensitivities, the directors believe that the Group is well-placed to manage its business risks successfully. Accordingly, they continue to adopt the going concern basis in preparing the financial statements.

Viability statement

In accordance with provision C.2.2 of the 2014 revision of the UK Corporate Governance Code, the Board have

assessed the viability of the Group over a three-year period taking into account its current financial position and the principal risks.

The period of three years has been considered appropriate and relevant as the Group has reasonable visibility

of secured work and pipeline of opportunities over this period and also aligns with the period reviewed by the Board in the normal business planning process.

The Risk Management Framework described above outlines the approach the Board has taken to

identifying and managing risk. As detailed above the Board has carried out an assessment of the

principal risks facing the Group including those that would threaten its business model, future performance,

solvency or liquidity. The assessment of viability has been made taking into account these principal risks and testing a number of plausible, but severe scenarios which are not included in the corporate plan.

The scenarios include various combinations of the following:

Based on an assessment of the financial impact of the scenarios on the corporate plan, the Board confirm that

they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as

they fall due over the three-year period to 31 December 2020.

Costain Group PLC

Results for the year ended 31 December 2017

Consolidated income statement

The impact of business disposals in either year was not material and, therefore, all results are classified as arising from continuing operations.

Notes to the financial statements

1 Basis of preparation

Costain Group PLC ("the Company") is a public limited company incorporated in the UK. The consolidated financial statements of the Company for the year ended 31 December 2017 comprise the Group and the Group's interests in associates, joint ventures and joint operations and have been prepared and approved by the directors in accordance with International Financial Reporting Standards as adopted by the EU ('Adopted IFRS') and their related interpretations.

The financial information set out herein (which was authorised for issue by the directors on 28 February 2018) does not constitute the Company's statutory accounts for the years ended 31 December 2017 or 2016 but is derived from those accounts. Statutory accounts for 2016 have been delivered to the Registrar of Companies, and those for 2017 will be delivered in advance of the Company's Annual General Meeting. The Auditors have reported on those accounts; their reports were unqualified and did not include reference to any matters to which the Auditors drew attention by way of emphasis without qualifying their reports and did not contain statements under section 498(2) or (3) of the Companies Act 2006.

Whilst the financial information included in this preliminary announcement has been prepared in accordance with International Financial Reporting Standards (IFRS), this announcement does not itself contain sufficient information to fully comply with IFRS.

Accounting policies have been consistently applied in 2017 and the comparative period.

The directors have acknowledged the guidance in respect of going concern published by the Financial Reporting Council. The directors have considered these requirements, the Group's current order book and future opportunities and its available bonding facilities. Having reviewed the latest projections, including the application of reasonable downside sensitivities, the directors believe that the Group is well-placed to manage its business risks. Accordingly, they continue to adopt the going concern basis in preparing these financial statements.

Significant areas of judgment and estimation

2 Operating segments

The Group has two core business segments: Natural Resources and Infrastructure plus the non-core business Alcaidesa in Spain. The core segments are strategic business units with separate management and have different core customers or offer different services. This information is provided to the Chief Executive who is the chief operating decision maker.

3 Net finance expense

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

4 Taxation

5 Earnings per share

The calculation of earnings per share is based on profit of £32.6 million (2016: £26.4 million) and the number of shares set out below.

6 Dividends

7 Intangible assets

8 Cash and cash equivalents

Cash and cash equivalents are analysed below, and include the Group's share of cash held by joint operations of £87.8 million (2016: £68.1 million).

9 Pensions

A defined benefit pension scheme is operated in the UK and a number of defined contribution pension schemes are in place in the UK and overseas. Contributions are paid by subsidiary undertakings and, to the defined contribution schemes, by employees. The total pension charge in the income statement was £12.9 million comprising £11.1 million included in operating costs plus £1.8 million included in net finance expense (2016: £12.1 million, comprising £11.0 million in operating costs plus £1.1 million in net finance expense).

Defined benefit scheme

The defined benefit scheme was closed to new members on 31 May 2005 and from 01 April 2006 future benefits were calculated on a Career Average Revalued Earnings basis. The scheme was closed to future accrual of benefits to members on 30 September 2009. A full actuarial valuation of the scheme was carried out as at 31 March 2016 and this was updated to 31 December 2017 by a qualified independent actuary. At 31 December 2017, there were 2,829 retirees and 3,100 deferred members. The weighted average duration of the obligations is 17.3 years.

Movements in present value of defined benefit obligations

Movements in fair value of scheme assets

Expense recognised in the income statement

Fair value of scheme assets

Principal actuarial assumption (expressed as weighted averages)

Weighted average life expectancy from age 65 as per mortality tables used to determine benefits at 31 December 2017 and 31 December 2016 is: