The Churchill Corporation

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P E O P L E

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PROGRESS

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V A L U E

2010 ANNUAL REPORT

$441 million

Market capitalization

$1.6 billion

$84 million

Backlog

EBITDA

$1.2 billion

Revenue

A Western Canada pure play that created BIG results in 2010 $IVSDIJMM JT UIF POMZ QVCMJD DPOTUSVDUJPO BOE JOEVTUSJBM TFSWJDFT DPNQBOZ UIBU JT GPDVTFE FYDMVTJWFMZ PO 8FTUFSO $BOBEB *O +VMZ XF EPVCMFE UIF TJ[F PG PVS DPNQBOZ XJUI UIF BDRVJTJUJPO PG 4FBDMJGG $POTUSVDUJPO $PSQPSBUJPO 0VS DPNCJOFE PQFSBUJPOT SFTVMUFE JO BOOVBM SFWFOVF PG CJMMJPO BOOVBM &#*5%" PG NJMMJPO BOE B ZFBS FOE CBDLMPH PG CJMMJPO $IVSDIJMMÂąT %FDFNCFS NBSLFU DBQJUBMJ[BUJPO XBT NJMMJPO NJMMJPO TIBSFT PVUTUBOEJOH BU QFS TIBSF

* “EBITDA� is earnings from continuing operations before interest, taxes, depreciation and amortization (a non-GAAP measure).

Refer to “Terminologyâ€? in the Management’s Discussion and Analysis for deďŹ nitions of non-GAAP measures.

4

Investor value

24 Markets we serve

6

Five year summary

36 Building a culture of excellence

8

In conversation with Jim Houck

38 Management’s Discussion and Analysis

12 Customer value

16 General contracting

79 Consolidated Financial Statements

82 Notes to the Consolidated Financial Statements

18 Commercial systems IBC Corporate & Shareholder Information

20 Industrial services

Think BIG

shareholder value

Weโ ll accomplish this through PVS GPDVT PO DPOUJOVFE QSPยบUBCMF PSHBOJD HSPXUI BDSPTT BMM CVTJOFTT TFHNFOUT TVQQMFNFOUFE CZ TFMFDUFE BDRVJTJUJPOT XIFSF UIF QSJDF JT SFBTPOBCMF BOE XF IBWF DMFBS MJOF PG TJHIU UP BO FOIBODFE CVTJOFTT NPEFM 0VS UBSHFU JT BDDSFUJWF HSPXUI UP B CJMMJPO NBSLFU DBQJUBMJ[BUJPO CZ

2010 ANNUAL REPORT

1

How our business segments work together General Contracting Builds commercial (privately owned) and institutional (publicly owned) buildings in Western Canada. Able to proďŹ tably meet client needs for large-scale, technologically-complex projects, on-time and on-budget.

Operating Company:

Commercial Systems

Industrial Services

Provides best-in-class electrical and data

Provides insulation (cladding, HVAC (heating,

communication systems for commercial and

ventilation and air conditioning), asbestos

institutional buildings in Western Canada.

remediation), electrical (instrumentation,

Customers are general contractors, including

power-line) and heavy construction (aggregate

Stuart Olson Dominion and its competitors.

processing, earthwork, concrete) services to

Operating Company:

industrial customers in Western Canada.

Operating Companies:

2

T H E C H U R C H I L L C O R P O R AT I O N

Power and Utilities

Mining

Commercial

Expertise in construction of

Expertise in construction of facilities

Expertise in the construction of retail,

facilities for power generation,

for surface and underground

office, hospitality and multi-unit

transmission, distribution, substations,

uranium, potash, precious metals

residential buildings.

instrumentation, temporary service,

and coal mining.

lighting, electrical buildings systems and data communications systems.

BIG opportunities across multiple markets

Oil Sands

Petrochemicals

Institutional

Expertise in construction of facilities

Expertise in insulation, cladding, roofing,

Expertise in constructing airports,

for natural gas processing, heavy

piping and equipment installation in large

buildings, educational facilities,

and conventional oil and bitumen

petrochemical complexes.

healthcare facilities, recreation

production, refining and upgrading,

centres, prisons, and civic and

and petrochemical manufacturing.

government buildings.

2010 ANNUAL REPORT

3

Building BIG comes naturally – like investor value Leadership Leadership team fosters a creative, dynamic and innovative organization that is accepting of change and challenge. Is committed to building a workplace on the foundation of trust between our organization and our business partners, employees, shareholders and the communities we work in.

Multi-Dimensional Services

Opportunistic

Provide general contracting, electrical

Focus on opportunities that enable us to utilize

and data communication services

our strongest skill-sets to maximize profit

to the commercial (privately

margins. Generate repeat business through

owned) and institutional (publicly

reputation of exceeding client

owned) building markets. Provide

expectations with high-quality,

insulation (cladding, HVAC,

innovative work performed safely,

asbestos remediation), electrical

on-time and on-budget.

(instrumentation, power-line) and civil construction (aggregate processing, earthwork, concrete) services to industrial customers.

Profitable Growth

Geographically Focused

Growing shareholder value by driving profitable

Focused exclusively on Western Canada, a free-

organic growth and acquiring successful

enterprise, entrepreneurial, rapidly-growing

businesses that are reasonably priced and

economy endowed with abundant natural

have strengths that can be enhanced with our

resources, including vast forests; large natural

business processes, complementary services

gas, uranium, potash and coal deposits; and huge oil reserves, second only to Saudi Arabia’s.

and industry expertise, creating synergies.

Vision

To be the most admired construction and industrial services company in Canada. That means exceeding the expectations of clients, business partners, employees, shareholders and the investment community by achieving continuous improvement in our business.

4

T H E C H U R C H I L L C O R P O R AT I O N

$520

$441

Enterprise value

Market capitalization

At December 31, 2010

At December 31, 2010

million

million

572

527 432

Total Shareholder Return (%) 364 Churchill Corporation (CUQ) (%) S&P/TSX Composite Index (%)

157

59

66 51

0

33

38 40

0

2000

-13 01

2

58

69

67

87

34

16

-25 02

03

$84.3 million

2010 EBITDA

04

05

06

07

08

09

2010

$2.14

Earnings/share (basic) Compared to $1.98 in 2009

Compared to $51.3 million in 2009 2010 ANNUAL REPORT

5

Five year summary 5IF GPMMPXJOH TFMFDUFE VOBVEJUFE ÂşOBODJBM EBUB IBT CFFO EFSJWFE GSPN $IVSDIJMMÂąT DPOTPMJEBUFE ÂşOBODJBM TUBUFNFOUT XIJDI IBWF CFFO BVEJUFE CZ %FMPJUUF 5PVDIF --1 $IBSUFSFE "DDPVOUBOUT 5IF JOGPSNBUJPO TFU GPSUI CFMPX TIPVME CF SFBE JO DPOKVODUJPO XJUI UIF .BOBHFNFOUÂąT %JTDVTTJPO "OBMZTJT $POTPMJEBUFE 'JOBODJBM 4UBUFNFOUT BOE /PUFT TFDUJPOT PG UIJT "OOVBM 3FQPSU 5IF EBUB CFMPX JT QSFTFOUFE PO B DPOUJOVJOH PQFSBUJPOT CBTJT Years ended December 31

($ thousands, except share and per share data and percentages)

INCOME STATEMENT DATA Contract revenue Contract income Contract income margin (%) Earnings (loss) before interest, tax depreciation and amortization (EBITDA) (1) Interest expense Depreciation and amortization expense Earnings before income taxes Net earnings from continuing operations and comprehensive income BALANCE SHEET DATA Working capital Shareholders’ equity Total debt PER COMMON SHARE DATA Net earnings per common share: Basic Diluted Book value per share OTHER DATA Price to earnings multiple (12 month trailing) Return on average shareholders’ equity (ROE) Total shareholder return Work-in-hand (1) Total backlog (1)

2010 $

1,175,333 148,305 12.6%

2009 $

601,241 91,951 15.3%

2008 $

760,953 93,879 12.3%

2007 $

694,021 63,218 9.1%

2006 $

478,893 44,136 9.2%

84,318 7,461 15,233 61,624

51,322 240 4,435 46,647

56,186 491 4,089 51,606

33,883 665 2,808 30,410

15,880 814 1,782 13,284

43,083

33,479

35,591

20,682

8,599

$

100,386 300,853 150,395

$

109,092 141,507 788

$

61,995 105,573 7,869

$

35,180 69,678 9,460

$

19,801 47,689 21,631

$

2.14 2.03 12.47

$

1.98 1.94 8.03

$

2.03 2.01 5.92

$

1.19 1.17 3.90

$

0.46 0.45 2.70

$ $

8.8 19% (5%) 1,222,526 1,555,034

$ $

10.1 27% 168% 784,237 1,388,624

$ $

3.6 41% (68%) 565,259 1,390,273

$ $

19.2 35% 275% 668,780 1,333,655

$ $

12.2 20% 90% 480,628 1,080,836

COMMON SHARE INFORMATION Weighted average shares outstanding – basic Weighted average shares outstanding – diluted

20,643,343 23,191,211

17,620,454 17,935,551

17,928,037 18,109,979

17,730,644 17,995,235

17,746,020 17,960,636

Shares outstanding at year-end: Basic Fully diluted

24,133,727 28,395,427

17,619,259 18,832,502

17,822,091 18,099,626

17,886,991 18,204,491

17,667,491 18,239,158

Shares traded

19,809,454

15,729,284

20,315,900

19,195,481

4,452,191

Share price: High Low Close Note: (1) See MD&A – Terminology section.

6

T H E C H U R C H I L L C O R P O R AT I O N

$

22.00 16.32 18.29

$

20.94 6.33 19.27

$

24.49 4.45 7.19

$

29.90 5.11 22.50

$

6.35 3.00 6.00

Contract Revenue & Contract Income Margin 15.3%

EBITDA and EBITDA Margin

12.6%

12.3% 9.1%

7.2%

$51.3

$84.3

4.9%

6.7%

$478.9

8.5% 7.4%

3.3%

$694.0

$761.0

06 07 08 Contract Revenue ($ millions)

$601.2

$1,175.3

$15.9

09 10 Contract Income Margin (%)

06

$33.9

$56.2

07 08 EBITDA ($ millions)

09 10 EBITDA Margin (%)

In 2010, contract revenue grew at a rate that more

We controlled indirect costs in 2010, thereby helping

than offset a decline in contract income margin

to grow our EBITDA* at a rate that more than offset a

(contract income divided by contract revenue).

decline in EBITDA margin (EBITDA divided by contract revenue).

BIG metrics

that matter

In 2010, we grew earnings and EPS, adding

We closed 2010 with a backlog* signiďŹ cantly higher

shareholder value while growing the Company

than our annual contract revenue, improving the

with the Seacliff acquisition.

visibility of our future contract revenue.

Earnings and Earnings per Share (EPS) $2.03

Contract Revenue and Backlog

$2.14 $1.98 $1,333.7

$1,390.3

$1,388.6

$694.0

$761.0

$601.2

$1,555.0

$1,080.8

$1.19 $0.46

$8.1 06

$21.1

$36.4

07 08 Net Earnings ($ millions)

$34.8 09 EPS (basic)

$44.2

$478.9

10

06

07 08 Contract Revenue ($ millions)

$1,175.3

09 10 Backlog ($ millions)

* See MD&A – Terminology section.

2010 ANNUAL REPORT

7

Straight up In conversation with Jim Houck, President and Chief Executive Of๏ฌ cer March 10, 2011 Q: In your 2009 Annual Report you said your focus in the years to come would be to grow by expanding geographically and adding new services to your business mix.

How would you rate your success in achieving those goals in 2010? " 8F BEWBODFE CPUI PG UIPTF PCKFDUJWFT JO 8JUI UIF 4FBDMJGG BDRVJTJUJPO XF HBJOFE B NVDI CSPBEFS HFPHSBQIJDBM GPPUQSJOU XJUI BEEJUJPOBM PGยบDF BOE QSPKFDU MPDBUJPOT UISPVHIPVU 8FTUFSO $BOBEB "T XFMM XF BEEFE OFX DBQBCJMJUJFT JO UISFF XBZT 'JSTU XF HBJOFE B LFZ NFSHFS CFOFยบ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

Q: Other than expanding geographically and growing your service offering, were there other strategies that you executed in 2010? " :FT UIFSF XFSF JODMVEJOH B WFSZ JNQPSUBOU POF XIJDI XBT UP JODSFBTF UIF PSHBOJ[BUJPOBM DBQBCJMJUZ PG PVS $IVSDIJMM DPSQPSBUF HSPVQ 8F IBE CFFO HFUUJOH CZ GPS TFWFSBM ZFBST XJUI FTTFOUJBMMZ B TLFMFUPO TUBGG BOE OPX UIBU XF XFSF NBOBHJOH B NVDI MBSHFS DPNQBOZ XF DPODMVEFE JU XBT UJNF UP JODSFBTF UIF TUSFOHUI PG PVS BDDPVOUJOH ยบOBODF DPSQPSBUF EFWFMPQNFOU IVNBO SFTPVSDFT JOGPSNBUJPO TZTUFNT BOE JOWFTUPS SFMBUJPOT HSPVQT 0VS UJNJOH UPPL BEWBOUBHF PG UIF DVSSFOU TUBUF PG UIF 8FTUFSO $BOBEJBO FDPOPNZ XIJDI XBT FNFSHJOH GSPN UIF SFDFOU HMPCBM SFDFTTJPO CVU OPU ZFU CBDL JO CPPN TP XF XFSF BCMF UP BEE TPNF WFSZ UBMFOUFE QFPQMF UP PVS UFBN

8

T H E C H U R C H I L L C O R P O R AT I O N

Acquisitions drove capacity and opportunity Q: The Seacliff transaction was well received by the market. Has it grown value for Churchillโ s shareholders? " 8F IBWF BMSFBEZ BDIJFWFE DPTU TZOFSHJFT BT XF JOUFHSBUFE UIF 4FBDMJGG DPNQBOJFT JOUP $IVSDIJMM UISPVHI SFEVDFE JOTVSBODF BOE QSPDVSFNFOU FYQFOTFT DMPTJOH EPXO UIF 4FBDMJGG BOE %PNJOJPO DPSQPSBUF PGยบDFT FMJNJOBUJOH EVQMJDBUJWF QVCMJD DPNQBOZ DPTUT BOE BEWBODJOH UIF PSHBOJ[BUJPO UP EFWFMPQ BOE HSPX UIF CFTU QFPQMF XIJMF FMJNJOBUJOH SFEVOEBODJFT 8F PSJHJOBMMZ FYQFDUFE UP BDIJFWF DPTU TBWJOHT PG NJMMJPO BOOVBMMZ GPS BOE CFZPOE 8JUI UIF BJE PG JNQSPWFE TZTUFNT QSPDFTTFT BOE JOUFSOBM DPOUSPMT BU 40%$- $IVSDIJMM JT OPX UBSHFUJOH BOOVBM DPTU TBWJOHT PG NJMMJPO UP NJMMJPO "OPUIFS CFOFยบU XFยฑSF XPSLJOH UP HBJO GSPN UIF 4FBDMJGG BDRVJTJUJPO JT USBOTJUJPOJOH MFHBDZ %PNJOJPO PQFSBUJPOT GSPN B ยบYFE CJE DVMUVSF UP 4UVBSU 0MTPOยฑT DPOTUSVDUJPO NBOBHFNFOU DVMUVSF *O UIF TIPSU UFSN XFยฑMM OFFE UP XPSL UISPVHI %PNJOJPOยฑT CBDLMPH PG ยบYFE CJE QSPKFDUT CVU HPJOH GPSXBSE XF FYQFDU NBSHJOT UP JNQSPWF BT OFX DPOTUSVDUJPO NBOBHFNFOU QSPKFDUT SFQMBDF UIFN 'VSUIFS $IVSDIJMM FYQFDUT UP SFBMJ[F TJHOJยบDBOU SFWFOVF TZOFSHJFT EVF UP UIF BCJMJUZ PG 40%$- UP TFDVSF DFSUBJO QSPKFDUT UIBU NBZ OPU IBWF CFFO BXBSEFE UP %PNJOJPO PS 4UVBSU 0MTPO BT TUBOE BMPOF FOUJUJFT 5IF $PSQPSBUJPO FYQFDUT UP BOOPVODF TFWFSBM QSPKFDUT PG UIJT OBUVSF JO XIJDI XPVME FYDFFE PVS QSPKFDUFE NJMMJPO JO BOOVBM SFWFOVF TZOFSHJFT XJUIJO 40%$- BMPOF *O BEEJUJPO XF BSF QVSTVJOH SFWFOVF TZOFSHJFT JO UIF *OEVTUSJBM 4FSWJDFT TFHNFOU CZ QSPEVDJOH CVOEMFE QSPEVDUT BOE TFSWJDFT PGGFSJOHT UP DVTUPNFST Q: Stuart Olson had large projects prior to the Seacliff acquisition, as did Dominion.

Why is SODCL better able to win large projects now, as opposed to when Stuart Olson and Dominion were separate companies? " 0VS JODSFBTFE TJ[F HJWFT VT JODSFBTFE ยบOBODJOH BOE CPOEJOH DBQBCJMJUJFT TP XF DBO UBLF PO MBSHFS QSPKFDUT BOE BU B MPXFS DPTU PG DBQJUBM "T XFMM NBOBHJOH MBSHF QSPKFDUT FGGFDUJWFMZ SFRVJSFT BO FYQFSJFODFE BOE UBMFOUFE UFBN 8JUI UIF JOUFHSBUJPO PG %PNJOJPO 40%$- IBT JODSFBTFE JUT OVNCFS PG TVDI UFBNT TP XF DBO OPX DPNQFUF GPS NPSF QSPKFDUT BU UIF TBNF UJNF Q: In addition to the items mentioned already, what other actions have been taken to integrate the operations of Churchill and Seacliff, and what work remains to be done?

" 5IF JOUFHSBUJPO PG 4UVBSU 0MTPO BOE %PNJOJPO JT DPNQMFUF 8F BSF BMTP JNQMFNFOUJOH B OFX 4"1 CBTFE FOUFSQSJTF SFTPVSDF QMBOOJOH PS &31 TZTUFN UP FOBCMF VT UP SVO UIF CVTJOFTT NPSF FGยบDJFOUMZ 5IJT TZTUFN IBT BMTP CFFO JNQMFNFOUFE JO -BJSE BOE *)* $BOFN 4ZTUFNT IBT CFFO LFQU BT B TUBOE BMPOF DPNQBOZ JO B TFQBSBUF CVTJOFTT TFHNFOU CFDBVTF XIJMF JU TFSWFT UIF TBNF DPNNFSDJBM BOE JOTUJUVUJPOBM NBSLFUT BT 40%$- $BOFN IBT NBOZ PQQPSUVOJUJFT UP QBSUOFS XJUI PUIFS HFOFSBM DPOUSBDUPST BOE XF XBOU JU UP SFUBJO UIBU GSFFEPN #SPEB BMTP SFNBJOT BT B TUBOE BMPOF PQFSBUJPO HJWJOH VT UIF PQQPSUVOJUZ UP BEE FBSUIXPSL DJWJM DPOTUSVDUJPO BOE DPODSFUF QSPEVDUJPO UP UIF CVOEMFE TFSWJDFT UIBU XF DBO PGGFS UP PVS JOEVTUSJBM DVTUPNFST BT OFFEFE 8F FYQFDU UP FYUFOE PVS OFX &31 TZTUFN UP $BOFN BOE #SPEB JO FBSMZ

2010 ANNUAL REPORT

9

Outlook and goals Q: Construction companies have been experiencing margin pressure.

Can you discuss the margin outlook for Churchill? " *O $IVSDIJMM±T &#*5%" NBSHJO XBT DPNQBSFE UP JO 0WFSBMM XF FYQFDU NBSHJOT UP CFHJO UP JNQSPWF JO MBUF PS FBSMZ BT EFNBOE GPS PVS QSPEVDUT BOE TFSWJDFT JNQSPWFT 'PS 40%$- XIJDI DPNQSJTFE BCPVU UXP UIJSET PG $IVSDIJMM±T SFWFOVF JO UIF &#*5%" NBSHJO XBT DPNQBSFE UP UIF NBSHJO SFQPSUFE JO 8F FYQFDU DPOUJOVFE NBSHJO DPNQSFTTJPO GPS 40%$- PWFS UIF OFYU GFX RVBSUFST BT XF XPSL UISPVHI UIF MPXFS NBSHJO QSPKFDUT BDRVJSFE JO UIF %PNJOJPO CBDLMPH BOE UIF QSPKFDUT BXBSEFE JO UIF NPSF DPNQFUJUJWF CJEEJOH FOWJSPONFOU EVSJOH UIF MBUF BOE SFDFTTJPO QFSJPE 8F BSF TUBSUJOH UP TFF HP JO NBSHJOT SJTF JO XIJDI XJMM MJLFMZ TUBSU CFJOH SF»FDUFE JO SFTVMUT SFQPSUFE JO MBUF BOE *O PVS *OEVTUSJBM 4FSWJDFT TFHNFOU XIJDI EFSJWFT B MBSHF QBSU PG JUT CVTJOFTT GSPN PJM TBOET QSPKFDUT SFWFOVFT XFSF TJHOJºDBOUMZ VQ JO CVU UIJT XBT QBSUMZ PGGTFU CZ MPXFS NBSHJOT BT UIF QSPKFDU NJY TIJGUFE UP MBSHFS QSPKFDUT XJUI NPSF DPNQFUJUJWF NBSHJOT 8IJMF UIJT TFHNFOU±T SFWFOVFT JODSFBTFE CZ PWFS JO &#*5%" NBSHJO EFDSFBTFE UP GSPN JO "T JOEVTUSJBM BDUJWJUZ JO "MCFSUB BOE 4BTLBUDIFXBO JODSFBTFT BOE BT #SPEB±T IJHIFS NBSHJO CVTJOFTT DPOUSJCVUFT NPSF UP UIF TFHNFOU XF FYQFDU UP TFF NBSHJOT CFHJO UP SJTF JO 0VS OFX $PNNFSDJBM 4ZTUFNT TFHNFOU±T &#*5%" NBSHJO XBT PO NJMMJPO PG SFWFOVF GPS UIF MBTU NPOUIT PG 8F FYQFDU $BOFN±T NBSHJOT UP CF VOEFS QSFTTVSF JO CVU UP SFNBJO JO UIF MPX EPVCMF EJHJU SBOHF Q: Are you expecting to grow outside of your current geographical reach? Will you add further construction services? Under what circumstances? " 8F XJMM DPOUJOVF UP CF GPDVTFE PO 8FTUFSO $BOBEB CFDBVTF XF LOPX UIF SFHJPO XFMM BOE XF CFMJFWF JU IBT FYDFMMFOU DPOTUSVDUJPO BOE JOEVTUSJBM TFSWJDFT HSPXUI PQQPSUVOJUJFT 8F JOUFOE UP HSPX PVS TFSWJDF PGGFSJOH UISPVHI PSHBOJD HSPXUI BOE SFBTPOBCMZ QSJDFE UVDL JO BDRVJTJUJPOT BOE XF BSF BMTP PQFO UP BOPUIFS JNQBDUGVM BDRVJTJUJPO CVU POMZ JG JU NBLFT TFOTF GSPN UISFF QFSTQFDUJWFT TUSBUFHJD ºU XJUI B DPNQFMMJOH HP GPSXBSE CVTJOFTT NPEFM DVMUVSBM ºU XJUI JNQSPWFE PSHBOJ[BUJPOBM DBQBCJMJUZ BOE ºOBODJBM NFUSJDT UIBU DSFBUF WBMVF GPS PVS TIBSFIPMEFST Q: How are Churchill’s industrial businesses positioned to win work on new oil sands projects? " *)* BOE -BJSE UIBOLT UP UIFJS FYDFMMFOU TBGFUZ BOE XPSL FYFDVUJPO SFDPSET BSF WFSZ XFMM QPTJUJPOFE UP CFOFºU GSPN UIF SFTVSHFODF PG UIF PJM TBOET 4BGFUZ JT JOHSBJOFE JOUP PVS DVMUVSF BOE -BJSE BDUVBMMZ BDIJFWFE [FSP SFDPSEBCMF JOKVSZ JODJEFOUT JO RVJUF BO BDDPNQMJTINFOU HJWFO UIFJS SFDPSE BDUJWJUZ MFWFM " QSPWFO BCJMJUZ UP FYFDVUF QSPKFDUT TBGFMZ BOE PO TDIFEVMF JT UIF NPTU JNQPSUBOU DPNQFUJUJWF GBDUPS JO TFDVSJOH PJM TBOET XPSL 5IF MBSHF TDBMF FDPOPNJDT PG PJM TBOET QSPKFDUT NBLF UIFN NPSF TDIFEVMF TFOTJUJWF UIBO DPTU TFOTJUJWF TJODF B EFMBZ JO DPNNJTTJPOJOH EBUF DBO IBWF B NBKPS JNQBDU PO QSPKFDU FDPOPNJDT -BSHF DVTUPNFST BMTP JOTJTU VQPO UPQ MFWFM QSPKFDU FYFDVUJPO QFSGPSNBODF BMPOH XJUI TPQIJTUJDBUFE TBGFUZ NBOBHFNFOU TZTUFNT 8F BSF FYQFDUJOH PVS BDUJWJUZ JO UIF PJM TBOET UP TPGUFO JO UIF ºSTU IBMG PG VOUJM PVS QBSUJDVMBS USBEF EJTDJQMJOFT BSF SFRVJSFE PO TJUF GPS OFX DPOTUSVDUJPO PS FYQBOEFE NBJOUFOBODF BOE TVTUBJOJOH DBQJUBM BDUJWJUJFT PG PVS DMJFOUT 8F FYQFDU UP CF CVTZ JO UIF MBTU IBMG PG BOE XF CFMJFWF XJMM CF B TUSPOH ZFBS

10

T H E C H U R C H I L L C O R P O R AT I O N

From Left: Jack Jenkins, VP Human Resources & Strategic Planning; Amy Gaucher, VP Finance & Administration; James Houck, President and Chief Executive Of๏ฌ cer; Daryl Sands, Executive VP & CFO; Andrew Apedoe, VP Investor Relations & Secretary, Joette Decore, VP Corporate Development.

Q: On Broda, wet weather in Saskatchewan proved to be a major impediment in 2010.

How does the 2011 pipeline look? " #SPEBยฑT DVTUPNFS CBTF JODMVEFT "HSJVN 1PUBTI $PSQPSBUJPO $BNFDP BOE 4BTLBUDIFXBO QSPWJODJBM BOE NVOJDJQBM HPWFSONFOUT 5IFZ BSF BMM QMBOOJOH TJHOJยบDBOU FYQFOEJUVSFT JO BOE CFZPOE "TTVNJOH B SFUVSO UP TPNFUIJOH DMPTFS UP BWFSBHF XFBUIFS DPOEJUJPOT JO 4BTLBUDIFXBO #SPEB JT XFMM QPTJUJPOFE GPS BO JNQSPWFE "T XFMM JO UIF TQSJOH XF BSF QMBOOJOH UP TUBSU PGGFSJOH #SPEBยฑT TFSWJDFT JO "MCFSUB BOE CVOEMJOH JUT TFSWJDFT XJUI -BJSE BOE *)* Q: Since you joined Churchill in January 2009, thereโ ve been some big changes. In 2009 you sold Churchillโ s Triton industrial businesses and in 2010 you acquired Seacliff Construction Corp. Whatโ s on your agenda for 2011 and beyond? " *O XF BSF DPOUJOVJOH UP GPDVT PO HSPXUI UIBU BEET WBMVF GPS PVS TIBSFIPMEFST 8F BSF FYFDVUJOH PSHBOJD HSPXUI UISPVHI UBSHFUJOH OFX QSPKFDUT XJUI TUSPOH QSPยบU NBSHJOT BDSPTT PVS ยบWF PQFSBUJOH DPNQBOJFT 0VS CVTJOFTT TFHNFOUT BSF DPPQFSBUJOH NPSF DMPTFMZ UP MFWFS FBDI PUIFSยฑT DVTUPNFST BOE QSPWJEF CVOEMFE PS HSPVQFE TFSWJDFT 8F BSF BMTP DPOUJOVJOH UP MPPL GPS BDRVJTJUJPOT UIBU BSF BDDSFUJWF UP PVS TIBSFIPMEFST PO B QFS TIBSF CBTJT 5IFTF NBZ JODMVEF TNBMM ยฎUVDL JOยฏ BDRVJTJUJPOT UIBU BEE QSPEVDUT PS TFSWJDFT UP PVS FYJTUJOH PQFSBUJOH DPNQBOJFT BOE XF BSF OPU SVMJOH PVU GVSUIFS USBOTGPSNBUJPOBM USBOTBDUJPOT PG B TJNJMBS TJ[F BOE TDPQF UP UIF 4FBDMJGG BDRVJTJUJPO "T XFMM XF XJMM CF QBZJOH EPXO EFCU BOE DPOTJEFSJOH JOTUJUVUJOH B DPNNPO TIBSF EJWJEFOE

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2010 ANNUAL REPORT

11

What sets us apart: BIG customer value Size larger enterprise, better able to: UÊÊ- ÕÀViÊ> `ÊÃiVÕÀiÊ«À iVÌÃÊvÀ ÊV i ÌÃ]Ê Ü iÀÊ}À Õ«ÃÊ> `ÊV ÃÕ Ì> ÌÃÆÊ UÊÊ ÝiVÕÌiÊ >À}iÀ]Ê ÀiÊÃÕLÃÌ> Ì > Ê«À iVÌÃÆÊ> ` UÊÊ-iVÕÀiÊV>« Ì> ÊÌ ÊvÕ `ÊV Ì Õi`Ê}À ÜÌ Ê> `ÊiÝ«> à °

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This enables us to:

University of Victoria

Hines

Potash Corporation

City of Winnipeg

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12

T H E C H U R C H I L L C O R P O R AT I O N

2010 ANNUAL REPORT

15

Major contracts across Western Canada Churchill has a diverse customer base spread across Western Canada. Commercial projects include office towers, hotels, multi-unit residences, and retail and wholesale outlets. Institutional projects include hospitals and health care facilities, university and college buildings, schools, Canadian Forces facilities, recreation centres, stadiums, parkades and prisons.

Industrial projects include oil refineries and upgraders, mines, petrochemical plants and power stations.

Churchill’s five construction and industrial services businesses, serving a broad group of customers across many economic sectors, make Churchill an investment in the Western Canadian economy.

General Contracting (Stuart Olson Dominion) Commercial Systems (Canem) Industrial Services (Laird, IHI, Broda) Office Location

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Don Pearson President and COO Stuart Olson Dominion Construction Ltd. 16

T H E C H U R C H I L L C O R P O R AT I O N

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Innovations Relationship-based construction management Holistic, team-based approach

Focuses on all project parameters:

Seeks to self-perform in selected

that brings clients, contractors and

materials, budget, costs and current

subcontracts such as concrete work,

consultants together as equals.

economic environment. Finds

to improve project timing and

innovations that maximize value for

economics for customers.

project stakeholders.

Think

BIG projects

Competitive strengths ths

2010 milestones

2011 goals

Size – As one of the largest general

With the integration of Dominion

Safety – Target zero lost-time

contractors in Western Canada, we

we achieved our goals of:

accidents and a 15% reduction in

are able to choose larger projects with lower risk profiles.

Experience – Our detailed construction management methodology, based on years of successful experience, enables us to estimate project parameters accurately, mitigating business risks and protecting margins.

People – Technically capable teams add value by improving project constructability.

Geographical Expansion, gaining

medical aids.

a broader presence across all of

Operations – Grow backlog and establish

Western Canada; and

an industrial sector presence.

Additional Capacity, including

Financial – Exceed revenue, margin

project managers and site

and backlog targets.

superintendents, enabling us to execute more substantial projects.

Human Resources – Continued focus on accelerated development program

A new SAP-based enterprise resource

for project management staff, achieve

planning system (ERP) is enhancing

improved productivity per person,

productivity and business efficiency.

and ensure staff talent matches project requirements.

2010 ANNUAL REPORT

17

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18

T H E C H U R C H I L L C O R P O R AT I O N

Al Miller President Canem Systems

Innovations Production Management Module

Stand-alone Prefabrication Facility

Centre for Building Performance

Tracks productivity, reduces labour

Significantly improves worksite

A newly constructed, permanent

risk and identifies potential

productivity by constructing modules

training and testing facility for

cost overruns.

in a controlled, well-organized

integrated environmentally friendly

off-site setting.

building systems.

Think

BIG networks

Competitive strengths

2010 milestones

2011 goals

Size – One of Western Canada’s

Established Smart Connected Real

Safety – Improve reportable incident

largest electrical contracting

Estate Division – Responsible for

frequency rating by 16%; reduce

companies.

establishing a company-wide security

Workers’ Compensation Board rates

Integrated Technology Systems

capacity, a national rollout marketing

by 40%.

– Enhance Canem’s operating

team, a building automation and

controls and allow it to consolidate

interconnectivity capability, and

procurement programs on a

an energy management and

regional basis.

sustainability practice.

People – In-house technical expertise

Established National Roll-Out

allows Canem to access higher-margin

Initiative – Focused on gaining

design-build projects and growth

construction and maintenance

markets, as well as to deliver high-

contracts with large clients that

quality services with greater reliability.

have nationwide operations.

Operations – Expand Smart Connected Real Estate offerings, roll out new brand, open Centre of Innovation, expand Manitoba operations, implement new SAP-based ERP. Financial – Exceed revenue, margin and backlog growth targets.

Human Resources – Formalize succession planning; enhance organizational capability.

2010 ANNUAL REPORT

19

How we work: Industrial services

Ron Martineau

David LeMay

Gord Broda

President and COO Insulation Holdings Inc.

President and COO Laird Electric Inc.

President and COO Broda Construction Inc.

$IVSDIJMM±T *OEVTUSJBM 4FSWJDFT TFHNFOU DPOTJTUT PG

QPUBTI BOE VSBOJVN QSPEVDFST BOE UIF QSPWJODF±T NBKPS

-BJSE &MFDUSJD *OD *OTVMBUJPO )PMEJOHT *OD *)* BOE

JOGSBTUSVDUVSF PSHBOJ[BUJPOT #SPEB IBT B VOJU »FFU

#SPEB $POTUSVDUJPO *OD

PG XFMM NBJOUBJOFE TQFDJBMJ[FE FBSUINPWJOH FRVJQNFOU

-BJSE JT IFBERVBSUFSFE JO &ENPOUPO "MCFSUB BOE QSPWJEFT FMFDUSJDBM JOTUSVNFOUBUJPO BOE QPXFS MJOF DPOTUSVDUJPO BOE NBJOUFOBODF TFSWJDFT UP SFTPVSDF BOE JOEVTUSJBM DMJFOUT QSJNBSJMZ JO UIF 'PSU .D.VSSBZ BOE HSFBUFS &ENPOUPO SFHJPOT *)* JT BMTP IFBERVBSUFSFE JO &ENPOUPO TFSWJOH JOEVTUSJBM DMJFOUT XJUI JOTVMBUJPO BTCFTUPT BCBUFNFOU TJEJOH BQQMJDBUJPO )7"$ BOE QMBOU NBJOUFOBODF TFSWJDFT *UT DMJFOUT BSF JO UIF PJM TBOET PJM BOE OBUVSBM HBT QFUSPDIFNJDBM GPSFTU QSPEVDUT QPXFS VUJMJUJFT BOE NJOJOH JOEVTUSJFT

XJUI IJHI VQUJNF BOE BWBJMBCJMJUZ EVF UP JUT JO IPVTF NBJOUFOBODF QSPHSBN XIJDI JODMVEFT BO TRVBSF GPPU NBJOUFOBODF GBDJMJUZ 5IF »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

#SPEB JT IFBERVBSUFSFE JO 1SJODF "MCFSU 4BTLBUDIFXBO

TVQQMJFST PO NBOZ QSPKFDUT #SPEB IBE TVSQMVT QSPEVDUJPO

QSPWJEJOH BHHSFHBUF QSPDFTTJOH FBSUIXPSL DJWJM

DBQBDJUZ JO EVF UP BO FYDFQUJPOBMMZ XFU DPOTUSVDUJPO

DPOTUSVDUJPO DPODSFUF QSPEVDUJPO BOE SFMBUFE TFSWJDFT *U

TFBTPO XIJDI NBEF FBSUI NPWJOH WFSZ EJGºDVMU )JTUPSJDBMMZ

TFSWFT B CSPBE SBOHF PG PSHBOJ[BUJPOT JODMVEJOH $BOBEB±T

#SPEB IBT CFFO B XFBUIFS TFOTJUJWF CVTJOFTT XJUI UIF NBKPSJUZ

UXP NBKPS SBJMXBZ DPSQPSBUJPOT 4BTLBUDIFXBO±T NBKPS

PG JUT DBTI »PX HFOFSBUFE CFUXFFO "QSJM BOE 0DUPCFS

20

T H E C H U R C H I L L C O R P O R AT I O N

Laird Electric

Innovations

Laird maximizes earnings per job site by: Gaining early access to new projects

Following up with ongoing

Performing ongoing maintenance and

by providing the initial power service;

instrumentation and control calibration

upgrades on facilities.

after project completion; and

Continuing with the electrical installation during the construction phase;

Think

BIG industries

Competitive strengths

2010 milestones

2011 goals

Size – One of the three largest

Launched new corporate brand.

Safety – Reduce total incident

industrial union electrical contractors in the Fort McMurray and Edmonton areas.

Broad Line of Services – Provides

frequency by 10%.

Increased customer base in Fort McMurray-area oil sands and

Operations – Add at least three

in northwest Ontario mining and

new customers, promote bundling

power generation.

with other Churchill industrial companies, broaden geographical

power-line installation, instrumentation services and electrical construction.

Strong Quality and Safety Record –

Generated record revenue of

and product footprint, implement new

$134.7 million, an increase of more

SAP-based ERP.

than 200% from $44.3 million in 2009.

Financial – Maintain revenue and grow

Reputation for completing high-quality work safely, on-time and on-budget.

EBITDA of $8.0 million compared to

gross margin and earnings.

$2.8 million in 2009.

Had best safety record in industry: zero recordable injury incidents.

Human Resources – Enhance productivity on all levels.

2010 ANNUAL REPORT

21

Insulation Holdings (IHI)

Innovations

Leading-edge technology and

All locations maintain full fabrication

Many systems and programs provide

equipment to conform to any

facilities served by experienced

assurance that projects are completed

specification or project requirement.

technical professionals.

safely and on-budget and conform to clients’ needs as well as legislative/ regulatory requirements.

Think

BIG industries

Competitive petiti e st strengths engths

2011 goals

Size – Western Canada’s largest

Strong Quality and Safety Record –

Safety – Target zero recordable

industrial insulation contracting

Reputation for completing high-quality

incidents and reduce total incident

specialist.

work safely, on-time and on-budget.

frequency by 10%.

Operations – Launch valve cover

Union and Open Shop – Serves the unionized trades market (Fuller

2010 milestones

fabrication in new facility, grow

Austin Inc.) and the open shop

Increased bundled services offerings

HVAC organically, promote

market (Northern Industrial Insulation

with Laird Electric.

bundling with other Churchill industrial

Contractors Inc.).

Generated record annual revenue of

Broad Range of Integrated Services

$145.6 million, a 99% increase from

– Thermal and sound insulation,

$73.3 million in 2009.

fireproofing, siding, sheet metal, utilidor construction, asbestos abatement and plant maintenance.

EBITDA of $14.2 million compared to $9.1 million in 2009.

companies, broaden geographical and product footprint, implement new SAP-based ERP. Financial – Maintain revenue, grow gross margin and grow earnings.

Human Resources – Enhance succession plan.

22

T H E C H U R C H I L L C O R P O R AT I O N

Broda Construction Group

Innovations

Repair shop – 18,000-square-foot,

Large major components and

Railroad Ballast Production –

state-of-the-art in-house facility

parts inventory – improves service

Recognized need of railroads for

ensures quality control of equipment

turnarounds.

ballast production in 1976, becoming

maintenance to drive high reliability and availability of equipment.

Mobile maintenance – Eight mobile maintenance repair vehicles support

exclusive supplier for CN and CP railroads in Western Canada.

onsite maintenance program.

Think

BIG industries

Competitive strengths

2010 milestones

2011 goals

Experience – Established in 1957

Subsidiaries North American Rock &

Safety – Reduce lost-time accidents;

Dirt Inc. and Kam-Crete Ltd. achieved

reduce reportable incident frequency

zero lost-time accidents for second

and total incident frequency.

year running.

Operations – Pursue more long-

real estate developers.

Became part of Churchill’s Industrial

term (less seasonal) projects such

Size – 400-unit fleet, can move more

Services segment with the completion

as uranium, potash and gold mining,

than 5 million cubic metres of material

of the Seacliff acquisition on

and municipal infrastructure; win

per year.

July 13, 2010.

Saskatchewan “election year”

Strong Quality and Safety Record –

Unusual wet seasonal weather in

Reputation for completing high-

2010 caused major deferrals of

quality work safely, on-time and

earthmoving work.

Business Relationships – Provincial and municipal governments, railroads, mining companies,

projects and 2010 deferred projects.

Financial – Increase gross revenue; maintain historically strong 15% to 20% EBITDA margins.

on-budget, evidenced by Gold Seal Certification from the Canadian Construction Association.

Human Resources – Build organizational capability to expand beyond Saskatchewan.

2010 ANNUAL REPORT

23

Markets we serve: Commercial .PTU DPNNFSDJBM DPOTUSVDUJPO JO 8FTUFSO $BOBEB UBLFT QMBDF JO UIF SFHJPOÂąT TJY NBKPS NFUSPQPMJUBO BSFBT 7BODPVWFS $BMHBSZ &ENPOUPO 3FHJOB 4BTLBUPPO BOE 8JOOJQFH SFQSFTFOUJOH BQQSPYJNBUFMZ PG UIF SFHJPOÂąT UPUBM QPQVMBUJPO PG NJMMJPO $POTUSVDUJPO BDUJWJUZ JT UZQJDBMMZ SFUBJM XIPMFTBMF BOE PGÂşDF TQBDF BT XFMM BT NVMUJ VOJU SFTJEFOUJBM

Economic drivers Population growth, natural resource assets, and industry and government capital spending are the main economic drivers. Despite the recent recession, Western Canada’s population has grown at a compound annual rate of 1.7% since 2006, concentrated in metropolitan areas.

Crude oil prices are expected to be in the $104 to $106 per barrel W.T.I. range (2)

in 2011 and 2012 , favourable for economic growth in Western Canada.

Government spending is expected

BIG numbers $8.8 billion 2010 Value of investment in Western Canadian commercial construction. (1)

$5.5 billion 2010 Value of commercial building permits in Western Canada. (1)

10.6 million Population of Western Canada (British Columbia, Alberta, Saskatchewan, Manitoba, Yukon). (1)

Growth strategies Our focus will be on construction management contracts and relationship-based wins, where there is less risk and opportunities to self-perform project components. To this end, we will continue to develop alliances with relationship-based project developers and investors.

As well, we will differentiate ourselves from our competitors by our quality and safety record, and by value-added product offerings, such as Canem’s Smart Connected Real Estate.

to remain high in 2011, partly due to provincial spending.

Services Â… 40%$- ÂŹ %FTJHO BOE DPOTUSVDUJPO PG CVJMEJOHT Â… $BOFN ÂŹ #FTU JO DMBTT FMFDUSJDBM BOE EBUB DPNNVOJDBUJPO TZTUFNT GPS CVJMEJOHT

Source: (1) Statistics Canada; (2) United States Energy Information Administration 24

T H E C H U R C H I L L C O R P O R AT I O N

Market strongholds 1 Vancouver

3 Edmonton

5 Saskatoon

UÊÊ iÊÌ Ê > >`>½ÃÊLÕà iÃÌÊ> `Ê largest port.

UÊÊÓä£äÊ«À iVÌÃ\Ê ÃV ÛiÀÞÊ Àii Ê Õ ` }Ê 12 ($42 million), Willingdon Office Park ($54 million).

UÊÊ ÀÌ iÀ Ê> `ÊVi ÌÀ> Ê LiÀÌ>½ÃÊ economic centre.

UÊÊÓä£äÊ«À iVÌÃ\Ê- i« iÀ`½ÃÊ >ÀiÊ Foundation home ($22 million); Steppes Gateway Office Complex ($15 million).

UÊÊ ÀÌ iÀ Ê->à >ÌV iÜ> ½ÃÊVi ÌÀiÊ for agriculture, and potash and uranium mining.

UÊÊÓä£äÊ«À iVÌÃ\Ê `>ÞÊ Ê­fÓxÊ ®°

2 Calgary

4 Winnipeg

6 Regina

UÊÊ ÃÌÊ > >` > Ê Ê> `Ê >ÌÕÀ> Ê}>ÃÊ companies headquartered here.

UÊÊÓä£äÊ«À iVÌÃ\Ê7> >ÀÌÊ ÃÌÀ LÕÌ Ê Centre ($73 million), Hanson Square office building ($19 million).

UÊÊ > Ì L>½ÃÊVi ÌÀiÊv ÀÊw > Vi]Ê manufacturing, transportation, and food and beverage production.

UÊÊ > V > Ê> `Ê ÃÕÀ> ViÊV «> ÞÊ head offices.

UÊÊ- ÕÌ iÀ Ê->à >ÌV iÜ> ½ÃÊVi ÌÀiÊ for agriculture, potash mining, and oil refining.

UÊÊ V Õ`iÃÊ i>`Ê vwViÊ vÊ}À> > ` }Ê giant Viterra Inc.

3 1.2 mm

5 1

2 2.3 mm

0.3 mm

6

4

0.2 mm

0.7 mm

1.2 mm

# on map = population (millions) Source: Statistics Canada

Quarterly Investment in Western Canada Commercial Building Construction* ($ millions)

Value of Western Canada Commercial Building Permits* ($ millions)

3,500

3,000

3,000

2,500

2,500

2,000

2,000 1,500

1,500

1,000

1,000

500

500 0

0 Q1 Q2 Q3 Q4

Q1 Q2 Q3 Q4

Q1 Q2 Q3 Q4

Q1 Q2 Q3 Q4

Q1 Q2 Q3 Q4

Q1 Q2 Q3 Q4

Q1 Q2 Q3 Q4

Q1 Q2 Q3 Q4

Q1 Q2 Q3 Q4

Q1 Q2 Q3 Q4

06

07

08

09

10

06

07

08

09

10

Western Canadian commercial construction investment was $8.8 billion in 2010 compared to $10.4 billion in 2009. However, Q4 2010 improved by 12% over Q2 2010.

After declining to $1.0 billion in Q1 2010, the value of Western Canadian commercial building permits rebounded to average $1.5 billion in Q2, Q3 and Q4.

*Source: Statistics Canada 2010 ANNUAL REPORT

25

Markets we serve: Oil and gas 0JM TBOET BDUJWJUZ UIF MBSHFTU DPNQPOFOU PG 8FTUFSO $BOBEBÂąT PJM BOE HBT JOEVTUSZ UBLFT QMBDF JO OPSUIFSO "MCFSUB "MCFSUB SBOLT TFDPOE POMZ UP 4BVEJ "SBCJB JO HMPCBM QSPWFE PJM SFTFSWFT 0JM TBOET BSF DPNQPTFE NBJOMZ PG XBUFS TBOE BOE B GPSN PG IFBWZ PJM DBMMFE CJUVNFO *O "MCFSUBÂąT CJUVNFO QSPEVDUJPO BWFSBHFE NJMMJPO CBSSFMT CCMT QFS EBZ BOE XBT DPOUJOVJOH UP HSPX

Economic drivers Global oil supply and demand, resource availability and proximity to the U.S. consuming market.

The West Texas Intermediate (W.T.I.) average spot price has trended

BIG numbers 170 billion bbls Oil sands proved oil reserves(1).

3.2 million bbls/day Forecast 2019 bitumen production(1).

upward since 2009 and is forecast to average between $102 and

$170 billion

$106 per bbl in 2011 and 2012(2). At this

Value of oil sands projects currently

price level most oil sands projects

underway or proposed(1).

Growth strategies Bundling of services and combining customer relationships between Laird and IHI were successful in 2010 and we are expanding this strategy in 2011 with the addition of Broda’s earthmoving services and industrial construction services from SODCL, as appropriate. We will also explore adding complementary business lines

are signiďŹ cantly proďŹ table, and

through acquisition. As well, we are

recent instability in North Africa and

increasing our marketing efforts to

the Middle East has created supply

broaden our customer base and will

concerns that add upside to oil prices.

continue to build our core of

With global demand for oil increasing

repeat business.

and international political strife threatening supply, Alberta’s oil sands are increasingly seen as an essential, safe and reliable source.

Services Â… -BJSE ÂŹ &MFDUSJDBM JOTUSVNFOUBUJPO BOE QPXFS MJOF DPOTUSVDUJPO BOE NBJOUFOBODF Â… *)* ÂŹ *OTVMBUJPO BTCFTUPT BCBUFNFOU TJEJOH BQQMJDBUJPO )7"$ BOE QMBOU NBJOUFOBODF Â… #SPEB ÂŹ "HHSFHBUF QSPDFTTJOH FBSUIXPSL DJWJM DPOTUSVDUJPO BOE DPODSFUF QSPEVDUJPO Â… 40%$- ÂŹ *OEVTUSJBM CVJMEJOHT Source: (1) Government of Alberta; (2) United States Energy Information Administration 26

T H E C H U R C H I L L C O R P O R AT I O N

Market strongholds 1 Calgary

2 Edmonton

3 Fort McMurray

UÊÊ V Õ`iÃÊ i>`Ê vwViÃÊ vÊ ÃÌÊ > ÀÊ Ê sands players including Suncor Energy, Shell Canada, Nexen Inc., Imperial Oil, Marathon Oil Canada, Chevron Canada Limited, Canadian Oil Sands Limited and Canadian Natural Resources Limited (CNRL).

UÊÊ > ÀÊv>LÀ V>Ì ÊVi ÌÀiÊ> `ÊÃÌ>} }Ê point for oil sands projects.

UÊÊ iÊÌ Ê >À}iÊ ÊÀiw iÀ iÃÊ> `Ê upgraders owned by Imperial Oil, Suncor Energy and Athabasca Oil Sands Project (60% Shell Canada, 20% Marathon Oil Sands LP and 20% Chevron Canada Limited).

UÊÊ V>Ìi`Ê ÊÌ iÊ i>ÀÌÊ vÊ ÊÃ> `ÃÊ production.

UÊÊ iÊÌ Ê >À}iÊ ÊÃ> `ÃÊÕ«}À>`iÀÃÊ owned by Suncor Energy, Syncrude, Opti-Nexen and CNRL.

3 0.08 mm

2 1.2 mm

1 1.2 mm # on map = population (millions) Source: Statistics Canada

W.T.I. Oil Average Spot Price ($/bbl) 140

Western Canada Oil & Natural Gas Construction Expenditures* ($ billions)

$104

120

Intentions

100 80 60 40 20

$39.95

0

Jan. 08

Jan. 09

Jan. 10 Actual

Jan. 11 Forecast

Jan. 12

The W.T.I. oil price has trended upward since 2009 and may be entering a period of volatility in a higher range.

06

$41.53

$43.68

07 08 British Columbia

$25.17 09 Alberta

$27.07

$30.82

10 11 Saskatchewan

After a major pullback in 2009, oil and natural gas companies intend to continue to increase their construction expenditures in Western Canada to over $30 billion in 2011.

*Source: Statistics Canada, United States Energy Information Administration 2010 ANNUAL REPORT

27

Markets we serve: Institutional *OTUJUVUJPOBM DPOTUSVDUJPO JO 8FTUFSO $BOBEB JT MFTT DPODFOUSBUFE JO VSCBO BSFBT UIBO DPNNFSDJBM DPOTUSVDUJPO CVU UIF NBKPSJUZ TUJMM UBLFT QMBDF JO UIF SFHJPOÂąT QPQVMBUJPO DFOUSFT *OTUJUVUJPOBM DPOTUSVDUJPO JT UZQJDBMMZ PG TDIPPMT IPTQJUBMT SFDSFBUJPO DFOUSFT EFUFOUJPO DFOUSFT HPWFSONFOU PGÂşDFT PUIFS QVCMJD CVJMEJOHT BOE USBOTQPSUBUJPO JOGSBTUSVDUVSF TVDI BT SPBET BOE CSJEHFT

Economic drivers

BIG numbers

The majority of Western Canada’s public institutional construction occurred in the 1950s, 1960s and early 1970s, with the sector being somewhat

80% Canadian infrastructure life expectancy utilized to date.

neglected during the 1980s and 1990s.

Private and public investment is required to support the construction of new and expanded infrastructure to meet market demands created by

$5.5 billion* 2010 investment in Western Canadian institutional construction (2009 – $4.9 billion).

aging and growing populations and infrastructure which is nearing the end of its useful life. In 2011, we expect provincial governments to increase institutional spending partly due to

$12 billion Capital value of 35+ P3 projects that Partnerships BC has participated in to date.

Growth strategies We will continue to pursue institutional and quasi-government construction projects in the forms offered by clients, including construction management and public private partnerships (P3), projects for which the risk/ reward proďŹ le is attractive. Similar to our strategy for the commercial market, our primary focus will be on construction management contracts and relationship-based wins, where there is less risk and opportunities to self-perform project components. To this end, we will continue to maintain close contact with government ofďŹ cials

impending provincial elections.

and elected members. We will also identify and aggressively pursue large projects where economics are favourable. Canem will also continue to perform maintenance and sustaining capital projects work on existing facilities.

Services Â… 40%$- ÂŹ %FTJHO BOE DPOTUSVDUJPO PG CVJMEJOHT Â… $BOFN ÂŹ #FTU JO DMBTT FMFDUSJDBM BOE EBUB DPNNVOJDBUJPO TZTUFNT GPS CVJMEJOHT

*Source: Statistics Canada 28

T H E C H U R C H I L L C O R P O R AT I O N

Market strongholds 1 Victoria

4 Fort McMurray

7 Saskatoon

UĂŠĂŠ >ÂŤÂˆĂŒ>Â?ĂŠÂœvĂŠ ° ° UĂŠĂŠĂ“Ă¤ÂŁĂ¤ĂŠÂŤĂ€ÂœÂ?iVĂŒĂƒ\ĂŠ1Â˜ÂˆĂ›iĂ€ĂƒÂˆĂŒĂžĂŠÂœvĂŠ6ˆVĂŒÂœĂ€Âˆ>ĂŠ ($54 million), Royal Canadian Navy eet maintenance facility ($49 million).

UÊÊÓä£äÊ*Ă€ÂœÂ?iVĂŒĂƒ\ĂŠ >V œ˜>Â?`ĂŠ ĂƒÂ?>˜`ĂŠ Recreation Centre ($139 million).

UĂŠĂŠĂ“Ă¤ÂŁĂ¤ĂŠÂŤĂ€ÂœÂ?iVĂŒĂƒ\ĂŠ->ĂƒÂŽ>ĂŒVÂ…iĂœ>Â˜ĂŠ ÂˆĂƒi>ĂƒiĂŠ Control Laboratory ($48 million), sludge treatment plant ($13 million).

2 Vancouver

5 Calgary

6 Regina

UĂŠĂŠĂ“Ă¤ÂŁĂ¤ĂŠÂŤĂ€ÂœÂ?iVĂŒĂƒ\ĂŠ6>˜VÂœĂ•Ă›iÀÊ ÂœÂ“Â“Ă•Â˜ÂˆĂŒĂžĂŠ College ($44 million), Simon Fraser University Schrum Science Centre ($38 million).

UĂŠĂŠĂ“Ă¤ÂŁĂ¤ĂŠÂŤĂ€ÂœÂ?iVĂŒĂƒ\ĂŠ ÂœĂœĂŠ6>Â?Â?iÞÊ ÂœÂ?Â?i}iĂŠ ($177 million), Genesis Centre ($63 million).

UĂŠĂŠ >ÂŤÂˆĂŒ>Â?ĂŠÂœvĂŠ->ĂƒÂŽ>ĂŒVÂ…iĂœ>˜° UĂŠĂŠĂ“Ă¤ÂŁĂ¤ĂŠÂŤĂ€ÂœÂ?iVĂŒĂƒ\ĂŠ ލÀiĂƒĂƒĂŠ,i}ˆœ˜>Â?ĂŠ Hospital ($33 million).

3 Fort St. John

6 Edmonton

9 Winnipeg

UĂŠĂŠĂ“Ă¤ÂŁĂ¤ĂŠÂŤĂ€ÂœÂ?iVĂŒĂƒ\ĂŠ ÂœĂ€ĂŒĂŠ-ĂŒÂ°ĂŠ ÂœÂ…Â˜ĂŠ ÂœĂƒÂŤÂˆĂŒ>Â?ĂŠ ($267 million).

UĂŠĂŠ >ÂŤÂˆĂŒ>Â?ĂŠÂœvĂŠ Â?LiĂ€ĂŒ>° UĂŠĂŠĂ“Ă¤ÂŁĂ¤ĂŠÂŤĂ€ÂœÂ?iVĂŒĂƒ\ĂŠ,i“>˜`ĂŠ iÂ˜ĂŒĂ€iĂŠ ($523 million), Terwillegar Recreation Centre ($139 million).

UĂŠĂŠ >ÂŤÂˆĂŒ>Â?ĂŠÂœvĂŠ >Â˜ÂˆĂŒÂœL>° UĂŠĂŠĂ“Ă¤ÂŁĂ¤ĂŠÂŤĂ€ÂœÂ?iVĂŒĂƒ\ĂŠ7ÂˆÂ˜Â˜ÂˆÂŤi}ĂŠ-ĂŒ>`ÂˆĂ•Â“ĂŠ ($170 million); HSC Tecumseh Parkade ($39 million).

4

3

0.08 mm

0.02 mm

6 1.2 mm 0.3 mm

7 0.3 mm

1

2

5 2.3 mm

8

1.2 mm

9

0.2 mm

0.8 mm

# on map = population (millions) Source: Statistics Canada

Quarterly Investment in Western Canada Institutional Building Construction* ($ millions)

Value of Western Canada Institutional Building Permits* ($ millions)

1,600

1,400

1,400

1,200

1,200

1,000

1,000

800

800

600

600

400

400

200

200

0

0 Q1 Q2 Q3 Q4

Q1 Q2 Q3 Q4

Q1 Q2 Q3 Q4

Q1 Q2 Q3 Q4

Q1 Q2 Q3 Q4

Q1 Q2 Q3 Q4

Q1 Q2 Q3 Q4

Q1 Q2 Q3 Q4

Q1 Q2 Q3 Q4

Q1 Q2 Q3 Q4

06

07

08

09

10

06

07

08

09

10

Investment in institutional building construction across Western Canada has begun to decline following a reduction in institutional building permits.

With the slowing of government stimulus spending, the value of Western Canadian institutional building permits has returned to more typical levels.

*Source: Statistics Canada 2010 ANNUAL REPORT

29

Markets we serve: Mining 4BTLBUDIFXBO QSPEVDFT POF UIJSE PG UIF XPSMEÂąT QPUBTI BOE VSBOJVN BOE # $ JT IPNF UP PWFS NJOJOH DPNQBOJFT XJUI HSPTT BOOVBM SFWFOVFT JO FYDFTT PG CJMMJPO "MCFSUB IBT MBSHF EFQPTJUT PG UIFSNBM DPBM VTFE GPS QPXFS QSPEVDUJPO BOE JT 8FTUFSO $BOBEBÂąT DFNFOU NBOVGBDUVSJOH IVC .BOJUPCB NJOFT QSPEVDF BCPVU CJMMJPO PG NFUBMT BOE JOEVTUSJBM NJOFSBMT QFS ZFBS

Economic drivers Potash – Potash Corporation, a Broda customer responsible for about 20% of global potash capacity, expects to nearly double its operational capability

BIG numbers $8 billion Combined annual revenues of over 800 B.C. mining companies.

by 2015(5).

33%

Uranium – Cameco Corporation, a

Saskatchewan’s share of world potash

Broda customer responsible for 16% of

and uranium production.

world uranium mine production, plans to double its production by 2018(6).

$3.9 billion

Copper, gold and coal – B.C. currently

Expected 2011 Western Canada mining

has seven new mines, each with

construction expenditures.

an operating life of 12-25 years,

Growth strategies Churchill’s industrial companies, Laird, IHI and Broda, together with SODCL, intend to broaden their collective customer base by presenting integrated service offerings to current and potential customers. Laird and IHI have already done this in the oil sands.

Now Churchill plans to bring Broda, with its primarily Saskatchewan mining customer base, and SODCL, with its industrial buildings capabilities, into the mix. Broda intends to lever its long-term relationships with

representing $4 billion in capital

companies such as Cameco and

investment and hundreds of millions

Potash Corporation to build multi-year

of dollars in ongoing, annual operating

revenue opportunities. Broda will also

expenditures(2).

continue to produce railroad ballast for CN Rail and CP Rail.

Services Â… -BJSE ÂŹ &MFDUSJDBM JOTUSVNFOUBUJPO BOE QPXFS MJOF DPOTUSVDUJPO BOE NBJOUFOBODF Â… *)* ÂŹ *OTVMBUJPO BTCFTUPT BCBUFNFOU TJEJOH BQQMJDBUJPO )7"$ BOE QMBOU NBJOUFOBODF Â… #SPEB ÂŹ "HHSFHBUF QSPDFTTJOH FBSUIXPSL DJWJM DPOTUSVDUJPO BOE DPODSFUF QSPEVDUJPO Â… 40%$- ÂŹ *OEVTUSJBM CVJMEJOHT Sources: (1) Saskatchewan Mining Association; (2) Mining Association of B.C.; (3) Government of Alberta; (4) Government of Manitoba; (5) www.potashcorp.com; (6) www.cameco.com 30

T H E C H U R C H I L L C O R P O R AT I O N

Market strongholds 1 Vancouver

3 Prince Albert

5 McArthur River

UÊÊ > ÀÊVi ÌÀiÊ vÊ iÀ> ÊiÝ« À>Ì Ê> `Ê financing expertise.

UÊÊ V Õ`iÃÊ > ÞÊ }ÊV «> ÞÊ headquarters and Canada’s largest port.

UÊÊ iÊÌ Ê À `>½ÃÊ i>`Ê vwVi°

UÊÊ V>Ì Ê vÊ > iV ÊÕÀ> Õ Ê i° UÊÊ ÕÀÀi ÌÊ À `>Ê«À iVÌ°

2 Saskatoon

4 Vanscoy

6 Thompson

UÊÊ V Õ`iÃÊ i>`Ê vwViÃÊ vÊÌ iÊÜ À `½ÃÊ largest publicly traded uranium company, Cameco, and the world’s largest potash producer, Potash Corporation.

UÊÊ V>Ì Ê vÊ }À Õ Ê V°Ê« Ì>Ã Ê i° UÊÊ ÕÀÀi ÌÊ À `>Ê«À iVÌ°

UÊÊ V>Ì Ê vÊ6> iÊ­v À iÀ ÞÊ V Ê Limited) nickel mining and processing operations.

UÊÊ*ÀiÛ ÕÃÊ Ê«À iVÌ°

1

UÊÊ-Ì>} }Ê« ÌÊv ÀÊ->à >ÌV iÜ> ½ÃÊ northern mining territory.

0.3 mm

2.3 mm

0.04 mm

6

3

0.01 mm

2

5 4

N/A

N/A

# on map = population (millions) Source: Statistics Canada

Western Canada Mining Construction Expenditures* ($ billions)

Intentions

$1.18

$1.72

06 07 British Columbia

$2.64 08 Alberta

$2.46

$3.90

09 10 Saskatchewan

$3.85 11 Manitoba

Western Canada mining construction expenditures have trended upward over the past 5 years, and are expected to remain strong in 2011.

CP Rail’s Swansea quarry operations near Cranbrook, British Columbia. Broda operates the quarry to produce ballast for CP’s rail beds in Western Canada.

*Source: Statistics Canada 2010 ANNUAL REPORT

31

Markets we serve: Power and utilities 5IF FMFDUSJD QPXFS NBSLFU JO 8FTUFSO $BOBEB JT EPNJOBUFE CZ QSPWJODJBM HPWFSONFOU PXOFE VUJMJUZ DPNQBOJFT JO # $ #$ )ZESP 4BTLBUDIFXBO 4BTL1PXFS BOE .BOJUPCB .BOJUPCB )ZESP *O "MCFSUBÂąT DPNQFUJUJWF NBSLFU UIFSF BSF UXP QVCMJDMZ USBEFE VUJMJUZ DPNQBOJFT 5SBOT"MUB $PSQPSBUJPO BOE $BQJUBM 1PXFS $PSQPSBUJPO B TQJO PGG PG &QDPS 6UJMJUJFT -UE BOE JOEJSFDUMZ B UIJSE JO "UDP &MFDUSJD B TVCTJEJBSZ PG QVCMJDMZ USBEFE "5$0 -UE "T XFMM "MCFSUB IBT "MUB-JOL B QSJWBUFMZ PXOFE USBOTNJTTJPO DPNQBOZ

&ONBY $PSQPSBUJPO PXOFE CZ UIF $JUZ PG $BMHBSZ QMVT OVNFSPVT JOEFQFOEFOU QPXFS QSPEVDFST

Economic drivers

BIG numbers

Industrial and population growth are the main drivers of western Canada’s electricity markets. The Alberta Electric System Operator (AESO)

$7.9 billion 2011 expected Western Canada utilities construction expenditures(3).

forecasts an average annual growth rate of 3.3% in Alberta energy demand over the next 20 years, nearly double (1)

the Canadian average . This will

$16.6 billion AESO’s 10-year capital budget for Alberta’s electric distribution system(1).

require upgrades to the congested, aging and inefďŹ cient transmission and distribution infrastructure, with major

$6 billion BC Hydro’s 3-year capital budget(2).

Growth strategies Laird, IHI, Broda and SODCL intend to work together to broaden their collective customer base by presenting integrated services offerings to current and potential customers. Laird and IHI have already done this in the oil sands, and the intention is to broaden customer bases further. The electric power industry is a natural ďŹ t for an integrated offering with Laird’s electrical capabilities, IHI’s industrial

upgrades having been proposed by

insulation skills, Broda’s earthmoving

AltaLink. In B.C., BC Hydro plans to

experience and SODCL’s building

invest about $6 billion to upgrade and

design and construction expertise.

(2)

expand capital infrastructure .

Services Â… -BJSE ÂŹ &MFDUSJDBM JOTUSVNFOUBUJPO BOE QPXFS MJOF DPOTUSVDUJPO BOE NBJOUFOBODF Â… *)* ÂŹ *OTVMBUJPO BTCFTUPT BCBUFNFOU TJEJOH BQQMJDBUJPO )7"$ BOE QMBOU NBJOUFOBODF Â… #SPEB ÂŹ &BSUIXPSL DJWJM DPOTUSVDUJPO BOE DPODSFUF QSPEVDUJPO Â… 40%$- ÂŹ *OEVTUSJBM CVJMEJOHT Sources: (1) www.aeso.com; (2) www.bchydro.com; (3) Statistics Canada.

32

T H E C H U R C H I L L C O R P O R AT I O N

Market strongholds 1 Fort McMurray

2 Edmonton

4 Calgary

UÊÊ > ÞÊ ÊÃ> `ÃÊ`iÛi « i ÌÃÊ >ÛiÊ co-generation facilities and most require high-voltage substations and power lines.

UÊÊ > À`Ê >ÃÊ } }ÊÜ À ÊÜ Ì Ê/À> Ã Ì>Ê Corporation in the area.

UÊÊ V Õ`iÃÊ i>`Ê vwViÃÊ vÊ >« Ì> Ê* ÜiÀ]Ê Epcor and Atco Electric.

UÊÊ V Õ`iÃÊ i>`Ê vwViÃÊ vÊ/À> Ã Ì>]Ê Enmax, AltaLink and many independent power producers.

UÊÊ V>Ì Ê vÊ >ݽÃÊÌÜ Ê«À « Ãi`Ê gas-fired generating plants totalling 965 megawatts of capacity.

UÊÊ >À}iÊ}i iÀ>Ì }Ê« > ÌÃÊ i>ÀLÞ° UÊ >« Ì> Ê* ÜiÀÊ> `Ê/À> Ã Ì>Ê >ÛiÊ employed Laird and IHI in the area.

3 Estevan UÊÊ ÃÌiÛ> Ê >ÃÊÌÜ Ê}i iÀ>Ì }Ê« > ÌÃÊ owned by SaskPower.

UÊÊ Ê >ÃÊ` iÊ« > ÌÊ ` wV>Ì ÊÜ À Ê for SaskPower in Estevan.

1 0.08 mm

2 1.2 mm

4 1.2 mm

0.01 mm

3

# on map = population (millions) Source: Statistics Canada

Western Canada Utilities Construction Expenditures* ($ billions)

Intentions

$3.56

$4.53

06 07 British Columbia

$5.89 08 Alberta

$7.49

$7.24

09 10 Saskatchewan

$7.94 11 Manitoba

Annual construction expenditures by utilities in Western Canada have exceeded $7 billion per year in 2009 and 2010, and utilities intend to spend $8 billion on construction in 2011.

Laird performs transmission line construction for Capital Power near Edmonton. Churchill’s companies are pursuing integrated services offerings to increase overall business.

*Source: Statistics Canada 2010 ANNUAL REPORT

33

Markets we serve: Petrochemicals 5IFSF BSF UXP NBJO QFUSPDIFNJDBM DPNQMFYFT JO 8FTUFSO $BOBEB CPUI JO "MCFSUB $BOBEBÂąT MBSHFTU QFUSPDIFNJDBM QSPEVDFS 0OF JT BU 'PSU 4BTLBUDIFXBO OFBS &ENPOUPO BOE UIF PUIFS JT BU +PGGSF OFBS 3FE %FFS *O UIJT TFDUPS JO "MCFSUB IBE TIJQNFOUT WBMVFE BU CJMMJPO SFQSFTFOUJOH BCPVU PG $BOBEJBO QSPEVDUJPO

Economic drivers

BIG numbers

Alberta petrochemical production has been based almost exclusively on natural gas feedstocks, mainly ethane. The primary petrochemical output is ethylene, which is used to produce a large variety of industrial and consumer products, including (1)

vinyl and synthetic rubber. Other

$2 billion Value of 2009 Alberta petrochemical shipments.

benzene. The main economic drivers for the industry therefore are low natural gas prices and high demand for

Laird, IHI, Broda and SODCL intend to work together to broaden their collective customer base by presenting integrated services

322 million litres Average annual Alberta petrochemical production (2005-2009).

outputs include styrene, propylene and

Growth strategies

43% Alberta’s proportion of Canadian petrochemical production.

offerings to current and potential customers. Petrochemical plant construction is a natural ďŹ t for an integrated service offering that would include IHI’s insulation expertise, Laird’s electrical capabilities, Broda’s earthmoving experience and SODCL’s building design and construction

end products. Alberta’s petrochemical

expertise. Churchill’s operating

production averaged 322 million litres

companies have performed work in

(2)

annually from 2005 to 2009.

the past for Dow Chemical Canada Inc. and Nova Chemicals Corporation at Joffre, and Shell Chemicals Canada Ltd. at Fort Saskatchewan.

Services Â… -BJSE ÂŹ &MFDUSJDBM JOTUSVNFOUBUJPO BOE QPXFS MJOF DPOTUSVDUJPO BOE NBJOUFOBODF Â… *)* ÂŹ *OTVMBUJPO BTCFTUPT BCBUFNFOU TJEJOH BQQMJDBUJPO )7"$ BOE QMBOU NBJOUFOBODF Â… #SPEB ÂŹ &BSUIXPSL DJWJM DPOTUSVDUJPO BOE DPODSFUF QSPEVDUJPO Â… 40%$- ÂŹ #VJMEJOHT Sources: (1) Industry Canada; (2) Statistics Canada.

34

T H E C H U R C H I L L C O R P O R AT I O N

Building a culture of excellence: Recruiting and developing a champion workforce "U $IVSDIJMM XF XPSL FWFSZ EBZ UP FOTVSF UIBU FNQMPZFFT BSF USFBUFE GBJSMZ BOE XJUI EJHOJUZ SFTQFDU BOE DPOTJEFSBUJPO GPS UIFJS HPBMT BOE BTQJSBUJPOT BOE UIBU EJWFSTJUZ JO UIF XPSLGPSDF JT FNCSBDFE /PU POMZ JT UIJT NPSBMMZ UIF SJHIU UIJOH UP EP CVU GPS B QVCMJDMZ USBEFE DPSQPSBUJPO TPVOE SFDSVJUNFOU BOE SFUFOUJPO QPMJDJFT BSF BMTP BO JNQPSUBOU GPSN PG SJTL NBOBHFNFOU BOE DPNQFUJUJWF QPTJUJPOJOH .BOBHFNFOU±T IVNBO SFTPVSDFT SFTQPOTJCJMJUJFT BSF PWFSTFFO CZ UIF #PBSE PG %JSFDUPST BTTJTUFE CZ JUT )VNBO 3FTPVSDFT BOE $PNQFOTBUJPO )3 $PNNJUUFF XIJDI JT DPNQSJTFE FOUJSFMZ PG JOEFQFOEFOU EJSFDUPST BT QFS UIF $BOBEJBO 4FDVSJUJFT "ENJOJTUSBUPST± /BUJPOBM 1PMJDZ 5IF )3 $PNNJUUFF IBT UIF SFTQPOTJCJMJUZ UP SFWJFX BOE SFQPSU UP UIF #PBSE PO NBUUFST SFHBSEJOH DPNQFOTBUJPO QPMJDJFT QMBOT BOE QSPHSBNT TVDDFTTJPO BOE PSHBOJ[BUJPOBM DIBOHF QMBOOJOH BOE PUIFS IVNBO SFTPVSDF JTTVFT *O $IVSDIJMM SBOLFE BNPOH UIF UPQ UISFF JO UIF 6OJWFSTJUZ PG 5PSPOUP±T TUVEZ PG DPSQPSBUF HPWFSOBODF JO $BOBEJBO TNBMM BOE NFEJVN TJ[FE FOUFSQSJTFT

We expanded our methodology for annual employee performance evaluations in 2010 to help us identify high-potential future leaders.

We customized leadership programs, accelerated development programs and provided professional development funding for our employees.

We utilize salary surveys and professional human resources consultants to ensure that we attract and retain high performers.

We challenge our people to be the best in terms of productivity and operational excellence and strive to provide the best tools to increase productivity.

2010 ANNUAL REPORT

35

Building a culture of excellence Health, safety and environment 5IF NPTU WBMVBCMF BTTFUT PG $IVSDIJMM BOE JUT PQFSBUJOH

4BGFUZ HVJEFT FWFSZUIJOH XF EP 'PS FYBNQMF 40%$- TUSJWFT

DPNQBOJFT BSF QFPQMF 8F SFDPHOJ[F PVS SFTQPOTJCJMJUZ

UP CF UIF DPOTUSVDUJPO JOEVTUSZ±T MFBEFS JO IFBMUI TBGFUZ BOE

UP FODPVSBHF IFBMUIZ MJGFTUZMFT USBJO QFPQMF JO TBGF XPSL

UIF FOWJSPONFOU 5IF 40%$- TBGFUZ QSPHSBN°T HPBM JT UP

QSBDUJDFT BOE SFTQFDU BOE QSPUFDU PVS OBUVSBM FOWJSPONFOU

IBWF B QFSGFDU TBGFUZ SFDPSE PO FWFSZ QSPKFDU 5IJT NFBOT TFUUJOH HPBMT GPS [FSP MPTU UJNF JOKVSZ JODJEFOUT BOE [FSP

Health and wellness

JODJEFOUT SFTVMUJOH JO EBNBHF UP FRVJQNFOU QSPQFSUZ PS

$IVSDIJMM±T IFBMUI BOE XFMMOFTT QSPHSBN GPDVTFT PO NFOUBM

UIF FOWJSPONFOU 5IF QSPHSBN QSPWJEFT B TBGF BOE IFBMUIZ

XFMMOFTT QIZTJDBM ºUOFTT BOE OVUSJUJPO 5IF PCKFDUJWFT PG

XPSL FOWJSPONFOU GPS BMM QSPKFDU QFSTPOOFM JODMVEJOH

UIJT QSPHSBN BSF UP

TVCDPOUSBDUPST BT XFMM BT GPS WJTJUPST BOE UIF HFOFSBM QVCMJD *U JT POF PG UIF DPOTUSVDUJPO JOEVTUSZ±T NPTU EJMJHFOU

Â… 1SPNPUF IFBMUI BOE XFMMOFTT JEFBT BOE PQQPSUVOJUJFT

SJHPSPVT BOE SFTQFDUFE QSPHSBNT

… .PUJWBUF FNQMPZFFT UP HFU QFSTPOBMMZ JOWPMWFE XJUI UIFJS PXO XFMMOFTT JOJUJBUJWFT BOE … &ODPVSBHF FNQMPZFFT UP UBLF BEWBOUBHF PG UIF SFTPVSDFT QSPWJEFE 5IF QSPHSBN DPOTJTUT PG … 0SHBOJ[FE BDUJWJUJFT TVDI BT ºUOFTT DMBTTFT BOE ®CSFBL PVU¯ TFTTJPOT UP EJTDVTT UPQJDT TVDI BT TNPLJOH DFTTBUJPO BOE EFTJHOJOH ZPVS PXO ºUOFTT QSPHSBN BOE … 4VCTJEJ[FE BDUJWJUJFT JODMVEJOH B QBSUJBM TVCTJEZ PG UIF DPTU PG FNQMPZFFT± QIZTJDBM NFOUBM BOE PS OVUSJUJPOBM BDUJWJUJFT

Safety

Environment

"U $IVSDIJMM UIF SFMBUJPOTIJQ XJUI PVS DVTUPNFST BOE

$IVSDIJMM±T PQFSBUJOH DPNQBOJFT BSF BU UIF GPSFGSPOU PG

PVS FNQMPZFFT JT CBTFE PO UIF QIJMPTPQIZ UIBU CPUI

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IBWF UIF JOIFSFOU SJHIU UP XPSL JO B TBGF XPSL QMBDF 0VS

BOE FOFSHZ DPOTFSWBUJPO BOE JOEVTUSJBM FOFSHZ BOE

HPWFSOBODF NBOBHFNFOU BOE PQFSBUJPOT BSF TUSVDUVSFE

FNJTTJPOT SFEVDUJPO 'PS FYBNQMF

XJUI UIJT JO NJOE 0VS #PBSE PG %JSFDUPST± )FBMUI 4BGFUZ BOE &OWJSPONFOU $PNNJUUFF JT EFEJDBUFE UP NPOJUPSJOH PVS IFBMUI TBGFUZ BOE FOWJSPONFOUBM QSBDUJDFT 8F BMTP JNQMFNFOUFE BO PQFSBUJPOBMMZ JOUFHSBUFE )FBMUI 4BGFUZ BOE &OWJSPONFOU $PVODJM DPOTJTUJOH PG TFOJPS NBOBHFNFOU BOE TBGFUZ SFQSFTFOUBUJWFT UP GBDJMJUBUF UIF TIBSJOH PG CFTU QSBDUJDFT BDSPTT BMM PQFSBUJOH VOJUT 8F BSF XPSLJOH UP TUBOEBSEJ[F UIF TBGFUZ SFQPSUJOH BDSPTT PVS CVTJOFTT VOJUT BMM PG XIJDI BMSFBEZ IBWF FYDFMMFOU TBGFUZ SFDPSET

… 40%$- QSPWJEFT JUT DMJFOUT XJUI WBMVF BEEFE FYQFSUJTF UP BUUBJO -&&% -FBEFSTIJQ JO &OFSHZ BOE &OWJSPONFOUBM %FTJHO TVTUBJOBCJMJUZ BDDSFEJUBUJPO … $BOFN±T OFX $FOUSF GPS #VJMEJOH 1FSGPSNBODF JO 3JDINPOE # $ TDIFEVMFE UP PQFO CZ NJE ZFBS JT EFTJHOFE BT B QFSNBOFOU USBJOJOH BOE UFTUJOH GBDJMJUZ UP BTTJTU EFWFMPQFST BOE PQFSBUPST UP ºOBODJBMMZ KVTUJGZ FOWJSPONFOUBMMZ GSJFOEMZ TZTUFNT BOE … *)*±T JOTVMBUJPO )7"$ BOE QMBOU NBJOUFOBODF TFSWJDFT BSF BMM GPDVTFE PO JNQSPWJOH UIF FOFSHZ FGºDJFODZ PG JUT DMJFOUT± PQFSBUJPOT

36

T H E C H U R C H I L L C O R P O R AT I O N

Health and safety programs, goals and initiatives

Laird is committed to ensuring all employees have the training, equipment and procedures necessary to work safely with zero incidents or injuries, and in 2010 had zero recordable injury incidents, a major accomplishment given it also set a record for number of hours worked.

IHI’s safety goal is to protect all workers, the public, property and the environment from incident or injury.

SODCL tracks every hour each employee works without a lost-time accident, providing awards when milestones are reached.

Broda requires all staff to meet all generally accepted safety standards, including training in WHMIS, First Aid/CPR and safety excellence.

2010 ANNUAL REPORT

37

Management’s Discussion and Analysis The following Management’s Discussion and Analysis (“MD&A”) of the operating performance and financial condition of The Churchill Corporation (“Churchill” or the “Corporation”), for the year ended December 31, 2010, contains information current to March 10, 2011 and should be read in conjunction with the December 31, 2010 audited Consolidated Financial Statements and related notes thereto. Unless otherwise specified all amounts are expressed in Canadian dollars.

Forward-Looking Statements Certain statements contained in this MD&A may constitute forward-looking statements. These statements relate to future events or the Corporation’s future performance. All statements, other than statements of historical fact, may be forward-looking statements. Forward-looking statements are often, but not always, identified by the use of words such as “seek”, “anticipate”, “plan”, “continue”, “estimate”, “expect”, “may”, “will”, “project”, “predict”, “propose”, “potential”, “targeting”, “intend”, “could”, “might”, “should”, “believe” and similar expressions. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. The Corporation believes that the expectations reflected in those forward-looking statements are reasonable but no assurance can be given that these expectations will prove to be correct and such forward-looking statements included in this MD&A should not be unduly relied upon by investors as actual results may vary. These statements speak only as of the date of this MD&A and are expressly qualified, in their entirety, by this cautionary statement.

In particular, this MD&A contains forward-looking statements, pertaining to the following: 9^hXadhjgZh bVYZ jcYZg i]Z ]ZVY^c\ ¹Djiadd`º0 <gdli] d[ Wjh^cZhh VcY deZgVi^dch ^c '%&&0 EZg[dgbVcXZ d[ deZgVi^c\ hjWh^Y^Vg^Zh ^c '%&&0 7jh^cZhh higViZ\^Zh VcY eaVch [dg ^beaZbZci^c\ i]Zb0 ;jijgZ XVh] Ådl! XVh] gZfj^gZbZcih VcY adc\"iZgb dWa^\Vi^dch0 9ZbVcY [dg i]Z 8dgedgVi^dc¼h hZgk^XZh0 VcY I]Z X]Vc\ZdkZg id >ciZgcVi^dcVa ;^cVcX^Va GZedgi^c\ HiVcYVgYh ¹>;GHº # With respect to forward-looking statements listed above and contained in this MD&A, the Corporation has made assumptions regarding, among other things: I]Z ZmeZXiZY eZg[dgbVcXZ d[ i]Z 8VcVY^Vc ZXdcdbn VcY i]Z Z[[ZXih i]ZgZd[ dc i]Z 8dgedgVi^dc¼h Wjh^cZhhZh0 I]Z ^beVXi d[ ^cXgZVh^c\ XdbeZi^i^dc0 I]Z \adWVa YZbVcY [dg d^a VcY i]Z Z[[ZXi dc d^a VcY cVijgVa \Vh egd_ZXih ^c LZhiZgc 8VcVYV0 VcY <dkZgcbZci eda^X^Zh#

38

T H E C H U R C H I L L C O R P O R AT I O N

The Corporation’s actual results could differ materially from those anticipated in these forward-looking statements as a result of the risk factors set forth below and elsewhere in this MD&A: <ZcZgVa \adWVa ZXdcdb^X VcY Wjh^cZhh XdcY^i^dch ^cXajY^c\ i]Z Z[[ZXi! ^[ Vcn! d[ V [jgi]Zg ZXdcdb^X hadlYdlc ^c i]Z J#H# VcY$dg 8VcVYV0 LZV` XVe^iVa VcY$dg XgZY^i bVg`Zih0 ;ajXijVi^dch ^c XjggZcXn VcY ^ciZgZhi gViZh0 8]Vc\Zh ^c aVlh VcY gZ\jaVi^dch0 I^b^c\ d[ XdbeaZi^dc d[ XVe^iVa dg bV^ciZcVcXZ egd_ZXih0 8dbeZi^i^dc VcY eg^X^c\ egZhhjgZh0 6Xi^dc dg cdc"VXi^dc d[ XjhidbZgh! hjeea^Zgh VcY$dg eVgicZgh0 VcY JcegZY^XiVWaZ lZVi]Zg XdcY^i^dch# The forward-looking statements contained in this MD&A are made as of the date hereof and the Corporation undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by applicable securities laws.

Throughout this MD&A certain measures are used that, while common in the construction industry, are not recognized bZVhjgZh jcYZg 8VcVY^Vc \ZcZgVaan VXXZeiZY VXXdjci^c\ eg^cX^eaZh ¹<66Eº # I]Z bZVhjgZh jhZY VgZ ¹XdcigVXi ^cXdbZ bVg\^c eZgXZciV\Zº! ¹ldg`"^c"]VcYº! ¹WVX`ad\º! ¹YZaVnZY WVX`ad\º! ¹ldg`^c\ XVe^iVaº! ¹:7>I96º! ¹:7Iº VcY ¹Wdd` value per share”. These measures are used by management of the Corporation to assist in making operating decisions and assessing performance. They are presented in this MD&A to assist readers to assess the performance of the Corporation and its operating companies. While Churchill calculates these measures consistently from period to period, they likely will not be directly comparable to similar measures used by other companies because they do not have standardized bZVc^c\h egZhXg^WZY Wn <66E# EaZVhZ gZk^Zl i]Z Y^hXjhh^dc d[ i]ZhZ bZVhjgZh ^c ¹IZgb^cdad\nº WZadl# Additional information regarding Churchill, including the Corporation’s current Annual Information Form and other required securities filings, is available on our website at www.churchillcorporation.com and on the Canadian Securities 6Yb^c^higVidgh¼ lZWh^iZ Vi lll#hZYVg#Xdb i]Z HnhiZb [dg :aZXigdc^X 9dXjbZci 6cVanh^h VcY GZig^ZkVa H:96G #

2010 ANNUAL REPORT

39

Overview of Business and Strategy Churchill constructs buildings and provides institutional, commercial and industrial construction and maintenance services. It is headquartered in Calgary, Alberta.

Vision To be the most admired construction and industrial services company in Canada.

Core Values 6Xi^c\ l^i] ^ciZ\g^in Wn gZheZXi^c\ VcY igjhi^c\ E:DEA:0 Hig^k^c\ [dg :M8:AA:C8: ^c Vc ZmX^i^c\ I:6B Zck^gdcbZci0 9ZbdchigVi^c\ >CCDK6I>DC VcY :CIG:EG:C:JG>6A he^g^i0 VcY 7Z^c\ XdchX^djh d[ H6;:IN! =:6AI= VcY i]Z :CK>GDCB:CI ^c Vaa lZ Yd#

Mission 8gZVi^c\ kVajZ [dg djg Xa^Zcih! ZbeadnZZh! eVgicZgh VcY jai^bViZan! djg h]VgZ]daYZgh0 6iigVXi^c\! gZiV^c^c\ VcY YZkZade^c\ i]Z WZhi eZdeaZ0 :mXZZY^c\ XjhidbZg ZmeZXiVi^dch Wn WZ^c\ gZhjaih Yg^kZc0 6X]^Zk^c\ hjhiV^cVWaZ \gdli] i]gdj\] Xdci^cjdjh ^begdkZbZci0 9Za^kZg^c\ Xdch^hiZcian hjeZg^dg deZgVi^c\ VcY ÄcVcX^Va gZhjaih0 VcY 8dcig^Wji^c\ edh^i^kZan id i]Z Xdbbjc^in ^c l]^X] lZ ldg`! a^kZ VcY eaVn#

Strategy =^gZ i]Z WZhi eZdeaZ VcY ZchjgZ i]Vi i]Zn ]VkZ i]Z WZhi iddah0 :be]Vh^oZ kVajZ VYYZY XdchigjXi^dc VcY di]Zg eVgicZg^c\ bZi]dYh d[ egd_ZXi YZa^kZgn0 7j^aY V higdc\ WVaVcXZ h]ZZi id hjeedgi \gdli] dW_ZXi^kZh0 ;dXjhZY \Zd\gVe]^X ZmeVch^dc0 EgdYjXi VcY hZgk^XZ a^cZ Y^kZgh^ÄXVi^dc0 VcY IVg\Zi XdcigVXih [dg aVg\Zg egd_ZXih#

Seacliff Construction Corp. Acquisition Dc ?jan &(! '%&%! i]Z 8dgedgVi^dc VXfj^gZY! Wn lVn d[ V eaVc d[ VggVc\ZbZci! Vaa d[ i]Z ^hhjZY VcY djihiVcY^c\ h]VgZh d[ Seacliff Construction Corp. (“Seacliff”) for total consideration of $387.4 million, including the assumption of liabilities.

This acquisition was financed by drawing down $80 million of the Corporation’s $200 million syndicated revolving credit facility, applying net proceeds from the issuance of 6,324,500 common shares for proceeds of $105.9 million and from a convertible debenture financing of $86.3 million, and utilizing $109.6 million of Churchill and Seacliff’s combined cash.

Transaction costs incurred to complete the acquisition were $5.6 million.

40

T H E C H U R C H I L L C O R P O R AT I O N

Reporting by Segment The quarter ended December 31, 2010 is the second quarter that the Corporation is reporting its results under four Wjh^cZhh hZ\bZcih/ <ZcZgVa 8dcigVXi^c\! 8dbbZgX^Va HnhiZbh! >cYjhig^Va HZgk^XZh! VcY 8dgedgViZ VcY Di]Zg# I]Z Corporation regularly analyzes the results of these categories independently as they serve different end-markets, generate different gross margin yields and have different risk proďŹ les. The evaluation of results by segment and by individual operating entity is consistent with the way in which management performance is assessed. In order to understand more clearly the operating results for the Corporation, the discussion of business results within this MD&A will be focused mainly at the business segment level.

HijVgi Dahdc 9db^c^dc 8dchigjXi^dc AiY# šHD98AÂş ! 8]jgX]^aaÂźh aVg\Zhi deZgVi^c\ XdbeVcn! [dgbh i]Z <ZcZgVa 8dcigVXi^c\ hZ\bZci VcY 8VcZb =daY^c\h AiY# š8VcZbÂş [dgbh i]Z 8dbbZgX^Va HnhiZbh hZ\bZci# 7di] d[ i]ZhZ companies, with earnings in excess of 10% of the combined earnings of the Corporation in 2010 (even though Canem contributed results for only 5½ months in 2010), are of a size that justiďŹ es separate disclosure under the Canadian >chi^ijiZ d[ 8]VgiZgZY 6XXdjciVcihÂź š8>86Âş =VcYWdd` HZXi^dc &,%&! HZ\bZci 9^hXadhjgZh# 6ai]dj\] i]Zn Wdi] serve the institutional/commercial construction market, they operate independently because they are different in terms d[ i]Z ineZ dg XaVhh d[ XjhidbZg [dg i]Z^g egdYjXih VcY hZgk^XZh! ^c i]Vi HD98AÂźh XjhidbZgh VgZ eg^bVg^an egd_ZXi dlcZgh! whereas Canem typically subcontracts to general contractors. This difference, in addition to their earnings contribution, _jhi^Ă&#x201E;Zh i]Z^g WZ^c\ Y^hXadhZY hZeVgViZan jcYZg 8>86 =VcYWdd` HZXi^dc &,%&# AV^gY :aZXig^X >cX# šAV^gYÂş ! >chjaVi^dc =daY^c\h >cX# š>=>Âş VcY 7gdYV 8dchigjXi^dc >cX# š7gdYVÂş [dgb i]Z >cYjhig^Va Services segment. Churchill reports these companies within the Industrial Services segment on the basis that they have similar economic characteristics and are similar in terms of services provided, production processes, customer base, methods of service delivery and the regulatory environment in which they operate.

General Contracting <ZcZgVa 8dcigVXi^c\ Xdch^hih d[ HD98A# ;daadl^c\ i]Z HZVXa^[[ VXfj^h^i^dc Xadh^c\! HijVgi Dahdc 8dchigjXidgh >cX# šHijVgi DahdcÂş VcY I]Z 9db^c^dc 8dbeVcn >cX# š9db^c^dcÂş lZgZ deZgVi^dcVaan XdbW^cZY id [dgb HD98A# HD98A ^h ]ZVYfjVgiZgZY ^c 8Va\Vgn! 6aWZgiV VcY XdchigjXih XdbbZgX^Va! ^chi^iji^dcVa! a^\]i"^cYjhig^Va VcY bjai^"jc^i gZh^YZci^Va Wj^aY^c\h# HijVgi Dahdc VcY 9db^c^dc ]VkZ WZZc \ZcZgVa XdcigVXidgh h^cXZ &.(. VcY &.&&! gZheZXi^kZan! VcY Yjg^c\ i]Z aVhi hZkZgVa nZVgh Wdi] ]VkZ WZXdbZ `Zn eaVnZgh ^c LZhiZgc 8VcVYVÂźh Wj^aY^c\ bVg`Zih# >c '%&%! HD98A comprised approximately two-thirds of Churchillâ&#x20AC;&#x2122;s consolidated revenues and earnings from continuing operations WZ[dgZ ^cXdbZ iVmZh ZmXajY^c\ i]Z ZmeZchZh d[ i]Z 8dgedgViZ VcY Di]Zg hZ\bZci VcY -% d[ idiVa WVX`ad\# H^b^aVgan!

HD98A ^h ZmeZXiZY id Xdbeg^hZ i]Z bV_dg^in d[ i]Z 8dgedgVi^dcÂźh gZkZcjZh! ZVgc^c\h VcY WVX`ad\ ^c '%&&# HD98A ]Vh WgVcX] d[Ă&#x201E;XZh ^c G^X]bdcY! 780 @ZadlcV! 780 L]^iZ]dghZ! N@0 8Va\Vgn! 670 :Ybdcidc! 670 HVh`Viddc! H@0 GZ\^cV! H@0 L^cc^eZ\! B70 VcY I]jcYZg 7Vn! DC#

2010 ANNUAL REPORT

41

Commercial Systems Commercial Systems is comprised of Canem, which designs, builds, maintains and services electrical and data communication systems for commercial, institutional, light industrial and multi-family residential customers. With ^ih ]ZVY d[ÄXZ ^c G^X]bdcY! 78! ^ih hZgk^XZh ^cXajYZ i]Z YZh^\c d[ ZaZXig^XVa Y^hig^Wji^dc hnhiZbh l^i]^c V Wj^aY^c\ dg XdbeaZm0 egdXjgZbZci VcY ^chiVaaVi^dc d[ ZaZXig^XVa Zfj^ebZci VcY bViZg^Vah0 dc"XVaa hZgk^XZ [dg ZaZXig^XVa bV^ciZcVcXZ VcY igdjWaZh]ddi^c\0 egZkZciVi^kZ VcY hX]ZYjaZY bV^ciZcVcXZ [dg Xg^i^XVa XdbedcZci ^chiVaaVi^dch0 WjY\Zi^c\ VcY egZ" XdchigjXi^dc hZgk^XZh0 VcY bVcV\ZbZci d[ gZ\^dcVa VcY cVi^dcVa XdcigVXih [dg bjai^"h^iZ ^chiVaaVi^dch#

Industrial Services >cYjhig^Va HZgk^XZh Xdch^hih d[ AV^gY! >=> VcY 7gdYV# AV^gY ^h ]ZVYfjVgiZgZY ^c :Ybdcidc! 6aWZgiV VcY egdk^YZh ZaZXig^XVa! instrumentation and power-line construction and maintenance services to resource and industrial clients, primarily in i]Z ;dgi BXBjggVn VcY \gZViZg :Ybdcidc gZ\^dch# >=> ^h Vahd ]ZVYfjVgiZgZY ^c :Ybdcidc! hZgk^c\ ^cYjhig^Va Xa^Zcih l^i] ^chjaVi^dc! VhWZhidh VWViZbZci! h^Y^c\ Veea^XVi^dc! ]ZVi^c\! kZci^aVi^dc VcY V^g XdcY^i^dc^c\ =K68 VcY eaVci maintenance services. Its clients are in the oil sands, oil and natural gas, petrochemical, forest products, power utilities VcY b^c^c\ ^cYjhig^Zh# 7gdYV ^h ]ZVYfjVgiZgZY ^c Eg^cXZ 6aWZgi! HVh`ViX]ZlVc! egdk^Y^c\ V\\gZ\ViZ egdXZhh^c\! ZVgi]ldg`! civil construction, concrete production and related services to mining and infrastructure organisations and Canada’s two bV_dg gV^alVn XdgedgVi^dch# 7di] >=> VcY 7gdYV hZgkZ HVh`ViX]ZlVc¼h bV_dg ediVh] VcY jgVc^jb b^c^c\ dg\Vc^oVi^dch# >=> VcY AV^gY ]VkZ bVcn XjhidbZgh ^c Xdbbdc ^c i]Z d^a hVcYh! eZigdX]Zb^XVa! edlZg ji^a^i^Zh VcY b^c^c\ ^cYjhig^Zh#

Corporate and Other I]Z 8dgedgViZ VcY Di]Zg Wjh^cZhh hZ\bZci ^cXajYZh XdgedgViZ XZcigZ hiV[[ [jcXi^dch d[ ÄcVcXZ! VXXdjci^c\! ]jbVc gZhdjgXZh! ^c[dgbVi^dc hZgk^XZh! XdgedgViZ YZkZadebZci! ^ckZhidg gZaVi^dch VcY i]Z d[ÄXZ d[ i]Z 8]^Z[ :mZXji^kZ D[ÄXZg# The costs of some functions, such as information services, are allocated directly to the other business segments, and di]Zgh gZbV^c ^c 8dgedgViZ VcY Di]Zg# >i egdk^YZh higViZ\^X Y^gZXi^dc! deZgVi^c\ VYk^XZ! ÄcVcX^c\! ^c[gVhigjXijgZ hZgk^XZh and management of public company requirements to each of the operating business segments.

6YY^i^dcVaan! i]Z 8dgedgVi^dc gZedgih i]Z gZhjaih d[ ^ih egZk^djhan Y^kZhiZY >cYjhig^Va <ZcZgVa 8dcigVXi^c\ ¹Ig^idcº hZ\bZci VcY XZgiV^c VhhZih VcY a^VW^a^i^Zh d[ i]Z 8dgedgViZ VcY Di]Zg hZ\bZci XdaaZXi^kZan Vh Y^hXdci^cjZY deZgVi^dch# 6\g^XjaijgVa aVcY VY_VXZci id V AVbdci! 6aWZgiV [VWg^XVi^dc [VX^a^in VcY i]Z Ig^idc d[ÄXZ Wj^aY^c\ ^c :Ybdcidc! 6aWZgiV are included in the assets held for sale on the balance sheet as at December 31, 2010.

42

T H E C H U R C H I L L C O R P O R AT I O N

Selected Annual Financial Information Set out below is selected annual financial information for each of the last three years, which has been prepared in VXXdgYVcXZ l^i] 8VcVY^Vc <66E# ($millions except per share amounts)

2010

Contract revenue Contract income EBITDA from continuing operations (1) Net earnings from continuing operations Net earnings from discontinued operations Net earnings Earnings per common share from continuing operations Basic Diluted Net earnings per common share Basic Diluted Backlog (1) Long-term indebtedness Total assets

Twelve Months Ended December 31 2009 2008

$ 1,175.3 148.3 84.3 43.1 1.1 44.2

$

601.2 92.0 51.3 33.5 1.3 34.8

$

761.0 93.9 56.2 35.6 0.9 36.4

$

$

1.90 1.87

$

1.98 1.96

2.09 1.98

2.14 2.03 $ 1,555.0 148.4 876.1

$

1.98 1.94 1,388.6 0.2 367.4

2.03 2.01 $ 1,390.3 7.9 302.8

Notes: (1) “EBITDA” is earnings from continuing operations before interest, taxes, depreciation and amortization (a non-GAAP measure). Backlog is also a non-GAAP

measure. Refer to “Terminology” for definitions of non-GAAP measures.

Annual Overview The Corporation has historically generated virtually all of its revenues from the four Western Canada provinces d[ BVc^idWV! HVh`ViX]ZlVc! 6aWZgiV VcY 7g^i^h] 8dajbW^V# I]Z [daadl^c\ iVWaZ hZih dji hZaZXiZY VccjVa gZhjaih Wn operating segment: ($millions except margin percent)

2010 Total

Contract revenue Contract income Contract income margin Indirect & administrative expense EBITDA (2) EBITDA margin EBT (1) Backlog (2)

$ 1,175.3 148.3 12.6% 65.6 84.3 7.2% 61.6 $ 1,555.0

General Contracting

$

812.2 90.9 11.2% 26.7 65.3 8.0% 62.7 $ 1,251.6

Commercial Systems

$

$

80.3 20.4 25.4% 8.7 11.7 14.6% 11.0 127.5

Industrial Services

$

$

300.5 37.6 12.5% 13.2 24.6 8.2% 21.1 176.0

Corporate and Other

$

$

– –

Intersegment Eliminations

$

(17.8) (0.6)

19.1 (16.3)

(2.1) (1.0)

(32.7) –

(0.5) –

$

2010 ANNUAL REPORT

43

($millions except margin percent)

2009 Total

Contract revenue Contract income Contract income margin Indirect & administrative expense EBITDA (2) EBITDA margin EBT (1) Backlog (2)

$

601.2 92.0 15.3% 41.7 51.3 8.5% 46.6 $ 1,388.6

General Contracting

$

484.1 70.3 14.5% 19.8 51.4 10.6% 49.2 $ 1,272.8

Commercial Systems

$

$

â&#x20AC;&#x201C; â&#x20AC;&#x201C; â&#x20AC;&#x201C; â&#x20AC;&#x201C; â&#x20AC;&#x201C; â&#x20AC;&#x201C; â&#x20AC;&#x201C; â&#x20AC;&#x201C;

Industrial Services

$

$

117.6 21.7 18.5% 9.9 11.9 10.0% 10.4 115.8

Corporate and Other

$

â&#x20AC;&#x201C; â&#x20AC;&#x201C;

Intersegment Eliminations

$

12.7 (11.1)

$

(12.7) â&#x20AC;&#x201C;

(0.5) â&#x20AC;&#x201C; (0.7) (0.9)

$

(0.3) â&#x20AC;&#x201C;

Notes: (1) â&#x20AC;&#x153;EBTâ&#x20AC;? is earnings from continuing operations before income tax.

(2) EBITDA and backlog are non-GAAP measures. Refer to â&#x20AC;&#x153;Terminologyâ&#x20AC;? for deďŹ nitions of non-GAAP measures.

For the year ended December 31, 2010, consolidated contract revenue was $1,175.3 million, compared to $601.2 million ^c '%%.! V .* ^begdkZbZci! Vh ^cXgZVhZh lZgZ gZedgiZY ^c Vaa deZgVi^c\ hZ\bZcih# GZkZcjZ ^cXgZVhZY YjZ id ]^\]Zg year-over-year levels of contracting activity in Churchillâ&#x20AC;&#x2122;s legacy operations as well as the addition of the Seacliff legacy companies for 5½ months in 2010.

Contract income increased from $92.0 million, or 15.3% of revenue, in 2009 to $148.3 million, or 12.6% of revenue, in '%&%# D[ i]Z *+#( b^aa^dc nZVg"dkZg"nZVg ^cXgZVhZ ^c XdcigVXi ^cXdbZ ^c '%&%! i]Z <ZcZgVa 8dcigVXi^c\! 8dbbZgX^Va Systems and Industrial Services segments reported increases of $20.6 million, $20.4 million and $15.9 million, respectively (with an intersegment elimination of $(0.6) million). The respective increases in contract income are due to increased revenue, as contract income margins have declined on a year-over-year basis in all business segments due to competitive bVg`Zi XdcY^i^dch VcY V X]Vc\^c\ egd_ZXi b^m# EaZVhZ gZ[Zg id i]Z Y^hXjhh^dc d[ hZ\bZciZY gZhjaih l]^X] [daadlh# Indirect and administrative expenses for 2010 amounted to $65.6 million, or 5.6% of revenue, compared to $41.7 million dg +#. d[ gZkZcjZ ^c '%%.# >cY^gZXi VcY VYb^c^higVi^kZ ZmeZchZh ^cXgZVhZY Wn +#. b^aa^dc VcY -#, b^aa^dc ^c i]Z <ZcZgVa 8dcigVXi^c\ VcY 8dbbZgX^Va HnhiZbh hZ\bZcih! gZheZXi^kZan! l]^aZ i]Z >cYjhig^Va HZgk^XZh! VcY 8dgedgViZ VcY Di]Zg segments increased by $3.3 million and $6.4 million, respectively (change in intersegment elimination of $(1.4) million).

I]Z ^cXgZVhZh ^c <ZcZgVa 8dcigVXi^c\! 8dbbZgX^Va HnhiZbh VcY >cYjhig^Va HZgk^XZh lZgZ eg^bVg^an YjZ id i]Z ^cXajh^dc d[ 9db^c^dc! 8VcZb VcY 7gdYV! gZheZXi^kZan! ^c i]Z 8dgedgVi^dcÂźh Ă&#x201E;cVcX^Va gZhjaih [dg i]Z aVhi * bdci]h d[ '%&%# I]Z ^cXgZVhZ ^c i]Z 8dgedgViZ VcY Di]Zg hZ\bZci lVh YjZ aVg\Zan id HZVXa^[[ ^ciZ\gVi^dc Xdhih! XdgedgViZ YZkZadebZci activities, and the inclusion of legacy Seacliff management in the Churchill executive incentive compensation plan.

The net impact of the aforementioned increases in contract income and indirect administrative expenses was a +) ^cXgZVhZ ^c nZVg"dkZg"nZVg :7>I96 '%&% ¡ -)#( b^aa^dc! '%%. ¡ *&#( b^aa^dc # In accounting for the Seacliff acquisition, Churchill used the fair value method for the intangible assets acquired on closing. The impact of amortizing these intangible assets resulted in an $8.8 million amortization charge for 2010. The unamortized balance of these assets as at December 31, 2010 was $61.4 million, of which $3.6 million is expected to be amortized in each quarter throughout 2011.

44

T H E C H U R C H I L L C O R P O R AT I O N

:7I [dg '%&% ^cXgZVhZY Wn &*#% b^aa^dc id +&#+ b^aa^dc [gdb )+#+ b^aa^dc gZedgiZY ^c '%%.! YjZ id i]Z ^cXgZVhZ ^c :7>I96 YZhXg^WZY VWdkZ! eVgi^Vaan d[[hZi Wn Vc ^cXgZVhZ ^c YZegZX^Vi^dc VcY Vbdgi^oVi^dc d[ &%#- b^aa^dc ^cXajY^c\ i]Z $8.4 million amortization of Seacliff intangible assets described above), and an increase in interest expense of $7.2 million primarily due to additional debt incurred to ďŹ nance the Seacliff acquisition.

The Corporationâ&#x20AC;&#x2122;s consolidated net earnings from continuing operations for 2010 were $43.1 million compared to net earnings from continuing operations of $33.5 million in 2009, reďŹ&#x201A;ecting the earnings before taxes described above partially offset by an increase in income tax of $5.4 million.

Churchillâ&#x20AC;&#x2122;s total backlog, including work-in-hand, at December 31, 2010 was $1,555.0 million compared to $1,388.6 million at December 31, 2009, a $166.4 million increase. The Corporationâ&#x20AC;&#x2122;s backlog consists of work-in-hand d[ &!'''#* b^aa^dc VcY VXi^kZ WVX`ad\ d[ (('#* b^aa^dc# 8]jgX]^aa XjggZcian ]Vh cd YZaVnZY WVX`ad\# Dc V hZ\bZciZY WVh^h! WVX`ad\ Vi nZVg"ZcY '%&% lVh &!'*&#+ b^aa^dc ^c <ZcZgVa 8dcigVXi^c\! &',#* b^aa^dc ^c 8dbbZgX^Va HnhiZbh VcY &,+#% b^aa^dc ^c i]Z >cYjhig^Va HZgk^XZh hZ\bZci# CZl XdcigVXi VlVgYh d[ (%*#& b^aa^dc lZgZ VYYZY id ldg`"^c"]VcY ^c the fourth quarter of 2010.

Discontinued Operations Tables that set out the net assets held for sale, net earnings (loss) and cash ďŹ&#x201A;ows from discontinued operations for 2010 VcY gZaViZY YZiV^ah VgZ ^cXajYZY ^c CdiZ ) id i]Z VccjVa VjY^iZY 8dchda^YViZY ;^cVcX^Va HiViZbZcih# I]ZhZ Vbdjcih VgZ associated with assets held for sale and the resolution of certain outstanding matters with respect to the sale of Triton, announced on August 12, 2009.

Annual Results of Operations General Contracting (SODCL) ;dg i]Z &' bdci]h ZcYZY 9ZXZbWZg (&! '%&%! HD98AÂźh gZkZcjZ lVh -&'#' b^aa^dc! XdbeVgZY id )-)#& b^aa^dc ^c '%%.# This $328.1 million (68%) increase is attributable to the inclusion of 5½ months of revenue from the legacy Dominion deZgVi^dch VcY ^cXgZVhZY gZkZcjZ [gdb i]Z aZ\VXn HijVgi Dahdc WgVcX]Zh i]gdj\]dji 6aWZgiV VcY 7g^i^h] 8dajbW^V# HD98AÂźh XdcigVXi ^cXdbZ ^c '%&% ^cXgZVhZY Wn '. id .%#. b^aa^dc [gdb ,%#( b^aa^dc [dg '%%.# I]Z '%&% XdcigVXi income margin percentage was 11.2% compared to 14.5% in 2009. Approximately 60% of the decline in contract income margin resulted from the inclusion of legacy Dominionâ&#x20AC;&#x2122;s lower margin operations in the last 5½ months of 2010.

I]Z di]Zg )% lVh YjZ id V YZXa^cZ ^c aZ\VXn HijVgi DahdcÂźh bVg\^ch dc egd_ZXih hZXjgZY ^c i]Z bdgZ XdbeZi^i^kZ markets of 2008 and 2009, lower amounts of self-performed work, and being in the early phases of construction on several new projects. :7>I96 [dg HD98A ^c '%&% lVh +*#( b^aa^dc XdbeVgZY id *&#) b^aa^dc ^c '%%.# I]^h &(#. b^aa^dc dg ', ^cXgZVhZ was due to the aforementioned increases in contract income partly offset by an increase in indirect and administrative ZmeZchZh d[ +#. b^aa^dc# HD98AÂźh ^cY^gZXi VcY VYb^c^higVi^dc ZmeZchZh lZgZ '+#, b^aa^dc (#( d[ gZkZcjZ ^c 2010 compared to $19.8 million (4.1% of revenue) in 2009.

2010 ANNUAL REPORT

45

HD98A ]VY idiVa WVX`ad\ d[ &!'*&#+ b^aa^dc Vh Vi 9ZXZbWZg (&! '%&%! XdbeVgZY id idiVa WVX`ad\ d[ &!','#- b^aa^dc at December 31, 2009. The December 31, 2010 backlog consisted of $927.5 million of work-in-hand and $324.1 million of active backlog, whereas the December 31, 2009 backlog was made up of $688.0 million of work-in hand, with the gZbV^cYZg WZ^c\ VXi^kZ WVX`ad\# I]Z <ZcZgVa 8dcigVXi^c\ hZ\bZci ZmeZXih id ZmZXjiZ --%#, b^aa^dc d[ ^ih ldg`"^c"]VcY and active backlog during 2011.

Commercial Systems (Canem) <^kZc i]Vi 8VcZb lVh ejgX]VhZY Wn i]Z 8dgedgVi^dc ^c ?jan '%&% Vh eVgi d[ i]Z HZVXa^[[ VXfj^h^i^dc! cd XdbeVgVWaZ Vbdjcih [dg 8dbbZgX^Va HnhiZbh VgZ Y^hXadhZY [dg '%%.# ;dg i]Z gZbV^cYZg d[ '%&% V[iZg i]Z ?jan ejgX]VhZ YViZ! 8VcZbÂźh revenue was $80.3 million.

Canemâ&#x20AC;&#x2122;s contract income for 2010 was $20.4 million or 25.4% of revenue.

8VcZb gZedgiZY :7>I96 [dg '%&% d[ &&#, b^aa^dc dg &)#+ d[ gZkZcjZ# 7VX`ad\ [dg i]^h hZ\bZci lVh &',#* b^aa^dc Vi i]Z ZcY d[ '%&%! Xdch^hi^c\ Zci^gZan d[ ldg`"^c"]VcY# I]Z hZ\bZci hiVgiZY the ďŹ nal quarter of 2010 with $155.1 million of work-in-hand, contracted $18.6 million of additional work-in-hand during the quarter and executed $46.2 million of construction activity. Work-in-hand of $76.5 million is expected to be executed during 2011.

Industrial Services (Laird, IHI and Broda) GZkZcjZ [dg '%&% ^cXgZVhZY Wn &*+ nZVg"dkZg"nZVg id (%%#* b^aa^dc [gdb &&,#+ b^aa^dc [dg '%%.# GZkZcjZ ^cXgZVhZh Vi AV^gY VcY >=> gZhjaiZY [gdb \gZViZg VXi^k^in aZkZah VhhdX^ViZY l^i] hZkZgVa d^a hVcYh Xdbb^hh^dc^c\! bV^ciZcVcXZ VcY turnaround projects in the Fort McMurray and Edmonton areas. A large proportion of this revenue was for bundled services that the two companies provided to a major oil sands customer. The revenue increase associated with the addition d[ 7gdYV h^cXZ ?jan &(! '%&% ^h '%#( b^aa^dc# 7gdYVÂźh deZgVi^dch VgZ ]ZVk^an hZVhdcVa! h`ZlZY idlVgY i]Z hZXdcY VcY i]^gY quarters as most civil and earthmoving work is done during these quarters. First and fourth quarters tend to be relatively adl ^c VXi^k^in [dg 7gdYV VcY i]Z XdbeVcn eZg[dgbh V h^\c^Ă&#x201E;XVci Vbdjci d[ ^ih Zfj^ebZci bV^ciZcVcXZ Yjg^c\ i]^h period. Accordingly, the ďŹ rst and fourth quarters tend to generate breakeven results or losses.

Contract income in 2010 increased to $37.6 million from $21.7 million for 2009. Contract income margins were lower at 12.5% in 2010 versus 18.5% in 2009, as a result of the combination of competitive market conditions and X]Vc\^c\ egd_ZXi b^m Vi AV^gY VcY >=># I]Z XdcigVXi ^cXdbZ ^cXgZVhZ VhhdX^ViZY l^i] i]Z VYY^i^dc d[ 7gdYV h^cXZ ?jan &(! '%&% ^h )#* b^aa^dc# :7>I96 ^cXgZVhZY id ')#+ b^aa^dc [dg '%&% [gdb &&#. b^aa^dc [dg '%%.# I]Z ^cXgZVhZ ^c :7>I96 gZhjaiZY [gdb i]Z higdc\ VXi^k^in aZkZah Vi AV^gY VcY >=> dc d^a hVcYh egd_ZXih ^c cdgi]Zgc 6aWZgiV! eVgi^Vaan d[[hZi Wn ]^\]Zg ^cY^gZXi VcY VYb^c^higVi^kZ ZmeZchZh [dg i]Z eZg^dY# I]Z :7>I96 ^beVXi VhhdX^ViZY l^i] i]Z VYY^i^dc d[ 7gdYV h^cXZ ?jan &(! '%&% is $2.4 million.

46

T H E C H U R C H I L L C O R P O R AT I O N

Industrial Services had total backlog of $176.0 million as at December 31, 2010, compared to total backlog of $115.8 million at December 31, 2009. The December 31, 2010 backlog consisted of $167.6 million of work-in-hand and $8.4 million of active backlog, whereas the December 31, 2009 backlog was made up of $96.3 million of work-in hand and &.#* b^aa^dc d[ VXi^kZ WVX`ad\# AV^gY VcY >=> hiVgiZY i]Z [djgi] fjVgiZg l^i] &''#+ b^aa^dc d[ ldg`"^c"]VcY! XdcigVXiZY $101.9 million of additional work-in-hand during the fourth quarter and executed $86.6 million of construction activity, ZcY^c\ i]Z nZVg l^i] &(,#- b^aa^dc d[ ldg`"^c"]VcY# AV^gY VcY >=> ZmeZXi id ZmZXjiZ &)'#* b^aa^dc d[ ldg`"^c"]VcY VcY VXi^kZ WVX`ad\ Yjg^c\ '%&&# 7gdYV hiVgiZY i]Z [djgi] fjVgiZg d[ '%&% l^i] (.#( b^aa^dc d[ ldg`"^c"]VcY! XdcigVXiZY $1.5 million of additional work-in-hand in the fourth quarter and executed $11.1 million of construction activity during that period, ending the year with $29.8 million of work-in-hand, of which $17.6 million is expected to be executed during 2011. Much of the work in this segment involves contracts of less than 12 months duration that have a modest impact on backlog.

Corporate and Other >c '%&%! i]Z 8dgedgViZ VcY Di]Zg hZ\bZci ^cXjggZY V cZi adhh WZ[dgZ iVm d[ ('#, b^aa^dc XdbeVgZY id V cZi adhh WZ[dgZ iVm d[ &'#, b^aa^dc ^c '%%.# I]Z ^cXgZVhZ ^c '%&% 8dgedgViZ VcY Di]Zg ZmeZchZh ^h Viig^WjiVWaZ id Xdhih VhhdX^ViZY l^i] the acquisition of Seacliff, including an $8.8 million amortization of intangible assets charge, indirect and administrative expenses associated primarily with at-risk, equity-based compensation expenses, increased resources at the corporate centre and additional professional fees required to support corporate development initiatives.

2010 ANNUAL REPORT

47

Quarterly Financial Information The following table sets out selected quarterly financial information of the Corporation for the last eight quarters: ($millions except per share data and percentages)

2010, Quarter Ended: Dec. 31

Contract revenue Contract income Contract income margin From continuing operations: EBITDA (2) EBT Net earnings EPS – basic (1) EPS – diluted (1) Net earnings EPS – basic (1) EPS – diluted (1) Backlog (2) Working capital Shareholders’ equity Book value ($ per basic share)

$

389.7 51.2

Sept. 30

$

13.2% $

386.0 48.3

$

12.5% $

2009, Quarter Ended:

June 30

223.1 25.8

Mar. 31

$

11.6% $

176.5 23.0

Dec. 31

$

13.0% $

173.9 24.7

Sept. 30

$

14.2% $

161.5 27.1

June 30

$

16.8% $

136.7 21.6

Mar. 31

$

15.8% $

129.1 18.6 14.4%

29.6 20.1 13.7 0.59 0.55 $ 14.6 0.62 0.58 $ 1,555.0 100.4 300.9

29.0 18.4 13.3 0.59 0.55 $ 13.3 0.59 0.55 $ 1,835.7 93.2 285.6

14.0 12.8 9.0 0.51 0.49 $ 9.1 0.52 0.50 $ 1,182.2 205.8 168.6

11.7 10.3 7.1 0.40 0.39 $ 7.2 0.41 0.40 $ 1,314.4 115.5 149.3

12.5 11.3 8.1 0.46 0.44 $ 7.7 0.44 0.42 $ 1,388.6 109.1 141.5

17.3 16.2 11.7 0.66 0.65 $ 15.2 0.86 0.85 $ 1,514.5 103.9 133.0

12.3 11.0 8.0 0.45 0.44 $ 7.4 0.42 0.41 $ 1,344.2 84.4 117.3

$

9.3 8.1 5.7 0.32 0.32 $ 4.6 0.26 0.26 $ 1,327.5 77.5 109.8

12.47

11.84

9.57

8.47

8.03

7.56

6.67

6.23

Notes: (1) Earnings per share in the first and third quarters of 2010 were adjusted to reflect actual diluted shares.

(2) EBITDA and backlog are non-GAAP measures. Refer to “Terminology” for definitions of non-GAAP measures.

A comprehensive analysis of the operating results for each of the first three quarters of 2010 was included in the MD&A ^c i]Z ^ciZg^b gZedgi id h]VgZ]daYZgh [dg ZVX] fjVgiZg# I]Z gZVYZg ^h gZ[ZggZY id i]Z 8dgedgVi^dc¼h '%%. 6ccjVa GZedgi [dg V Y^hXjhh^dc VcY VcVanh^h d[ i]Z gZhjaih d[ i]Z fjVgiZgh egZXZY^c\ ?VcjVgn &! '%&%#

48

T H E C H U R C H I L L C O R P O R AT I O N

Fourth Quarter Overview The following table sets out selected fourth quarter results by operating segment: ($millions except margin percent)

Fourth Quarter 2010 Total

Contract revenue Contract income Contract income margin Indirect & administrative expense EBITDA (1) EBITDA margin EBT (1)

$

389.7 51.2 13.1% 21.9 29.6 7.6% 20.1

General Contracting

$

257.8 27.3 10.6% 7.4 20.0 7.8% 19.6

Commercial Systems

$

46.2 12.6 27.3% 5.0 7.6 16.5% 7.3

Industrial Services

$

95.7 11.6 12.1% 4.2 7.5 7.8% 6.3

Corporate and Other

$

â&#x20AC;&#x201C; â&#x20AC;&#x201C;

Intersegment Eliminations

$

(10.0) (0.3)

5.6 (5.1)

(0.3) (0.4)

(12.9)

(0.2)

Fourth Quarter 2009 Total

Contract revenue Contract income Contract income margin Indirect & administrative expense EBITDA (1) EBITDA margin EBT (1)

$

173.9 24.7 14.2% 12.4 12.5 7.2% 11.3

General Contracting

$

137.5 19.5 14.2% 6.1 13.5 9.8% 12.9

Commercial Systems

$

â&#x20AC;&#x201C; â&#x20AC;&#x201C;

Industrial Services

$

â&#x20AC;&#x201C; â&#x20AC;&#x201C; â&#x20AC;&#x201C;

36.6 5.3 14.5% 2.5 2.8 7.7% 2.4

Corporate and Other

$

â&#x20AC;&#x201C; â&#x20AC;&#x201C;

Intersegment Eliminations

$

(0.2) (0.1)

4.0 (3.7)

(0.2) (0.1)

(3.9)

(0.1)

Notes: (1) EBITDA and EBT are non-GAAP measures. Refer to â&#x20AC;&#x153;Terminologyâ&#x20AC;? for deďŹ nitions of non-GAAP measures.

For the fourth quarter of 2010, consolidated contract revenue was $389.7 million, compared to $173.9 million in the same eZg^dY ^c '%%.! V &') ^cXgZVhZ [jZaaZY Wn \gdli] ^c Vaa deZgVi^c\ hZ\bZcih# GZkZcjZ \gdli] lVh YjZ id ]^\]Zg nZVg" over-year quarterly levels of contracting activity in Churchillâ&#x20AC;&#x2122;s legacy operations as well as the addition of the Seacliff legacy companies for the full quarter.

Contract income increased from $24.7 million, or 14.2% of revenue, in the fourth quarter of 2009 to $51.2 million, or &(#' d[ gZkZcjZ! ^c i]Z [djgi] fjVgiZg d[ '%&%# D[ i]Z '+#* b^aa^dc fjVgiZgan nZVg"dkZg"nZVg ^cXgZVhZ! i]Z <ZcZgVa Contracting and Industrial Services segments reported increases of $7.8 million and $6.3 million, respectively. The respective increases are due to increased revenue, as contract income margins declined on a year-over-year basis in the <ZcZgVa 8dcigVXi^c\ VcY >cYjhig^Va HZgk^XZh Wjh^cZhh hZ\bZcih YjZ id XdbeZi^i^kZ bVg`Zi XdcY^i^dch VcY V X]Vc\^c\ project mix. The balance of the increase, $12.6 million, was due to the inclusion of Canemâ&#x20AC;&#x2122;s results in the fourth quarter of 2010.

2010 ANNUAL REPORT

49

Indirect and administrative expenses for the fourth quarter of 2010 amounted to $21.9 million, or 5.6% of revenue, compared to $12.4 million or 7.1% of revenue in the comparable period of 2009. Indirect and administrative expenses ^cXgZVhZY Wn &#( b^aa^dc! &#, b^aa^dc VcY &#+ b^aa^dc ^c i]Z <ZcZgVa 8dcigVXi^c\! >cYjhig^Va HZgk^XZh VcY 8dgedgViZ segments, respectively, with the balance of $5.0 million attributable to the addition of the Commercial Systems hZ\bZci# I]Z nZVg"dkZg"nZVg fjVgiZgan ^cXgZVhZh ^c <ZcZgVa 8dcigVXi^c\ VcY >cYjhig^Va HZgk^XZh lZgZ eg^bVg^an YjZ id i]Z ^cXajh^dc d[ 9db^c^dc VcY 7gdYV! gZheZXi^kZan! ^c i]Z 8dgedgVi^dc¼h '%&% [djgi] fjVgiZg ÄcVcX^Va gZhjaih [dg i]Z [jaa quarter. The year-over-year quarterly increase in the Corporate segment was due largely to Seacliff integration costs, corporate development activities, and the inclusion of legacy Seacliff senior management in the executive incentive compensation plan. :7>I96 [gdb Xdci^cj^c\ deZgVi^dch ^c i]Z [djgi] fjVgiZg lVh '.#+ b^aa^dc! XdbeVgZY id &'#* b^aa^dc ^c i]Z [djgi] quarter of 2009. This strong year-over-year quarterly growth of 137% was due to the aforementioned increases in contract income partly offset by increases in indirect and administrative expenses.

In accounting for the Seacliff acquisition, Churchill used the fair value method to account for the intangible assets acquired on closing. The impact of amortizing these intangible assets resulted in a $3.7 million amortization charge for the three months ended December 31, 2010. :7I [dg i]Z [djgi] fjVgiZg d[ '%&% ^cXgZVhZY Wn -#- b^aa^dc id '%#& b^aa^dc [gdb &&#( b^aa^dc gZedgiZY ^c i]Z [djgi] fjVgiZg d[ '%%. YjZ id i]Z ^cXgZVhZ ^c :7>I96 YZhXg^WZY VWdkZ! eVgi^Vaan d[[hZi Wn Vc ^cXgZVhZ ^c YZegZX^Vi^dc VcY amortization of $4.8 million (including the $3.7 million amortization of intangible assets described above), and an increase in interest expense of $3.6 million primarily due to additional debt incurred to finance the Seacliff acquisition.

The Corporation’s consolidated net earnings from continuing operations for the three months ended December 31, 2010 were $13.7 million compared to $8.1 million in the fourth quarter of 2009. Consolidated net earnings for the three months ended December 31, 2010 were $14.6 million compared to $7.7 million in the corresponding period of 2009.

Fourth Quarter Results of Operations General Contracting (SODCL) ;dg i]Z i]gZZ bdci]h ZcYZY 9ZXZbWZg (&! '%&%! HD98A¼h gZkZcjZ lVh '*,#- b^aa^dc! XdbeVgZY id &(,#* b^aa^dc ^c the fourth quarter of 2009. The increase is due to the addition of Dominion’s operations for the full quarter and increased gZkZcjZ [gdb i]Z HijVgi Dahdc aZ\VXn deZgVi^dch i]gdj\]dji 6aWZgiV VcY 7g^i^h] 8dajbW^V#

50

T H E C H U R C H I L L C O R P O R AT I O N

HD98AÂźh XdcigVXi ^cXdbZ ^c i]Z [djgi] fjVgiZg d[ '%&% ^cXgZVhZY Wn )% id ',#( b^aa^dc [gdb &.#* b^aa^dc [dg i]Z same period in 2009. The fourth quarter 2010 contract income margin percentage was 10.6% compared to 14.2% in the fourth quarter of 2009. Approximately three-quarters of the decrease in contract income margin resulted from the inclusion of Dominionâ&#x20AC;&#x2122;s operations in the quarter. The balance of the decline in contract income margin was due to a YZXa^cZ ^c aZ\VXn HijVgi Dahdc bVg\^c XVjhZY Wn adlZg bVg\^ch dc egd_ZXih hZXjgZY ^c i]Z bdgZ XdbeZi^i^kZ bVg`Zi d[ 2008 and 2009, lower amounts of self-performed work, and being in the early phases of construction on several new egd_ZXih# EVgi^Vaan d[[hZii^c\ i]ZhZ [VXidgh lVh V '#& b^aa^dc gZYjXi^dc ^c i]Z fjVgiZg ^c i]Z Vbdjci d[ adc\"iZgb YZ[ZggZY warranty claims liability, reďŹ&#x201A;ecting the ongoing assessment of subcontractor risk under the Corporationâ&#x20AC;&#x2122;s Subguard program. When we initiated the Subguard program in 2008, we consciously took an approach that has now proven to be overly conservative. :7>I96 [dg HD98A ^c i]Z [djgi] fjVgiZg d[ '%&% lVh '%#% b^aa^dc XdbeVgZY id &(#* b^aa^dc ^c i]Z [djgi] fjVgiZg d[ 2009. This 48% or $6.5 million increase resulted from the aforementioned increases in contract income partly offset by Vc ^cXgZVhZ ^c ^cY^gZXi VcY VYb^c^higVi^kZ ZmeZchZh d[ &#( b^aa^dc# HD98AÂźh ^cY^gZXi VcY VYb^c^higVi^dc ZmeZchZh lZgZ $7.4 million (2.9% of revenue) in 2010 compared to $6.1 million (4.4% of revenue) in 2009.

Commercial Systems (Canem) 8VcZb lVh ejgX]VhZY Wn i]Z 8dgedgVi^dc ^c ?jan '%&% Vh eVgi d[ i]Z HZVXa^[[ VXfj^h^i^dc VcY VXXdgY^c\an cd XdbeVgVWaZ amounts for Commercial Systems are disclosed for the 2009 periods. For the three months ended December 31, 2010, Canemâ&#x20AC;&#x2122;s revenue was $46.2 million.

Commercial Systemsâ&#x20AC;&#x2122; contract income for the three months ended December 31, 2010 was $12.6 million or 27.3% of revenue.

8dbbZgX^Va HnhiZbh gZedgiZY :7>I96 [dg i]Z i]gZZ bdci]h ZcYZY 9ZXZbWZg (&! '%&% d[ ,#+ b^aa^dc dg &+#* of revenue.

Industrial Services (Laird, IHI and Broda) GZkZcjZ [dg i]Z i]gZZ bdci]h ZcYZY 9ZXZbWZg (&! '%&% ^cXgZVhZY Wn &+& id .*#, b^aa^dc [gdb (+#+ b^aa^dc [dg i]Z hVbZ eZg^dY d[ '%%.# :mXZei^dcVa gZkZcjZ ^cXgZVhZh Vi AV^gY VcY >=> gZhjaiZY [gdb \gZViZg VXi^k^in aZkZah VhhdX^ViZY l^i] several oil sands commissioning, maintenance and turnaround projects in the Fort McMurray and Edmonton areas. The gZkZcjZ ^cXgZVhZ VhhdX^ViZY l^i] i]Z VYY^i^dc d[ 7gdYV [dg i]Z [jaa fjVgiZg ^h .#& b^aa^dc# 7gdYVÂźh deZgVi^dch VgZ ]ZVk^an hZVhdcVa! h`ZlZY idlVgY i]Z hZXdcY VcY i]^gY fjVgiZgh# ;^ghi VcY [djgi] fjVgiZgh iZcY id WZ adl ^c VXi^k^in [dg 7gdYV VcY the company performs a signiďŹ cant amount of its own equipment maintenance during this period.

Contract income in the fourth quarter of 2010 increased to $11.6 million from $5.3 million for the comparable period in 2009. Contract income margins were lower at 12.1% in the fourth quarter of 2010 versus 14.5% in the fourth quarter of '%%.! Vh V gZhjai d[ i]Z XdbW^cVi^dc d[ XdbeZi^i^kZ bVg`Zi XdcY^i^dch VcY X]Vc\^c\ egd_ZXi b^m Vi AV^gY VcY >=># I]Z XdcigVXi ^cXdbZ ^cXgZVhZ VhhdX^ViZY l^i] i]Z VYY^i^dc d[ 7gdYV [dg i]Z [djgi] fjVgiZg d[ '%&% ^h %#. b^aa^dc#

2010 ANNUAL REPORT

51

:7>I96 ^cXgZVhZY id ,#* b^aa^dc Yjg^c\ i]Z i]gZZ"bdci] eZg^dY ZcY^c\ 9ZXZbWZg (&! '%&% [gdb '#- b^aa^dc ^c i]Z [djgi] fjVgiZg d[ '%%.# I]Z ^cXgZVhZ ^c :7>I96 gZhjaiZY [gdb i]Z higdc\ VXi^k^in aZkZah Vi AV^gY VcY >=> dc d^a hVcYh egd_ZXih ^c cdgi]Zgc 6aWZgiV! eVgi^Vaan d[[hZi Wn ]^\]Zg ^cY^gZXi VcY VYb^c^higVi^kZ ZmeZchZh [dg i]Z eZg^dY# :7>I96 margins were slightly higher at 7.8% in the fourth quarter of 2010 versus 7.7% in the fourth quarter of 2009. The :7>I96 ^beVXi VhhdX^ViZY l^i] i]Z VYY^i^dc d[ 7gdYV ^c i]Z fjVgiZg ^h %#( b^aa^dc#

Corporate and Other >c i]Z [djgi] fjVgiZg d[ '%&%! i]Z 8dgedgViZ VcY Di]Zg hZ\bZci ^cXjggZY V adhh WZ[dgZ iVm d[ &'#. b^aa^dc XdbeVgZY id V adhh WZ[dgZ iVm d[ (#. b^aa^dc ^c i]Z [djgi] fjVgiZg d[ '%%.# I]Z ^cXgZVhZ ^c '%&% 8dgedgViZ VcY Di]Zg ZmeZchZh is attributable to costs associated with the acquisition of Seacliff, including a $3.7 million amortization of intangible assets charge, indirect and administrative expenses associated primarily with at-risk, equity-based compensation expenses, increased resources at the corporate centre, and additional professional fees required to support corporate development initiatives.

Capital Resources and Liquidity Cash and Debt Balances Cash and cash equivalents at December 31, 2010 were $70.8 million, compared to $184.4 million at December 31, 2009.

Adc\"iZgb ^cYZWiZYcZhh Vi 9ZXZbWZg (&! '%&%! ZmXajY^c\ i]Z XjggZci edgi^dc d[ '#% b^aa^dc! VbdjciZY id &)-#) b^aa^dc compared to $0.2 million at December 31, 2009. This amount consisted of $74.5 million of the debt portion of convertible YZWZcijgZh VcY ,(#. b^aa^dc YgVlc dc 8]jgX]^aa¼h '%% b^aa^dc hZc^dg gZkdak^c\ XgZY^i [VX^a^in# Dc ?jcZ &*! '%&%! id support the Seacliff acquisition, the Corporation closed its previously announced financing of convertible debentures.

The Corporation issued convertible debentures in the principal amount of $86.3 million, including the exercise by the underwriters of the over-allotment option. Upon closing, the debentures became an obligation of the Corporation. For accounting purposes, the equity conversion rights were assigned a value of $9.5 million (net of financing fees) which is included in shareholders’ equity, and $73.4 million was assigned to the long-term debt component (net of transaction costs and interest accretion). In the remainder of 2010, $0.9 million of interest accretion and $0.3 million amortization of financing fees were added to the long-term debt component, and $0.1 million of future taxes were added to the equity conversion rights of the debentures, making the debt and equity portions of the debentures $74.5 million and $9.7 million, respectively.

52

T H E C H U R C H I L L C O R P O R AT I O N

Summary of Cash Flows Cash flow from operating activities before changes in non-cash working capital balances for 2010 increased by $36.9 million to $67.2 million from $30.3 million during 2009. The increase in cash flow is largely due to the inclusion of results from the legacy Seacliff operating companies and record activity in Churchill’s legacy Industrial Services operating XdbeVc^Zh! AV^gY VcY >=># 8Vh] Ådl jhZY ^c deZgVi^dch lVh '+#- b^aa^dc V[iZg VXXdjci^c\ [dg V X]Vc\Z ^c ldg`^c\ XVe^iVa of $(91.9) million resulting from increasing working capital requirements associated with a growing business, primarily in the Industrial Services segment as expanding operations have caused receivables to grow faster than payables.

Investing activities resulted in a use of cash of $343.9 million during 2010, which compares with cash used of $8.3 million in 2009. In addition to the third-quarter 2010 Seacliff acquisition, the cash was invested in the acquisition of construction equipment for long-term projects under contract and the implementation of a new computer system for enterprise gZhdjgXZ eaVcc^c\ ¹:GEº ! l]^X] lZci a^kZ ^c i]Z Äghi fjVgiZg d[ '%&& [dg HD98A! AV^gY VcY >=># I]Z hnhiZb ^h WZ^c\ ZmeVcYZY id ^cXajYZ 8VcZb VcY 7gdYV# During 2010, cash received from financing activities amounted to $255.0 million, compared to cash used in financing of $7.9 million in 2009. The majority of the 2010 financing activities arose from the Seacliff acquisition, which necessitated drawing down $80 million of the Corporation’s new $200 million syndicated revolving credit facility and applying proceeds [gdb i]Z ^hhjVcXZ d[ +!(')!*%% Xdbbdc h]VgZh d[ &%*#. b^aa^dc# CZi gZeVnbZcih d[ adc\"iZgb YZWi ^c '%&% VbdjciZY to $(72.6) million, compared to net repayments of $7.1 million in 2009. In the second quarter of 2010 Churchill issued $86.3 million of convertible debentures in support of the Seacliff acquisition. Stock options exercised by directors, officers and employees of the Corporation contributed $1.4 million to the cash generated from financing in 2010 compared to %#( b^aa^dc ^c '%%.# I]Z 8dgedgVi^dc ZmeZcYZY &#% b^aa^dc ^c '%%. jcYZg ^ih CdgbVa 8djghZ >hhjZg 7^Y! l]^X] Zme^gZY in the fourth quarter of 2009. Financing costs in 2010 were $11.2 million.

As at December 31, 2010, Churchill had working capital of $100.4 million, compared to $109.1 million at December 31, 2009.

Contractual Obligations ($millions)

Finance contracts and capital lease obligations Operating leases and other Total contractual obligations (2)

Total (1)

$ 2.7 $ 28.2 $ 30.9

Current Year

$ $ $

2.0 6.0 8.3

2-3 years

4-5 years

$ 0. 7 $ 10.3 $ 10.8

$ $ $

0.0 6.6 6.5

After 5 years

$ $ $

0.0 5.3 5.3

Notes: (1) Principal repayments of scheduled debt.

(2) Excluding accounts payable and accrued liabilities and interest payments on debt. Refer to Note 21 to the Consolidated Financial Statements for

additional detail.

Scheduled debt repayments for 2011 are $2.0 million. The finance contracts and capital lease obligations are hZXjgZY Wn XdchigjXi^dc VcY Vjidbdi^kZ Zfj^ebZci VcY VgZ bdgZ [jaan YZhXg^WZY ^c CdiZ &' id i]Z 8dchda^YViZY Financial Statements.

2010 ANNUAL REPORT

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The operating leases and other obligations in the above table are with regard to certain construction equipment, kZ]^XaZh! d[ÄXZ egZb^hZh VcY Zfj^ebZci! VcY V XZgiV^c Xdbb^ibZci id H6>I EdaniZX]c^X# I]Zn VgZ bdgZ [jaan YZhXg^WZY ^c CdiZ '' id i]Z 8dchda^YViZY ;^cVcX^Va HiViZbZcih# I]Z 8dgedgVi^dc gZbV^ch V eVgicZg ^c i]gZZ _d^ci kZcijgZh! dcZ d[ l]^X] ^h V ejWa^X"eg^kViZ eVgicZgh]^e ¹E(º egd_ZXi# ;dg i]Vi egd_ZXi i]Z 8dgedgVi^dc ]Vh egdk^YZY V _d^ci VcY hZkZgVa guarantee, increasing the maximum potential exposure to the full value of the work remaining under the contract.

E( ^c[gVhigjXijgZ egd_ZXih bVn ZmedhZ i]Z 8dgedgVi^dc id ÄcVcX^Va eZcVai^Zh VcY$dg a^fj^YViZY YVbV\Zh [dg egd_ZXi YZaVnh# E( egd_ZXih Vahd gZfj^gZ hZXjg^in ^c i]Z [dgb d[ aZiiZgh d[ XgZY^i id hjeedgi i]Z 8dgedgVi^dc¼h dWa^\Vi^dch# During 2011, the Corporation anticipates that it will require approximately $23.0 million to fund its planned capital expenditures, compared to $16.1 million spent in 2010. These expenditures are planned for the areas of information technology infrastructure ($5.7 million), construction equipment ($8.1 million), tenant improvements ($5.2 million), vehicles ($3.1 million) and furniture and equipment ($0.9 million). This significant increase in capital expenditures year-over-year is associated with the Corporation’s need to support the growth in size and scope of its operations and l^i] i]Z Xdci^cj^c\ ^beaZbZciVi^dc d[ ^ih cZl H6E"WVhZY :GE hnhiZb# 6aa XVe^iVa heZcY^c\ ^h WZ^c\ XadhZan bdc^idgZY by management.

Management believes that the Corporation has the capital resources and liquidity necessary to meet its commitments, support its operations, finance capital expenditures and support growth strategies. In addition to the Corporation’s cash and cash equivalents, ability to generate cash from operations, and its $200 million credit facility, the Corporation believes that it has access to further debt and/or equity through the capital markets.

Shareholders’ equity was $300.9 million at December 31, 2010 compared to $141.5 million at December 31, 2009.

GZiV^cZY ZVgc^c\h ^cXgZVhZY [gdb &&+#( b^aa^dc Vi 9ZXZbWZg (&! '%%. id &+%#* b^aa^dc Vi nZVg"ZcY '%&%! gZÅZXi^c\ i]Z cumulative addition of $44.2 million of net earnings for the year.

Share Data I]Z 8dgedgVi^dc ]Vh Vc :beadnZZ H]VgZ EjgX]VhZ EaVc ¹:HEEº VkV^aVWaZ id Vaa [jaa"i^bZ ZbeadnZZh# 6i 9ZXZbWZg (&! '%&%! i]Z :HEE ]ZaY ,&+!-&& Xdbbdc h]VgZh [dg ZbeadnZZh# JcYZg i]Z :HEE! Xdbbdc h]VgZh VgZ VXfj^gZY in the open market. ;daadl^c\ i]Z Xadh^c\ d[ i]Z HZVXa^[[ VXfj^h^i^dc dc ?jan &(! '%&%! i]Z 8dgedgVi^dc ^hhjZY +!(')!*%% Xdbbdc h]VgZh jedc the conversion of previously issued subscription receipts and the net proceeds from the subscription receipts financing were released from escrow. The $102.7 million net proceeds of the subscription receipts were included in share capital.

As at March 10, 2011, the Corporation had 24,133,727 common shares issued and outstanding and 1,131,809 options XdckZgi^WaZ ^cid Xdbbdc h]VgZh jedc ZmZgX^hZ 9ZXZbWZg (&! '%&% · ')!&((!,', Xdbbdc h]VgZh VcY &!&(&!&,' options).

As well, the Corporation has convertible debentures outstanding in the amount of $86.3 million convertible into (!,.&!'%* Xdbbdc h]VgZh# GZ[Zg id CdiZ &( id i]Z 8dchda^YViZY ;^cVcX^Va HiViZbZcih [dg [jgi]Zg YZiV^a#

54

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Stock-Based Compensation Stock-based compensation is a non-cash expense driven in part by the number, fair value and vesting rights of options granted. The stock-based compensation expense was $5.4 million during 2010 and $2.0 million for 2009.

Other Compensation Expenses The Corporation has a Deferred Share Unit (“DSU”) plan. During the 12 months ended December 31, 2010, the Corporation granted 39,157 DSUs to directors as part of their annual remuneration. In addition, during 2010, directors and employees voluntarily elected to purchase 25,192 DSUs by deferring compensation related to retainers, meeting fees, base salary and/or cash bonus, as applicable. These DSU grants and elections resulted in $1.2 million of stock-based XdbeZchVi^dc ZmeZchZ [dg '%&% '%%. · %#, b^aa^dc # I]Z 9HJh VgZ higjXijgZY jcYZg i]Z XjggZci eaVc id WZ hZiiaZY ^c cash, upon ceasing service with the Corporation.

During the 12 months ended December 31, 2010, the Corporation recorded compensation expenses for eZg[dgbVcXZ h]VgZ jc^ih ¹EHJhº \gVciZY id ZbeadnZZh d[ &#+ b^aa^dc! XdbeVgZY id &#% b^aa^dc ^c '%%.# 6h Vi 9ZXZbWZg (&! '%&%! i]Z 8dgedgVi^dc ]VY '.&!'.& EHJh djihiVcY^c\! XdbeVgZY id ')(!,() EHJh Vi 9ZXZbWZg (&! '%%.# I]Z EHJh VgZ higjXijgZY jcYZg i]Z XjggZci eaVc id WZ hZiiaZY ^c XVh] Vi i]Z i^bZ d[ kZhi^c\! ^[ XZgiV^c eZg[dgbVcXZ objectives for shareholder value creation are met. The first vesting and payout is expected to be in March 2011 for EHJh \gVciZY ^c '%%-#

Supplemental Disclosures Off-Balance-Sheet Arrangements The Corporation had no off-balance sheet arrangements in place at December 31, 2010.

Related-Party Transactions The Corporation incurred legal fees during the year ended December 31, 2010, with a law firm of which a director of the Corporation is also a partner. The fees were for services rendered in the ordinary course of business. The amount ^cXjggZY Yjg^c\ i]Z [djgi] fjVgiZg d[ '%&% lVh )(!%%% F) '%%. · --!%%% # AZ\Va [ZZh d[ (*)!%%% 9ZXZbWZg (&! '%%. · +&%!%%% lZgZ ^cXjggZY l^i] i]^h aVl Ägb [dg i]Z nZVg ZcYZY 9ZXZbWZg (&! '%&%# 6i 9ZXZbWZg (&! '%&%! )!%%% lVh ^cXajYZY ^c VXXdjcih eVnVWaZ 9ZXZbWZg (&! '%%. · '.!%%% # 9jg^c\ i]Z [djgi] fjVgiZg d[ '%&%! i]Z 8dgedgVi^dc ^cXjggZY [VX^a^in Xdhih d[ (*!%%% F) '%%. · (+!%%% gZaVi^c\ id i]Z gZciVa d[ V Wj^aY^c\ dlcZY Wn V Y^gZXidg d[ i]Z 8dgedgVi^dc# ;VX^a^in Xdhih d[ &)+!%%% 9ZXZbWZg (&! '%%. · &)+!%%% for this building were incurred for the year ended December 31, 2010. The rented building is the operations base for AV^gY VcY >=> ^c ;dgi BXBjggVn VcY i]Z gZciVa X]Vg\Z ^h XdbeVgVWaZ id i]Z bVg`Zi gViZ d[ h^b^aVg egdeZgi^Zh# I]Z XjggZci lease arrangement expires on December 31, 2012. At December 31, 2010, there was $nil included in accounts payable 9ZXZbWZg (&! '%%. · c^a #

2010 ANNUAL REPORT

55

9jg^c\ i]Z [djgi] fjVgiZg d[ '%&%! i]Z 8dgedgVi^dc ^cXjggZY [VX^a^in Xdhih d[ &%&!%%% F) '%%. · c^a gZaViZY id Vc office lease agreement with a company controlled by a senior executive of the Corporation at terms representative of i]^gY eVgin XdcigVXih# ;VX^a^in Xdhih d[ &-)!%%% 9ZXZbWZg (&! '%%. · c^a [dg i]^h Wj^aY^c\ lZgZ ^cXjggZY [dg i]Z nZVg ZcYZY 9ZXZbWZg (&! '%&%# I]Z gZciZY Wj^aY^c\ ^h i]Z ]ZVY d[ÄXZ! bV^ciZcVcXZ [VX^a^in VcY deZgVi^dch WVhZ [dg 7gdYV ^c Eg^cXZ 6aWZgi! HVh`ViX]ZlVc#

Outlook Following its acquisition of Seacliff, Churchill is a larger, more diversified entity that is better positioned to compete [dg egd_ZXih l^i]^c ^ih kVg^djh Wjh^cZhh hZ\bZcih# I]Z HZVXa^[[ VXfj^h^i^dc XdbeaZiZY ^c ?jan '%&% ]Vh Xdcig^WjiZY id increasing Churchill’s backlog to $1.6 billion. Subsequent to the acquisition, the Corporation targeted achieving cost and gZkZcjZ hncZg\^Zh aVg\Zan Vh V gZhjai d[ XdbW^c^c\ i]Z ild ejWa^X XdbeVc^Zh VcY deZgVi^dcVaan XdbW^c^c\ HijVgi Dahdc VcY 9db^c^dc id [dgb HD98A! l^i] Vc ZmeZXiVi^dc d[ VX]^Zk^c\ Xdhi hVk^c\h d[ , b^aa^dc VcY gZkZcjZ hncZg\^Zh d[ $3 million for a total of $10 million annually for 2012 and beyond. Cost synergies would result from eliminating redundant d[ÄXZh! [VX^a^i^Zh VcY hiV[[ edh^i^dch# L^i] i]Z V^Y d[ ^begdkZY hnhiZbh! egdXZhhZh VcY ^ciZgcVa Xdcigdah Vi HD98A! Churchill has revised its original expectations with regard to cost synergies and now is targeting estimated annual cost savings of $10 to $13 million. Further, Churchill expects to realize significant revenue synergies due to the ability of the aVg\Zg XdbW^cZY Zci^in! HD98A! id hZXjgZ XZgiV^c aVg\Z egd_ZXih i]Vi bVn cdi ]VkZ WZZc VlVgYZY id Z^i]Zg 9db^c^dc dg HijVgi Dahdc Vh hiVcY"VadcZ Zci^i^Zh# I]Z 8dgedgVi^dc ZmeZXih id VccdjcXZ hZkZgVa egd_ZXih d[ i]^h cVijgZ ^c i]Z Äghi ]Va[ d[ '%&&! l]^X] ldjaY YZbdchigViZ i]Vi i]Z egd_ZXiZY ( b^aa^dc ^c gZkZcjZ hncZg\^Zh ldjaY WZ ZmXZZYZY l^i]^c HD98A alone. In addition, revenue synergies within the Industrial Services segment are being pursued by producing bundled products and services offerings to customers.

The Corporation incurred some debt to complete the acquisition, but given the significant cash flow expected to be generated in future periods, the Corporation’s focus will be to pay down this debt from operating cash flow in the short-term and, further, to assess the appropriateness of instituting a dividend. As well, Churchill is exploring adding complementary lines of business through relatively small “tuck-in” acquisitions and may also consider more impactful acquisitions where the price is reasonable and there is a clear opportunity to enhance the business model and create shareholder value.

56

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General Contracting I]Z ^ciZ\gVi^dc d[ HijVgi Dahdc VcY 9db^c^dc! [dgb^c\ HD98A! ^h ZhhZci^Vaan XdbeaZiZ! ZmeVcY^c\ HD98A¼h bVg`Zi presence across the four provinces of Western Canada and capitalizing on the strengths of each company in its geographical VcY hZXidgVa bVg`Zih! l]ZgZ i]Zn lZgZ VagZVYn lZaa edh^i^dcZY# HD98A¼h &#( W^aa^dc WVX`ad\ gZbV^ch ^chi^iji^dcVaan levered, and there are many project opportunities in the pipeline. For the remainder of 2011 the institutional spending outlook in Western Canada remains strong, partly due to expected provincial government spending. The non-residential private sector spending outlook is continuing to improve as a result of generally strong commodity prices, particularly oil prices, and favourable financing and construction costs. This is expected to support continued revenue growth for HD98A! Wji bVg\^c egZhhjgZ l^aa Xdci^cjZ Vh i]Z hZ\bZci ldg`h i]gdj\] adlZg bVg\^c aZ\VXn 9db^c^dc WVX`ad\ VcY egd_ZXih hZXjgZY ^c i]Z gZXZhh^dcVgn '%%- VcY '%%. Zck^gdcbZci# HD98A ^ciZcYh id eVgi^Vaan d[[hZi i]^h bVg\^c pressure by focusing its marketing activities on large relationship-based construction management projects that will Vaadl WZiiZg bVg\^c jeh^YZ VcY ZhiVWa^h]^c\ Vc ^cYjhig^Va hZXidg egZhZcXZ [dg Wj^aY^c\ XdchigjXi^dc# 8jggZci HD98A egd_ZXih ^cXajYZ/ i]Z :Ybdcidc GZbVcY 8ZcigZ! V *'("b^aa^dc! *,!%%%"hfjVgZ"bZigZ [VX^a^in ^c :Ybdcidc! 6aWZgiV hX]ZYjaZY [dg XdbeaZi^dc d[ i]Z XVe^iVa XdchigjXi^dc e]VhZ ^c i]Z [Vaa d[ '%&'0 i]Z ;dgi Hi# ?d]c =dhe^iVa! V '.-"b^aa^dc! &*!%%%"hfjVgZ"bZigZ E( egd_ZXi ^c ;dgi Hi# ?d]c! 7g^i^h] 8dajbW^V hX]ZYjaZY [dg XdbeaZi^dc ^c i]Z heg^c\ d[ '%&'0 VcY the Winnipeg Stadium project, a $170-million, 33,000-seat football facility scheduled for completion in the fall of 2012.

Commercial Systems I]Z djiadd` [dg 8VcZb Yjg^c\ '%&& ^h edh^i^kZ# 6h l^i] <ZcZgVa 8dcigVXi^c\! 8dbbZgX^Va HnhiZbh¼ gZkZcjZ djiadd` for 2011 is expected to be strong as a result of continued institutional spending and increasing private sector spending. =dlZkZg! bVg\^ch VgZ ZmeZXiZY id WZ jcYZg Xdci^cj^c\ egZhhjgZ ^c V kZgn XdbeZi^i^kZ W^YY^c\ bVg`Zi# 8VcZb ^ciZcYh to partially offset this margin pressure by differentiating itself from the competition with building systems integration solutions to support its core operations. Canem has developed considerable expertise in sustainable buildings and energy Z[ÄX^ZcXn VcY ^c '%&% 8VcZb aVjcX]ZY ^ih HbVgi 8dccZXiZY GZVa :hiViZ Egd\gVb# DcZ egdYjXi d[ i]^h egd\gVb ^h i]Z 8VcZb 8ZcigZ [dg 7j^aY^c\ EZg[dgbVcXZ ^c G^X]bdcY! 7g^i^h] 8dajbW^V! l]^X] ^h ZmeZXiZY id deZc ^c i]Z hZXdcY quarter of 2011 as a permanent training and testing facility for integrated building systems, with the goal of encouraging building owners and developers to adopt new efficiencies and performance in buildings systems. Current projects ^cXajYZ/ :^\]i] 6kZcjZ EaVXZ ^c 8Va\Vgn! 6aWZgiV! V & W^aa^dc '("b^aa^dc ZaZXig^XVa WjY\Zi ! &,,!%%%"hfjVgZ"bZigZ d[ÄXZ"gZiV^a YZkZadebZci hX]ZYjaZY [dg XdbeaZi^dc ^c [Vaa '%&&0 i]Z :Ybdcidc GZbVcY 8ZcigZ! V *'("b^aa^dc -%" million electrical budget), 57,000-square-metre facility in Edmonton, Alberta scheduled for completion of the capital XdchigjXi^dc e]VhZ ^c i]Z [Vaa d[ '%&'0 VcY 9dX`h^YZ <gZZc! V (%%"b^aa^dc +"b^aa^dc ZaZXig^XVa WjY\Zi [dg ^c^i^Va ild phases), 121,000-square-metre, residential/office development.

2010 ANNUAL REPORT

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Industrial Services AV^gY VcY >=> Xdci^cjZY id eZg[dgb ZmXZei^dcVaan lZaa i]gdj\]dji '%&% ^c V XdbeZi^i^kZ Zck^gdcbZci# 9dlclVgY pressure on bid margins resulted from several competitors not operating at full capacity and the project mix shifting to aVg\Zg egd_ZXih l^i] adlZg bVg\^ch# =dlZkZg! l^i] ldg`"^c"]VcY VcY WVX`ad\ Vi ]^\] aZkZah! '%&% lVh V gZXdgY nZVg [dg ZVgc^c\h [dg AV^gY VcY >=># HjXXZhh [dg i]ZhZ Wjh^cZhhZh ^h Yg^kZc Wn bVcn [VXidgh! cdi aZVhi i]Z^g gZejiVi^dc [dg hV[Zin VcY fjVa^in# AV^gY VcY >=> ]VkZ kZgn higdc\ hV[Zin gZXdgYh! ZcVWa^c\ i]Zb id WZ i]Z egZ[ZggZY hjeea^Zgh dc bVcn egd_ZXih# 7di] AV^gY VcY >=> \ZcZgViZY gZXdgY gZkZcjZh ^c '%&% Wji bVg\^ch XdbegZhhZY YjZ id V X]Vc\^c\ ldg` b^m VcY V kZgn XdbeZi^i^kZ Wjh^cZhh Zck^gdcbZci# <d^c\ [dglVgY! AV^gY VcY >=> VgZ ZmeZXi^c\ gZkZcjZ \gdli] id bdYZgViZ! [daadl^c\ completion of commissioning work on oil sands mining and upgrader projects in 2010, and margins are expected to improve in the second half of 2011 with a large sustainable industrial project spend and increased major project activity.

The economic outlook for the oil sands remains strong. The players in this market are evolving to more senior exploration and development companies, foreign national oil companies and integrated oil companies. With the stable and high XdbbdY^in eg^XZh! VcY cjbZgdjh egd_ZXi gZhiVgih VcY hVcXi^dc^c\ VccdjcXZbZcih Z#\# @ZVga! ;^gZWV\! Hjcg^hZ! Hjgbdci! ?VX`Äh] '! 8]g^hi^cV AV`Z E]VhZ ' ! i]Z djiadd` ^h edh^i^kZ [dg 8]jgX]^aa¼h ^cYjhig^Va deZgVi^dch# >c VYY^i^dc! eaVccZY turnarounds are expected to continue to provide opportunities for additional work. The focus is now on securing backlog for the remainder of 2011 and execution of strategic plans to expand market share and customer base. The record revenue growth of 2010 is expected to moderate in 2011 and margins are expected to remain under pressure as competition is keen from other firms with unused capacity and the work mix continues to shift to large-volume/lower-margin projects.

7gdYV ]VY V hadl hiVgi id '%&% VcY ÄcVcX^Va gZhjaih lZgZ YVbeZcZY Wn iZcYZg^c\ YZaVnh VcY Y^[ÄXjai ldg` XdcY^i^dch associated with heavy rain in Saskatchewan in the spring and summer. Additionally, the unevenness of the economic gZXdkZgn ]Vh aZY id i]Z YZ[ZggVa d[ hZkZgVa ^cYjhig^Va deedgijc^i^Zh0 ]ZcXZ i]Z nZVg"ZcY WVX`ad\ l^i]^c 7gdYV lVh gZaVi^kZan adl Vi '.#- b^aa^dc# 7gdYV ^h XjggZcian [dXjhZY dc Wj^aY^c\ ^ih WVX`ad\ [dg i]Z gZbV^cYZg d[ '%&&! [dXjh^c\ ^ih bVg`Zi^c\ Z[[dgih dc hZkZgVa gZeZVi b^c^c\ XjhidbZgh hjX] Vh 8VbZXd VcY EdiVh] 8dgedgVi^dc! Vh lZaa Vh cZl b^c^c\ VcY bjc^X^eVa ^c[gVhigjXijgZ deedgijc^i^Zh! VcY aZkZgV\^c\ ^ih XdgedgViZ gZaVi^dch]^e l^i] >=> VcY AV^gY id [jgi]Zg ZmeVcY i]Z^g hZgk^XZ bundling efforts for industrial customers in the oil sands and related industries. Assuming a return to more normal lZVi]Zg XdcY^i^dch! 7gdYV¼h gZhjaih VgZ ZmeZXiZY id ^begdkZ h^\c^ÄXVcian ^c '%&&#

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Critical Accounting Estimates I]Z `Zn Vhhjbei^dch VcY WVh^h [dg i]Z Zhi^bViZh i]Vi bVcV\ZbZci ]Vh bVYZ jcYZg <66E! VcY i]Z^g ^beVXi dc i]Z Vbdjcih gZedgiZY ^c i]Z VccjVa 8dchda^YViZY ;^cVcX^Va HiViZbZcih VcY cdiZh i]ZgZid! VgZ XdciV^cZY ^c CdiZ & id i]Z Consolidated Financial Statements.

Churchill’s financial statements include estimates and assumptions made by management in respect of operating results, financial condition, contingencies, commitments, and related disclosures. Actual results may vary from these estimates.

The following are, in the opinion of management, the more significant estimates that have an impact on Churchill’s financial condition and results of operations: GZkZcjZ gZXd\c^i^dc VcY XdcigVXi Xdhi Zhi^bViZh0 <ddYl^aa ^beV^gbZci VhhZhhbZci0 9ZegZX^Vi^dc VcY Vbdgi^oVi^dc0 >cXdbZ iVm egdk^h^dch0 6XXdjcih gZXZ^kVWaZ XdaaZXiVW^a^in0 VcY KVajVi^dc d[ YZÄcZY WZcZÄi eZch^dc eaVch#

Revenue Recognition and Contract Cost Estimates GZkZcjZ [dg Xdhi"eajh XdcigVXih ^h gZXdgYZY Vh i]Z hZgk^XZ ^h eZg[dgbZY VcY i]Z gZaViZY ZmeZchZh VgZ ^cXjggZY# Under this method, the costs incurred and the related revenue are included in the Consolidated Statements of :Vgc^c\h! 8dbegZ]Zch^kZ :Vgc^c\h VcY GZiV^cZY :Vgc^c\h Vh i]Z ldg` egd\gZhhZh# 8dcigVXi gZkZcjZ [gdb ÄmZY"eg^XZ and unit-price contracts is recognized as revenue on a percentage-of-completion basis, measured by the ratio of either the actual cost of work or the actual hours performed to date, to the estimated total cost or estimated total hours. In making such estimates, judgments are required to evaluate contingencies such as variances in scheduling, material costs, labour Xdhih! aVWdjg egdYjXi^k^in! hjWXdcigVXidg Xdhih! X]Vc\Z dgYZgh VcY a^VW^a^in XaV^bh# GZkZcjZ gZXd\c^i^dc Zhi^bViZh bVn WZ gZfj^gZY ^c ZVX] d[ 8]jgX]^aa¼h deZgVi^c\ Wjh^cZhh hZ\bZcih! Wji ldjaY cdgbVaan WZ bdhi egZkVaZci ^c HD98A l]ZgZ a significant portion of contract revenue and contract income for the period is estimated. Changes in estimated costs to complete on fixed-price contracts may have a material impact on the realization of net earnings.

Goodwill Impairment Assessment <ddYl^aa ^beV^gbZci ^cXdgedgViZh! Vi V b^c^bjb! Vc VccjVa VhhZhhbZci d[ i]Z kVajZ d[ 8]jgX]^aa¼h \ddYl^aa Wn applying a fair value-based test to each segment of goodwill. Each fair value test may incorporate estimates such as normalized earnings, future earnings, price to earnings multiples, future cash flows, discount rate, and terminal values.

I]Z \ddYl^aa Vbdjci dc i]Z 8dchda^YViZY 7VaVcXZ H]ZZih Vh Vi 9ZXZbWZg (&! '%&% VgdhZ [gdb i]Z VXfj^h^i^dc d[ AV^gY ^c ;ZWgjVgn '%%( VcY HZVXa^[[ ^c ?jan '%&%# 6 h^\c^ÄXVci edgi^dc d[ i]Z kVajVi^dc d[ \ddYl^aa ^h gZaViZY id [jijgZ earnings, which are estimated and uncertain. Any significant reduction in these estimates could result in an impairment of goodwill.

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Depreciation and Amortization :[[ZXi^kZ ?VcjVgn &! '%&%! i]Z 8dgedgVi^dc X]Vc\ZY ^ih bZi]dY d[ YZegZX^Vi^c\ XZgiV^c XaVhhZh d[ egdeZgin VcY Zfj^ebZci from declining-balance to straight-line in order to reflect the true consumption of the asset. The effect of this change did cdi ]VkZ V bViZg^Va ^beVXi dc i]Z 8dchda^YViZY ;^cVcX^Va HiViZbZcih# GZ[Zg id CdiZ & k^ VcY CdiZ . id i]Z 8dchda^YViZY Financial Statements for further detail.

Income Tax Provisions Income tax provisions, including current and future income tax assets and liabilities, may require estimates and interpretations of federal and provincial tax rules and regulations, and judgments as to their interpretation and application to Churchill’s specific situation. Income tax provisions are estimated each quarter, updated each year-end to reflect actual differences and the impact of revenue recognition estimates, and then finalized during the preparation of the tax returns.

Any changes between the quarterly estimates, the year-end provision, and the final filing position, may impact the income tax expense category, as well as the current and future income tax asset and liability categories.

Accounts Receivable Collectability Accounts receivable collectability may require an assessment and estimation of the creditworthiness of the client, the interpretation of specific contract terms, the strength of Churchill’s security, and the timing of collection. An allowance would be provided against any amount estimated to be uncollectible, and reflected as a bad debt expense.

Valuation of Defined Benefit Pension Plans Fluctuations in the valuation of the Corporation’s defined benefit pension plans expose the Corporation to additional risk. Economic factors such as expected long-term rate-of-return on plan assets, discount rates and future salary and Wdcjh ^cXgZVhZh l^aa XVjhZ kdaVi^a^in ^c i]Z VXXgjZY WZcZÄi dWa^\Vi^dc# GZ[Zg id CdiZ & m^k id i]Z 8dchda^YViZY ;^cVcX^Va Statements for further information.

All estimates are updated each reporting period to reflect actual activity as well as incorporate all relevant information i]Vi ]Vh XdbZ id i]Z ViiZci^dc d[ bVcV\ZbZci# <^kZc i]Z cVijgZ d[ XdchigjXi^dc! l^i] cjbZgdjh XdcigVXih ^c egd\gZhh at any given time, the impact of these critical accounting estimates on the results of operations is significant. Activities or information received subsequent to the date of this MD&A may cause actual results to vary, which will be reflected in the results of subsequent reporting periods.

Financial Instruments Financial instruments consist of recorded amounts of receivables and other like amounts that will result in future cash receipts, as well as accounts payable, short-term borrowings and any other amounts that will result in future cash outlays. The fair value of Churchill’s short-term financial assets and liabilities approximates their respective carrying amounts on the balance sheets because of the short-term maturity of those instruments. The fair value of the Corporation’s interest-bearing financial liabilities, including capital leases, financed contracts, the revolving credit facility and convertible debentures, also approximates their respective carrying amounts due to the floating-rate nature of the debt. The carrying value of the convertible debentures approximates fair value due to the recent issuance of the debentures.

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The ďŹ nancial instruments used by the Corporation expose the Corporation to credit, interest rate and liquidity risks. The 8dgedgVi^dcÂźh 7dVgY d[ 9^gZXidgh ]Vh dkZgVaa gZhedch^W^a^in [dg i]Z ZhiVWa^h]bZci VcY dkZgh^\]i d[ i]Z 8dgedgVi^dcÂźh g^h` management framework and reviews corporate policies on an ongoing basis.

The Corporation is exposed to credit risk through accounts receivable. This risk is minimized by the number of customers in diverse industries and geographical centres. The Corporation further mitigates this risk by performing an assessment of its customers as part of its work procurement process, including an evaluation of ďŹ nancial capacity.

Allowances are provided for potential losses as at the balance sheet date. Accounts receivable are considered for impairment on a case-by-case basis when they are past due or when objective evidence is received that a customer will default. The Corporation takes into consideration the customerâ&#x20AC;&#x2122;s payment history, creditworthiness and the current economic environment in which the customer operates to assess impairment.

The Corporation accounts for a speciďŹ c bad debt provision when management considers that the expected recovery is less than the actual account receivable. The provision for doubtful accounts has been included in operating expenses on i]Z 8dchda^YViZY HiViZbZcih d[ :Vgc^c\h! 8dbegZ]Zch^kZ :Vgc^c\h VcY GZiV^cZY :Vgc^c\h! VcY ^h cZi d[ Vcn gZXdkZg^Zh that were provided for in a prior period. Allowance for doubtful accounts as at December 31, 2010 was $3.7 million 9ZXZbWZg (&! '%%. ¡ &#& b^aa^dc # The Corporation had $12.4 million of trade receivables which were greater than 90 days past due and not provided for as Vi 9ZXZbWZg (&! '%&% 9ZXZbWZg (&! '%%. ¡ '#* b^aa^dc # D[ i]Z idiVa! )#. b^aa^dc )% d[ i]Z .% YVnh eVhi YjZ VcY not provided for trade receivables as of December 31, 2010 were concentrated in one oil sands customer account, but $nil remains outstanding as of March 10, 2011. There were no other concentrations of credit risk by geography or customer as at December 31, 2010.

Financial risk is the risk to the Corporationâ&#x20AC;&#x2122;s earnings that arises from ďŹ&#x201A;uctuations in interest rates and the degree of volatility of these rates. The Corporation does not use derivative instruments to reduce its exposure to this risk. At December 31, 2010, the increase or decrease in annual net earnings for each 1.0% change in interest rates on ďŹ&#x201A;oating rate debt would be approximately $0.5 million.

The Corporation invests its cash with the objective of maintaining safety of principal and providing adequate liquidity to meet all current payment obligations. The Corporation invests its cash and cash equivalents with counterparties that are d[ ]^\] XgZY^i fjVa^in Vh VhhZhhZY Wn gZejiVWaZ gVi^c\ V\ZcX^Zh# <^kZc i]ZhZ ]^\] XgZY^i gVi^c\h! i]Z 8dgedgVi^dc YdZh cdi expect any counterparties to fail to meet their obligations.

Di]Zg i]Vc i]Z cZl g^h`h gZaViZY id i]Z YZĂ&#x201E;cZY WZcZĂ&#x201E;i eZch^dc eaVch! i]ZgZ ]VkZ cdi WZZc Vcn X]Vc\Zh ^c i]Z ineZ d[ g^h`h arising from ďŹ nancial instruments during the period.

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Changes in Accounting Policies The Corporation’s audited Consolidated Financial Statements for the year ended December 31, 2010 have been prepared ^c VXXdgYVcXZ l^i] 8VcVY^Vc <66E# HZZ CdiZ & id i]Z 8dchda^YViZY ;^cVcX^Va HiViZbZcih [dg i]Z nZVg ZcYZY 9ZXZbWZg 31, 2010 for more information regarding the significant accounting principles used to prepare the financial statements.

Future Changes in Accounting Standards International Financial Reporting Standards (“IFRS”) I]Z 8VcVY^Vc 6XXdjci^c\ HiVcYVgYh 7dVgY ]Vh XdcÄgbZY i]Z X]Vc\ZdkZg YViZ [dg 8VcVY^Vc ejWa^Xan VXXdjciVWaZ ZciZgeg^hZh id hiVgi jh^c\ >ciZgcVi^dcVa ;^cVcX^Va GZedgi^c\ HiVcYVgYh ¹>;GHº ! Vh ^hhjZY Wn i]Z >ciZgcVi^dcVa 6XXdjci^c\ HiVcYVgYh 7dVgY! id WZ [dg ÄhXVa nZVgh WZ\^cc^c\ dc dg V[iZg ?VcjVgn &! '%&&# >;GH jhZh V XdcXZeijVa [gVbZldg` h^b^aVg id 8VcVY^Vc <66E0 ]dlZkZg! i]ZgZ VgZ h^\c^ÄXVci Y^[[ZgZcXZh ^c gZXd\c^i^dc! bZVhjgZbZci VcY Y^hXadhjgZh# I]Z 8dgedgVi^dc YZkZadeZY V higViZ\n [dg i]Z >;GH XdckZgh^dc l]^X] ]Vh WZZc Y^hXjhhZY ^c YZiV^a ^c eg^dg fjVgiZgh# I]^h ^h V ]^\] aZkZa gZXVe d[ i]Z >;GH VXi^k^i^Zh id YViZ VcY egd\gZhh i]Vi ]Vh WZZc bVYZ Vh egZeVgVi^dch [dg 8]jgX]^aa¼h Äghi hZi d[ >;GH ÄcVcX^Va hiViZbZcih VgZ gZaZVhZY ^c F& d[ '%&&#

Overview of Progress to Date I]Z 8]jgX]^aa >;GH XdckZgh^dc higViZ\n ^cXajYZh ( e]VhZh0 E]VhZ &/ egZa^b^cVgn hXdeZ VcY Y^V\cdhi^X0 E]VhZ '/ YZiV^aZY YZh^\c VcY ZkVajVi^dc0 E]VhZ (/ ^beaZbZciVi^dc VcY ZbWZYY^c\ d[ egdXZhhZh# E]VhZ & VcY ' lZgZ Wdi] XdbeaZiZ Vi nZVg"ZcY# E]VhZ ( ^h ZmeZXiZY id WZ [jaan XdbeaZiZY ^c F& d[ '%&&# Dc 9ZXZbWZg ,! '%&% i]Z 6jY^i 8dbb^iiZZ ]VY V heZX^Va bZZi^c\ id VYYgZhh i]Z 8dgedgVi^dc¼h egd\gZhh ^c gZheZXi d[ >;GH# >c i]^h bZZi^c\! i]Z 8dbb^iiZZ gZXZ^kZY [jgi]Zg igV^c^c\ id Vhh^hi ^c i]Z^g jcYZghiVcY^c\ d[ i]Z ^beVXi d[ >;GH to the Corporation’s financial statements. To assist in the demonstration of the impact, a set of draft Q1 2011 financial statements and related notes were prepared and presented. The draft financial statements notes provided significantly more Y^hXadhjgZ VcY VcVanh^h i]Vc i]Z 8dgedgVi^dc¼h XjggZci Y^hXadhjgZ jcYZg <66E# I]ZhZ hiViZbZcih ^cXajYZY XdbeVgVi^kZ numbers, but did not include any numbers in respect of December 31, 2010 and March 31, 2011. This process allowed the Audit Committee members the chance to ask questions regarding the proposed Q1 disclosures. The Committee did not approve the opening balance sheets presented in those statements, as that approval will be granted when the Q1 2011 financial statements are complete.

In addition to reviewing the draft Q1 2011 financial statements, a summary of the changes in accounting policies were gZk^ZlZY l^i] i]Z 6jY^i 8dbb^iiZZ# 6 gZk^Zl d[ i]Z bV_dg Y^[[ZgZcXZh WZilZZc 8VcVY^Vc <66E VcY >;GH ^beVXi^c\ Churchill were reviewed in detail with the Committee.

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E]VhZ ( Vahd ^cXajYZh i]Z ^beaZbZciVi^dc d[ egdXZhhZh id ZchjgZ i]Vi >;GH ^h WZ^c\ gZÅZXiZY ^c i]Z ÄcVcX^Va hiViZbZcih# 8]jgX]^aa¼h eaVc ^h id ]VkZ >;GH egdXZhhZh ZbWZYYZY l^i]^c i]Z dg\Vc^oVi^dc i]gdj\] jhZ d[ X]ZX`a^hih VcY YZX^h^dc models to give guidance on the proper accounting. In early 2011, meetings were held with finance teams across the Corporation to ensure that they were in possession of the right tools to arrive at the correct numbers in compliance l^i] >;GH# 6h lZ egd\gZhh ^cid F& '%&& gZedgi^c\! i]Z egdXZhhZh l^aa WZ gZÄcZY ^[ lZ YZiZgb^cZ i]Vi i]Zn VgZ cdi WZ^c\ applied consistently or correctly.

E]VhZ ( l^aa WZ XdbeaZiZ l]Zc i]Z F& '%&& ÄcVcX^Va hiViZbZcih VgZ XdbeaZiZY VcY ]VkZ WZZc [dgbVaan VeegdkZY Wn i]Z Audit Committee.

In prior quarters, management has shared summaries of elections available, discussion and expected treatment of the new standards. Those details are not repeated in the current MD&A. Dollar values of impacts of the new standards became clearer as the opening balance sheet was prepared. Changes in the value of the impact or changes in the approach are discussed below.

Fair value election of deemed cost Dg^\^cVaan! i]Z 8dgedgVi^dc gZedgiZY Vc ^cXgZVhZ ^c YZZbZY Xdhi d[ XZgiV^c VhhZih WZilZZc '#% VcY '#* b^aa^dc# Management has reconsidered which assets will adopt a new deemed cost. The expectation is that only one of two properties originally considered will adopt deemed cost on transition. The new range is between $500,000 and $700,000.

Contract revenue – construction contracts IAS 11 includes criteria for determining whether construction contracts should be segmented or if multiple construction contracts should be combined. The Corporation previously reported that, in aggregate, a $3 million to $4 million gZYjXi^dc id gZiV^cZY ZVgc^c\h Vi ?VcjVgn &! '%&% lVh Vci^X^eViZY# I]Z X]Vc\Z VeeZVgh id WZ bjX] hbVaaZg i]Vc dg^\^cVaan determined due to a closer review of the adjustments made in the general contracting segment. The new range is between $700,000 and $1 million.

IFRS Impacts Due to Seacliff Acquisition I]Z bdhi h^\c^ÄXVci ^beVXi d[ i]Z HZVXa^[[ igVchVXi^dc ^h gZaViZY id >;GH (! 7jh^cZhh 8dbW^cVi^dch# IgVchVXi^dc Xdhih incurred in respect of the Seacliff acquisition are $5.6 million. These costs will no longer be capitalized after the transition date and instead will be reflected in an opening retained earnings adjustment.

AVhi fjVgiZg! bVcV\ZbZci gZedgiZY i]Vi i]Z bZi]dY d[ gZkZcjZ gZXd\c^i^dc [dg gV^alVn WVaaVhi deZgVi^dch $gdX` Xgjh]^c\ Vi 7gdYV lVh WZ^c\ ZmVb^cZY# 9jg^c\ i]Z [djgi] fjVgiZg! V YZX^h^dc lVh bVYZ i]Vi gZkZcjZ ldjaY Xdci^cjZ id WZ gZXd\c^oZY as the rock is consumed by the railway companies, as opposed to when the rock is produced.

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Risks and Uncertainties Volatile Market Conditions The volatility created by the global financial crisis damaged investor confidence in global equity markets and negatively impacted the value of publicly-traded securities of many companies. This global financial crisis also resulted in a significant decline in commodity prices including oil and natural gas. Additionally, changing fiscal, taxation, and royalty policies of various levels of government can impact the decisions of oil and gas companies to conduct business in Western Canada. These macro-economic conditions did have a significant and adverse effect on the operating conditions of the clients and industries in which the Corporation provides services, resulting in significant declines in capital expenditures Wn d^a VcY \Vh XdbeVc^Zh ^c '%%.# ;dgijcViZan! i]Z djiadd` ]Vh ^begdkZY0 ^ckZhidg XdcÄYZcXZ ^h higdc\Zg! XdbbdY^in prices are higher, the banking and financial sectors have been stabilized and a global depression may have been averted due to the coordinated actions of central bankers from around the world. While the current crisis has been dealt with, it remains possible that a future economic crisis, outside of management’s control, may yet cause instability in the financial system. Future market conditions could negatively impact the outlook, financial performance and the common share price of the Corporation.

Limited Geographic Scope of Operations Churchill’s operations are centered in, and primarily focused on, Western Canada. The majority of construction in LZhiZgc 8VcVYV! eVgi^XjaVgan ^cYjhig^Va XdchigjXi^dc! ^h Z^i]Zg Y^gZXian dg ^cY^gZXian XdccZXiZY id d^a VcY \Vh# D^a VcY \Vh pricing and activity levels are directly impacted by worldwide events such as a global recession. The Corporation monitors this information to assist in managing various mid-term aspects of its business. Significant downward movement in oil or gas commodity prices could lead clients to slow down, delay or cancel current projects or planned expansions, while significant upward movement could lead to clients seeking to accelerate their project schedule. Either movement could put pressure on the Corporation’s organizational infrastructure in the short term. Slow downs, delays or cancellations could have a material adverse impact on the Corporation’s financial condition.

Unexpected Adjustments and Cancellations in Backlog Churchill may not be able to convert its entire backlog into revenue and cannot guarantee that the revenues projected in ^ih WVX`ad\ l^aa WZ gZVa^oZY dg! ^[ gZVa^oZY! l^aa gZhjai ^c egdÄih# Egd_ZXih bVn gZbV^c ^c ^ih WVX`ad\ [dg Vc ZmiZcYZY eZg^dY of time or be cancelled. Churchill includes in its backlog binding and non-binding letters of intent, work orders and cost reimbursable contracts, which may be different than the items other issuers include or exclude in their respective backlog.

Egd_ZXi XVcXZaaVi^dch dg hXdeZ VY_jhibZcih bVn dXXjg [gdb i^bZ id i^bZ l^i] gZheZXi id XdcigVXih gZÅZXiZY ^c WVX`ad\# In respect of backlog evidenced by a non-binding letter of intent, the formal contract respecting the same may never be ÄcVa^oZY! gZhjai^c\ ^c hjX] Zc\V\ZbZci WZ^c\ iZgb^cViZY# 7VX`ad\ gZYjXi^dch XVc VYkZghZan V[[ZXi i]Z gZkZcjZ VcY egdÄi Churchill actually receives from projects reflected in its backlog.

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Weather The climate in Western Canada can generate severe weather, including heavy rain, snow and extreme winter temperatures, which could slow down or delay construction for short periods of time, impacting costs and delivery schedules.

I]^h XdjaY VYkZghZan ^beVXi gZhjaih d[ deZgVi^dch# 7gdYV¼h ZVgi]bdk^c\ Wjh^cZhh ^h eVgi^XjaVgan hZch^i^kZ id VYkZghZ weather conditions.

Competition There is strong competition relating to all aspects of the construction industry. The Corporation competes with a broad range of companies in each market, some of which are substantially larger than the Corporation. Such competition may adversely affect the Corporation’s ability to be awarded new business. Competitors that have greater financial and other resources can better bear the risk of under-pricing projects, whereas smaller competitors may have lower overhead cost structures and therefore may be able to provide their services at lower rates. The Corporation’s business may be adversely impacted to the extent that it is unable to successfully bid against these companies. The loss of existing clients to competitors or the failure to win new projects could materially and adversely affect the Corporation’s business and results of operations.

Performance Bonds Churchill’s operating companies are often required to provide performance and labour and material payment bonds as assurance against contract completion. The Corporation entered into a new co-surety arrangement with Travelers <jVgVciZZ 8dbeVcn VcY 8C6 HjgZin 8dgedgVi^dc Yjg^c\ '%&%# 6XXZhh id i]^h hjgZin [VX^a^in bVn WZ V XdbeZi^i^kZ advantage to the Corporation. If for any reason participants in the surety market are unable to satisfy the Corporation’s future bonding requirements, this could limit growth and potentially adversely affect ongoing operations. Alternatively, if there were a significant failure in the construction industry such that owners started demanding surety bonds for all contracts, Churchill’s bonding capacity might be insufficient to meet its business needs.

Corporate Guarantees and Letters of Credit In the course of business operations, the Corporation may be required to guarantee the performance pursuant to a XdcigVXi d[ dcZ dg bdgZ d[ ^ih DeZgVi^c\ 9^k^h^dch Wn lVn d[ egdk^Y^c\ \jVgVciZZh dg aZiiZgh d[ XgZY^i# >[ 8]jgX]^aa¼h capacity to issue letters of credit under its revolving credit facility and its cash on hand is insufficient to satisfy clients and hjgZin egdk^YZgh! i]Z Wjh^cZhh VcY gZhjaih d[ deZgVi^dch XdjaY WZ VYkZghZan V[[ZXiZY# AZiiZgh d[ XgZY^i VgZ ^hhjZY bV^can to provide security to third parties in the case of non-performance under a contract. Significant claims under letters of credit and/or corporate guarantees could materially and adversely affect the Corporation’s business, financial stability and operating capacity.

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Dependence on the Public Sector A significant portion of the Corporation’s revenue is derived from contracts with various governments or their agencies.

Consequently, any reduction in demand for the Corporation’s services by the public sector, whether from funding constraints or changing capital spending plans, would likely have an adverse effect on the Corporation if that business could not be replaced from within the private sector.

Client Concentration Canem does a significant amount of work with a small number of major general contractors. Consequently, the loss of, or a significant reduction in business with, one or more of these contractors, whether as a result of completion of a contract, early termination, or a failure or inability to pay amounts owed, could have a material adverse effect on Canem’s VcY XdchZfjZcian 8]jgX]^aa¼h Wjh^cZhh VcY gZhjaih d[ deZgVi^dch# H^b^aVgan! AV^gY VcY 7gdYV Vahd ZVX] ]VkZ V cVggdl concentration of clients. The loss of, or significant reduction in business with, one or more of these clients could have a bViZg^Va VYkZghZ Z[[ZXi dc AV^gY VcY 7gdYV! VcY XdchZfjZcian dc 8]jgX]^aa¼h Wjh^cZhh VcY gZhjaih d[ deZgVi^dch#

Penalties Related to Total Costs and Completion Dates A portion of Churchill’s revenue may be derived from contracts which have performance incentives and penalties depending on the total cost of a project as compared to the original estimate. Churchill could incur significant penalties based on cost overruns. In addition, the total project cost as defined by contract may include work performed by other contractors or subcontractors. As a result, Churchill could incur penalties due to work performed by others over which it has no control. Churchill may also incur penalties if projects are not completed by their specified completion date milestones.

These penalties, if incurred, could have a significant impact on Churchill’s profitability under these contracts.

Any catastrophic occurrence in excess of insurance limits at projects where Churchill’s structures are installed or services are performed could result in significant professional liability, product liability, warranty or other claims against the Corporation. Such liabilities could potentially exceed Churchill’s current insurance coverage and the fees derived from those services. A partially or completely uninsured claim, if successful and of a significant magnitude, could result in substantial losses.

Unanticipated Shutdowns A portion of Churchill’s work is generated from the development, expansion and ongoing maintenance of oil sands mining, extraction and upgrading facilities. Shutdowns of these facilities due to events outside of the Corporation’s control or the control of the Corporation’s clients, such as the cancellation of projects due to a downturn in oil and gas prices, fires, mechanical breakdowns, technology failures or pressure from environmental activists, could lead to the temporary shutdown or complete cessation of projects on which Churchill is working. These events could materially and adversely affect the Corporation’s business and results of operations.

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Failure of Clients to Obtain Required Permits and Licenses The development of construction projects requires Churchill’s clients to obtain regulatory and other permits and licenses from various governmental licensing bodies. Churchill’s clients may not be able to obtain all necessary permits and licenses required for the development of their projects, in a timely manner or at all. These delays are generally outside the Corporation’s control. The major cost associated with these delays is personnel and associated overhead that is designated for the project and that cannot be reallocated effectively to other work. If the client’s project is unable to proceed, it may adversely impact the demand for the Corporation’s services.

Labour Shortages and Material Prices EZg^dYh d[ ]^\] XdchigjXi^dc VXi^k^in XVc XgZViZ h]dgiV\Zh d[ aVWdjg VcY bViZg^Va# >c i]Z eVhi! i]Z gVe^Yan ZmeVcY^c\ bVg`Zi ^c 6aWZgiV! 7#8# VcY di]Zg _jg^hY^Xi^dch! ]Vh XgZViZY \ZcZgVa h]dgiV\Zh d[ igVYZhbZc VcY bVcV\ZbZci eZghdccZa# In 2008, the labour market softened as a result of a weaker demand for commodities, amid a global economic slowdown.

Churchill’s operating companies attempt to mitigate labour shortages through competitive remuneration, enhanced inhouse training programs and expanded recruiting, both within Canada and internationally. If Churchill is unable to recruit and retain enough employees with the appropriate skills, the Corporation may be unable to maintain its client service levels, and it may not be able to satisfy increased demand for its services. Any future labour and/or material shortage may lead to construction cost escalation which could decrease contract margins, should clients not agree to absorb these additional costs. Any increase in the price of building and construction materials could have a material adverse effect on market demand and on the Corporation’s growth and profitability.

Ability to Lease Equipment A portion of Churchill’s equipment fleet is currently leased from third parties. Further, as project demands fluctuate, Churchill may be required to lease substantial amounts of equipment to perform the work on projects it has been awarded. In addition, future projects may require Churchill to lease additional equipment. If equipment lessors are unable or unwilling to provide Churchill with the equipment it needs to perform its work, Churchill’s results of operations may be adversely affected.

Ability to Obtain Long Lead Time Equipment and Tires Churchill’s ability to grow its business is, in part, dependent upon obtaining equipment on a timely basis. Due to the long production lead times of suppliers of large earthmoving equipment during strong economic times, the Corporation may have to forecast its demand for equipment many months or even years, in advance. If the Corporation fails to forecast accurately, it could suffer equipment shortages or surpluses, which could have a material adverse impact on Churchill’s financial condition and results of operations. In strong economic times, global demand for tires of size and specifications the Corporation requires can exceed the available supply. Churchill’s inability to procure tires to meet the demands for its existing fleet as well as to meet new demand for Churchill’s services could have an adverse effect on Churchill’s ability to grow its business.

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Ability to Maintain and Repair Churchill’s Equipment Fleet The outdoor environment which Churchill’s equipment operates in is harsh and demanding, subjecting the equipment to conditions that may cause significant and long-term breakdown and failure. Due to long lead times to supply some of Churchill’s equipment parts, the limited number of trained and qualified service technicians, and the potential for multiple failures occurring at the same time, the Corporation experiences periods where equipment is non-productive and non-operable. Churchill’s financial condition and results of operations could be adversely impacted due to events of this nature.

Shortage of Client Design Capabilities Churchill’s clients may face shortages of internal and contracted engineering capability, resulting in delays in project start-ups. This may adversely impact the Corporation’s business and operating results.

Design-Build Risk HD98A dXXVh^dcVaan eVgi^X^eViZh ^c YZh^\c"Wj^aY egd_ZXih l]ZgZWn ^i VhhjbZh i]Z VYY^i^dcVa g^h` d[ YZh^\c"gZaViZY ÅVlh or failures. This risk is reduced by utilizing external consultants for the design component as well as by the purchase of appropriate insurance protection. Design remediation work could result in additional contract costs that may not be reimbursed by the client.

Public-Private Partnerships HD98A bVn eVgi^X^eViZ ^c E(h# I]ZhZ XdcigVXih bVn gZfj^gZ aZiiZgh d[ XgZY^i! eVgZciVa \jVgVciZZh! Zfj^in eVgi^X^eVi^dc dg XdciV^c a^fj^YViZY YVbV\Z XaVjhZh# A^fj^YViZY YVbV\Z XaVjhZh ^bedhZ V eZcVain [dg [V^ajgZ id bZZi egd_ZXi XdbeaZi^dc schedules, which can be impacted by many factors outside of the direct control of the general contractor.

Joint Venture Partners Churchill undertakes certain contracts with joint venture partners. The success of its joint ventures depends on the satisfactory performance of Churchill’s joint venture partners in their joint venture obligations. The Corporation may provide joint and several guarantees in connection with these joint ventures. The failure of the joint venture partners to perform their obligations could impose additional financial and performance obligations on Churchill that could result in increased costs.

Estimating Costs, Assessing Contract Risk The contract price for all projects performed by Churchill is based in part on cost estimates that are based on a number of assumptions. If, as a result of faulty estimates or unforeseen circumstances, the Corporation’s assumptions are erroneous, or if the Corporation inaccurately assesses the risks associated with a contract, or if its estimates of project costs are inaccurate, project profitability may be lower than anticipated, or a loss may be incurred.

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Accuracy of Cost to Complete Estimates DcXZ V egd_ZXi ]Vh WZ\jc! i]Z egd_ZXi bVcV\ZbZci iZVb bdc^idgh Xdhih VcY egd_ZXi ZmZXji^dc V\V^chi i]Z dg^\^cVa Xdhi Zhi^bViZh VcY XdcigVXi iZgbh# Dc Vi aZVhi V bdci]an WVh^h! Zhi^bViZh d[ i]Z Xdhih id XdbeaZiZ V XdcigVXi VgZ Xdbe^aZY by the Corporation. These estimates form an integral part of Churchill’s process for determining construction profits.

To the extent that the costs to complete estimates are based on inaccurate or incomplete information, or on faulty judgments, the accuracy of reported construction profits can be compromised. The Corporation assesses its project controls on an ongoing basis.

Reliance on Suppliers and Subcontractors The Corporation relies on third party suppliers and subcontractors. The profitable completion of some contracts depends to a large degree on the satisfactory performance of the subcontractors that complete different elements of work. If these subcontractors do not perform to accepted standards, the Corporation may be required to hire different subcontractors to complete the tasks, which may add additional costs to a contract, may impact profitability on a specific job and in certain circumstances lead to significant losses. The failure of such third party suppliers and subcontractors to execute or effectively manage their own business plans and deliver on their contractual commitments can have a material adverse effect on the Corporation’s business, operating results and financial condition.

Quality Assurance and Quality Control Churchill enters into contracts which specify the scope of the project to be constructed including quality standards. If all or portions of the work fail to meet these standards, the Corporation would be exposed to additional costs for the correction of non-compliant work.

Contractor Default Insurance HD98A ]Vh ZciZgZY ^cid Vc ^ccdkVi^kZ! nZi lZaa"iZhiZY hjWXdcigVXidg g^h` bVcV\ZbZci higViZ\n egdk^YZY Wn Zurich Canada, a leading commercial property-casualty insurance provider serving the global corporate market. Under i]^h higViZ\n! V edgi^dc d[ hjWXdcigVXidg eZg[dgbVcXZ g^h` ^h gZiV^cZY Wn HD98A! l^i] i]Z WVaVcXZ WZ^c\ igVch[ZggZY id the insurance provider. This risk management program provides more control over the subcontractor pre-qualification egdXZhh! Vc VW^a^in id bVcV\Z egd_ZXi g^h` bdgZ Z[[ZXi^kZan! VcY Xdhi Z[ÄX^ZcX^Zh [dg HD98A# 7ZXVjhZ i]^h ^h Vc ^chjgVcXZ egdYjXi! HD98A eVnh V egZb^jb id i]Z ^chjgZg [dg XdkZgV\Z# >i ^h Y^[ÄXjai id egZY^Xi l]Zi]Zg i]^h egd\gVb l^aa gZhjai ^c hVk^c\h dg ^cXgZbZciVa ZmeZchZh id HD98A#

Work Stoppages Certain of the Corporation’s businesses are subject to collective bargaining agreements with their hourly employees.

Any work stoppage resulting from a strike or lockout could have a material adverse effect on the Corporation’s business, financial condition and results of operations, including increased labour costs and service disruptions. In addition, Churchill’s clients employ workers under collective agreements. Any work stoppage or labour disruption experienced by Churchill’s clients could significantly reduce the amount of Churchill’s services they require.

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Dc BVgX] (&! '%&&! >ciZgcVi^dcVa 7gdi]Zg]ddY d[ :aZXig^XVa Ldg`Zgh aVWdjg V\gZZbZcih ^c 7g^i^h] 8dajbW^V l^aa Zme^gZ# I]Z iZgbh d[ i]Z jeXdb^c\ XdcigVXi VgZ jc`cdlc Vh cZ\di^Vi^dch ]VkZ cdi hiVgiZY# 8dchigjXi^dc AVWdjg GZaVi^dch i]Z WVg\V^c^c\ jc^i [dg i]Z ZbeadnZgh ]Vh ^cY^XViZY i]Vi i]ZgZ VgZ cd eaVch id XdbbZcXZ cZ\di^Vi^dch until late 2011/early 2012. The existing agreement will continue in force and effect until a new agreement is negotiated and ratified by the union. There can be no guarantee that contract negotiations will be concluded in a timely bVccZg# 6cn ldg` hideeV\Zh dg aVWdjg Y^hgjei^dch XdjaY bViZg^Vaan V[[ZXi i]Z ÄcVcX^Va gZhjaih [gdb 8VcZb¼h 7g^i^h] Columbia-based operations.

Dc 6eg^a (%! '%&&! Vaa d[ i]Z Wj^aY^c\ igVYZh aVWdjg V\gZZbZcih ^c 6aWZgiV VcY HVh`ViX]ZlVc l^aa Zme^gZ l]^X] V[[ZXih i]Z deZgVi^dch d[ AV^gY VcY >chjaVi^dc =daY^c\h >cX# 6aa cZl ("nZVg V\gZZbZcih VgZ Z^i]Zg ^c eaVXZ! VlV^i^c\ gVi^ÄXVi^dc dg jcYZg cZ\di^Vi^dc# I]Z 8dgedgVi^dc YdZh cdi ZmeZXi Vcn ldg` hideeV\Zh ^c '%&&# =dlZkZg! i]ZgZ XVc WZ cd guarantee that contract negotiations will be concluded in a timely manner. Work stoppages may occur if negotiations VgZ jchjXXZhh[ja! l]^X] XdjaY bViZg^Vaan V[[ZXi i]Z ÄcVcX^Va gZhjaih [gdb AV^gY VcY >chjaVi^dc =daY^c\h >cX# gZaViZY id construction projects active in Alberta.

Cost Overruns by Churchill’s Clients In the past, several of Churchill’s clients’ projects have experienced significant cost overruns, impacting their returns.

As new projects are contemplated or built, if cost overruns continue to challenge Churchill’s clients, they could reassess future projects and expansions which could adversely affect the amount of work Churchill receives.

Financial Resources Churchill’s operations, particularly its industrial operations, require a significant amount of working capital due to a large manpower workforce on projects. The Corporation’s ability to obtain additional capital is a significant factor in achieving its strategy of expansion in the construction industry. There can be no assurance that the current working capital of Churchill will be sufficient to enable it to implement all of its objectives. As well, there can be no assurance that, if, as and when Churchill seeks equity or debt financing, it will be able to obtain the required funding on favourable commercial terms, or at all. Any such future financing may also result in significant dilution to existing shareholders.

Credit Risk 8]jgX]^aa hZgkZh V WgdVY gVc\Z d[ Xa^Zcih hegZVY VXgdhh \Zd\gVe]^X VcY bVg`Zi hZXidgh# 7n bV^ciV^c^c\ i]^h Y^kZgh^in! XgZY^i risk is mitigated, as the concentration of accounts receivable is not specific to a particular client, market or geographic sector. Management performs a regular review of accounts receivable past due in order to identify clients with potential payment issues and resolves issues that might be causing a delay in collections. The maximum amount of credit risk exposure is limited to the accounts receivable balances noted in the financial statements.

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Potential for Non-Payment 7Z[dgZ h^\c^c\ Vcn XdchigjXi^dc XdcigVXi! i]Z 8dgedgVi^dc \dZh id Xdch^YZgVWaZ aZc\i]h id hVi^h[n ^ihZa[ i]Vi i]Z ediZci^Va client has adequate resources to pay as construction work is completed. During the term of the contract, Churchill may be required to utilize its working capital to fund construction costs until payments are collected from clients. If a client defaults in making its payments on a project, Churchill would generally have a right to register a lien against the project.

If the client were ultimately unable or unwilling to pay the amounts owing to the Corporation, a lien against the property ldjaY cdgbVaan egdk^YZ hdbZ hZXjg^in i]Vi 8]jgX]^aa XdjaY jai^bViZan gZVa^oZ l]Vi ^h dlZY# =dlZkZg! ^c i]ZhZ h^ijVi^dch i]Z 8dgedgVi^dc¼h VW^a^in id jai^bViZan XdaaZXi l]Vi ^i ^h dlZY ^h cZkZg VhhjgZY# EVnbZci YZ[Vjai Wn V Xa^Zci XdjaY gZhjai in a financial loss to the Corporation that could have a material adverse effect on its operating results and financial position. The Corporation’s objective is to reduce credit risk by ensuring the collection of its trade and other receivables on a timely basis. Furthermore, the concentration of credit risk is limited due to the large number of clients comprising Churchill’s revenue base.

Acquisition and Integration Risk >c i]Z eVhi! 8]jgX]^aa ]Vh \gdlc eVgian Wn VXfj^h^i^dc# I]Z 8dgedgVi^dc¼h \gdli] higViZ\n XdciZbeaViZh bdgZ VXfj^h^i^dch0 however, future acquisition opportunities may not be identified and obtainable on suitable terms. The ability to undertake future acquisitions is limited, in part, by the Corporation’s ability to access financing. If integration of new businesses does not occur as expected, their performance is less than expected, or an unforeseen liability is acquired, the Corporation’s profitability may be lower than anticipated.

Loss of Key Management; Inability to Attract and Retain Management The Corporation’s future prospects depend to a significant extent on the continued service of its key executives.

Furthermore, the Corporation’s continued growth and future success depends on its ability to identify, recruit and retain key management personnel. The competition for such employees is intense and there can be no assurance that the Corporation will be successful in identifying, recruiting or retaining such personnel.

Maintaining Safe Worksites Churchill’s success as a contractor is highly dependent on its ability to keep its construction worksites safe. Failure to do so can have serious impacts beyond the threat to personal safety of its employees and others. It can expose the Corporation to fines, regulatory sanction and even criminal prosecution. The Corporation’s safety record and worksite safety practices have a direct bearing on its ability to secure work. Management is not aware of any pending health and safety legislation or prior incidents which would be likely to have a material impact on any of the Corporation’s deZgVi^dch! XVe^iVa ZmeZcY^ijgZ gZfj^gZbZcih dg XdbeZi^i^kZ edh^i^dc# CZkZgi]ZaZhh! i]ZgZ XVc WZ cd \jVgVciZZ l^i] respect to the impact of future legislation or accidents.

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Internal Controls Churchill’s internal controls over financial reporting and its disclosure controls and procedures may not prevent all possible errors. Internal control over financial reporting and disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems objective will be met. A misstatement due to internal control issues may result in decisions being made on non-current or inaccurate financial information, fraud, or similar events or disruptions which may adversely affect Churchill’s operating results.

Interruption of Information Technology Systems Churchill is heavily dependent on computers and related communications systems to effectively run its operations.

Dc ?VcjVgn &! '%&&! 8]jgX]^aa aVjcX]ZY i]Z igVch^i^dc id V cZl H6E"WVhZY ZciZgeg^hZ gZhdjgXZ eaVcc^c\ hnhiZb# >[ i]Z Corporation is unable to maintain the integrity of Churchill’s data, train Churchill’s staff effectively in the use of the new system and hence improve the overall efficiency of Churchill’s operations, the Corporation’s processes could be Y^hgjeiZY VcY ^ih ÄcVcX^Va gZedgih bVn WZ YZaVnZY dg ^cVXXjgViZ# CVijgVa Y^hVhiZgh! XdbejiZg k^gjhZh! hZXjg^in WgZVX]Zh! and similar events or disruptions could cause computers and related communications systems failures that may adversely affect Churchill’s business and financial results.

Adoption of IFRS I]Z 8VcVY^Vc 6XXdjci^c\ HiVcYVgYh 7dVgY ^h gZfj^g^c\ i]Z VYdei^dc d[ >;GH [dg Vaa 8VcVY^Vc ejWa^X XdbeVc^Zh [dg ^ciZg^b VcY VccjVa ÄcVcX^Va hiViZbZcih gZaVi^c\ id ÄhXVa nZVgh WZ\^cc^c\ dc dg V[iZg ?VcjVgn &! '%&&# 9jg^c\ i]^h eZg^dY d[ change there may be modifications in the design and effectiveness of internal controls, as well as communications issues l^i] hiV`Z]daYZgh Vh id i]Z ^beVXi d[ >;GH VcY X]Vc\Zh ^c i]Z ÄcVcX^Va gZhjaih Vh XdbeVgZY id i]dhZ egZk^djhan gZedgiZY under Canadian generally accepted accounting principles.

Litigation Risk In the normal course of business, the Corporation is involved in various legal actions and proceedings which arise from time to time, some of which may be substantial. In view of the quantum of the amounts claimed and the insurance coverage maintained by the Corporation in respect of these matters, management of the Corporation does not believe any of the legal actions or proceedings that are presently known or anticipated by the Corporation are likely to have a bViZg^Va VYkZghZ Z[[ZXi dc i]Z 8dgedgVi^dc¼h ÄcVcX^Va edh^i^dc# =dlZkZg! i]ZgZ XVc WZ cd VhhjgVcXZ i]Vi i]Z 8dgedgVi^dc¼h insurance arrangements will be sufficient to cover any particular claim or claims that may arise in the future. Furthermore, the Corporation is subject to the risk of claims and legal actions for various commercial and contractual matters primarily arising from construction disputes, in respect of which insurance is not available.

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T H E C H U R C H I L L C O R P O R AT I O N

Compliance with Environmental Laws The Corporation is subject to numerous federal, provincial and municipal environmental laws and judicial, legislative and regulatory developments, relating to environmental protection on an ongoing basis. While the Corporation strives to keep informed of and to comply with all applicable environmental laws, circumstances may arise and incidents may occur that are beyond the Corporation’s control that could adversely affect it. Management is not aware of any pending environmental legislation that would be likely to have a material adverse impact on any of the Corporation’s operations, capital expenditure requirements or competitive position, although there can be no assurance that future legislation will not be proposed, and if implemented, may have a material adverse impact on the Corporation’s operations.

Regulations The operations of Churchill’s clients are subject to or impacted by a wide array of regulations in the jurisdictions in which they operate, such as applicable environmental laws. As a result of changes in regulations and laws relating to these industries, clients’ operations could be disrupted or curtailed by governmental authorities. The high cost of compliance with applicable regulations may cause clients to discontinue or limit their operations or may discourage companies from continuing further development activities. As a result, demand for the Corporation’s services could be substantially affected by regulations adversely impacting these industries.

Volatility of Market Trading The market price of the Common Shares may be volatile and could be subject to fluctuations in response to quarterly variations in operating results, changes in financial estimates by securities analysts, or other events or factors. In addition, the financial markets have experienced significant price and volume fluctuations that have particularly affected the market eg^XZh d[ Zfj^in hZXjg^i^Zh d[ bVcn XdbeVc^Zh egdk^Y^c\ hZgk^XZh id i]Z XdbbdY^in ^cYjhign# D[iZc i]ZhZ ÅjXijVi^dch have been unrelated to the operating performance of such companies or have resulted from the failure of the operating gZhjaih d[ hjX] XdbeVc^Zh id bZZi bVg`Zi ZmeZXiVi^dch ^c V eVgi^XjaVg fjVgiZg# 7gdVY bVg`Zi ÅjXijVi^dch! dg Vcn [V^ajgZ d[ the Corporation’s operating results in a particular quarter to meet market expectations, may adversely affect the market price of the Common Shares.

Controls and Procedures All of the controls and procedures set out below encompass all legacy Churchill companies and scope out controls for aZ\VXn HZVXa^[[ Zci^i^Zh! Vh eZgb^iiZY Wn i]Z 8VcVY^Vc HZXjg^i^Zh 6Yb^c^higVidgh¼ CVi^dcVa >chigjbZci ¹C>º *'"&%. [dg 365 days following the acquisition.

Disclosure Controls & Procedures Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered VcY gZedgiZY id hZc^dg bVcV\ZbZci! ^cXajY^c\ i]Z 8:D VcY 8;D! dc V i^bZan WVh^h! hd i]Vi Veegdeg^ViZ YZX^h^dch XVc WZ bVYZ gZ\VgY^c\ ejWa^X Y^hXadhjgZ# I]Z 8:D VcY 8;D id\Zi]Zg VgZ gZhedch^WaZ [dg ZhiVWa^h]^c\ VcY bV^ciV^c^c\ i]Z Corporation’s disclosure controls and procedures. They are assisted in this responsibility by the Disclosure Committee which is composed of senior management members of the Corporation.

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An evaluation of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures lVh XVgg^ZY dji jcYZg i]Z hjeZgk^h^dc d[ 8]jgX]^aa¼h bVcV\ZbZci! ^cXajY^c\ i]Z 8:D VcY 8;D! l^i] dkZgh^\]i Wn i]Z 7dVgY d[ 9^gZXidgh VcY ^ih 6jY^i 8dbb^iiZZ Vh d[ 9ZXZbWZg (&! '%&%# 7VhZY dc i]^h ZkVajVi^dc! i]Z 8:D VcY 8;D ]VkZ XdcXajYZY i]Vi i]Z YZh^\c VcY deZgVi^dc d[ i]Z 8dgedgVi^dc¼h Y^hXadhjgZ Xdcigdah VcY egdXZYjgZh Vh YZÄcZY ^c C> *'"&%.!

Certification of Disclosure in Issuers’ Annual and Interim Filings, were effective as at December 31, 2010.

Internal Controls over Financial Reporting Internal controls over financial reporting are designed to provide reasonable assurance regarding the reliability of ÄcVcX^Va gZedgi^c\ VcY i]Z egZeVgVi^dc d[ ÄcVcX^Va hiViZbZcih [dg ZmiZgcVa ejgedhZh ^c VXXdgYVcXZ l^i] 8VcVY^Vc <66E# 7ZXVjhZ d[ ^c]ZgZci a^b^iVi^dch ^c Vaa Xdcigda hnhiZbh! VWhdajiZ VhhjgVcXZ XVccdi WZ egdk^YZY i]Vi Vaa b^hhiViZbZcih have been detected. Management is responsible for establishing and maintaining adequate internal controls appropriate to the nature and size of the business, to provide reasonable assurance regarding the reliability of financial reporting for the Corporation.

JcYZg i]Z dkZgh^\]i d[ i]Z 7dVgY d[ 9^gZXidgh VcY ^ih 6jY^i 8dbb^iiZZ! bVcV\ZbZci l^i] i]Z eVgi^X^eVi^dc d[ i]Z 8dgedgVi^dc¼h 8:D VcY 8;D ZkVajViZY i]Z YZh^\c VcY deZgVi^dc d[ i]Z 8dgedgVi^dc¼h ^ciZgcVa Xdcigdah dkZg ÄcVcX^Va gZedgi^c\ jh^c\ i]Z Xdcigda [gVbZldg` ^hhjZY Wn i]Z 8dbb^iiZZ d[ Hedchdg^c\ Dg\Vc^oVi^dch d[ i]Z IgZVYlVn 8dbb^hh^dc dc >ciZgcVa 8dcigda · >ciZ\gViZY ;gVbZldg`# I]Z ZkVajVi^dc ^cXajYZY YdXjbZciVi^dc gZk^Zl! enquiries, testing and other procedures considered by management to be appropriate in the circumstances. As at 9ZXZbWZg (&! '%&%! i]Z 8:D VcY 8;D ]VkZ XdcXajYZY i]Vi i]Z YZh^\c VcY deZgVi^dc d[ i]Z ^ciZgcVa Xdcigdah dkZg financial reporting were effective.

Material Changes to the Internal Controls over Financial Reporting There has been no change to the Corporation’s internal controls over financial reporting that occurred during 2010 that has materially affected or is reasonably likely to materially affect the Corporation’s internal controls over financial reporting.

Terminology Throughout this MD&A, management refers to certain terms when explaining its financial results that do not have Vcn hiVcYVgY^oZY bZVc^c\ jcYZg 8VcVY^Vc <66E Vh hZi dji ^c i]Z 8>86 =VcYWdd`# HeZX^ÄXVaan! i]Z iZgbh ¹XdcigVXi ^cXdbZ bVg\^c eZgXZciV\Zº! ¹ldg`"^c"]VcYº! ¹WVX`ad\º! ¹YZaVnZY WVX`ad\º! ¹ldg`^c\ XVe^iVaº! ¹:7>I96º! ¹:7Iº VcY “book value per share” have been defined as:

Contract Income Margin Percentage Contract income margin percentage is the percentage derived by dividing contract income by contract revenue. Contract income is calculated by deducting all associated direct and indirect costs from contract revenue in the period.

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T H E C H U R C H I L L C O R P O R AT I O N

Work-In-Hand Work-in-hand is the unexecuted portion of work that has been contractually awarded for construction to the Corporation.

It includes an estimate of the revenue to be generated from maintenance contracts during the shorter of (a) 12 months, or (b) the remaining life of the contract.

Backlog 7VX`ad\ bZVch i]Z idiVa kVajZ d[ ldg` ^cXajY^c\ ldg`"^c"]VcY i]Vi ]Vh cdi nZi WZZc XdbeaZiZY i]Vi V ^h VhhZhhZY by the Corporation as having high certainty of being performed by the Corporation or its subsidiaries by either the existence of a contract or work order specifying job scope, value and timing, or (b) has been awarded to the Corporation or its subsidiaries, as evidenced by an executed binding or non-binding letter of intent or agreement, describing the general job scope, value and timing of such work, and with the finalization of a formal contract respecting such work currently assessed by the Corporation as being reasonably assured. All projects within backlog are classified as Active 7VX`ad\ jcaZhh i]Z 8dbeVcn ]Vh gZXZ^kZY lg^iiZc dg kZgWVa cdi^ÄXVi^dc [gdb i]Z Xa^Zci i]Vi V _dW$egd_ZXi$XdcigVXi ]Vh WZZc YZaVnZY! Vi l]^X] ed^ci i]Z WVX`ad\ ^h XaVhh^ÄZY Vh 9ZaVnZY 7VX`ad\# I]Z 8dgedgVi^dc egdk^YZh cd VhhjgVcXZ i]Vi additional clients will not choose to defer or cancel their projects in the future. There can be no assurance that the client l^aa gZhjbZ i]Z egd_ZXi dg i]Vi i]Z YZaVnZY WVX`ad\ l^aa cdi WZ gZ"iZcYZgZY# ?dWh dg egd_ZXih hjWhZfjZcian gZ"iZcYZgZY VcY not awarded to the Corporation or its subsidiaries would at that time be removed from the Corporation’s backlog.

As at December 31, 2010 ($millions) Work-in-hand

$ 1,222.5

Active Backlog

$

Delayed Backlog

332.5

$

Total Backlog

–

$ 1,555.0

Delayed Backlog

Total Backlog

As at December 31, 2009 ($millions) Work-in-hand

$

784.2

Active Backlog

$

504.4

$

100.0

$ 1,388.6

Working Capital Working capital is current assets less current liabilities. The calculation of working capital is provided in the table below: As at ($millions)

Current assets Less: Current liabilities Working capital

December 31, 2010

$ $

495.0 394.6 100.4

December 31, 2009

$ $

330.3 221.2 109.1

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75

EBITDA EBITDA is a common financial measure widely used by investors to facilitate an “enterprise level” valuation of an entity.

The Corporation follows the standardized definition of EBITDA. Standardized EBITDA represents an indication of the Corporation’s capacity to generate income from operations before taking into account management’s financing decisions and costs of consuming tangible and intangible capital assets, which vary according to their vintage, technological currency, and management’s estimate of their useful life. Accordingly, standardized EBITDA comprises revenues less operating cost before interest expense, capital asset amortization and impairment charges, and income taxes. This measure as reported by the Corporation may not be comparable to similar measures presented by other reporting issuers. The following is a reconciliation of net earnings to EBITDA for each of the periods presented in this MD&A in accordance with GAAP.

($millions)

Net earnings from continuing operations Add: Income tax Depreciation and amortization Interest expense EBITDA from continuing operations

Three Months Ended December 31 2010 2009

$

13.7

$

6.3 6.0 3.6 29.6

$

8.1

$

3.2 1.1 – 12.4

Twelve Months Ended December 31 2010 2009

$

43.1

$

18.5 15.2 7.5 84.3

$

33.5

$

13.2 4.4 0.2 51.3

Book Value per Share Book value per share is the value of shareholders’ equity less value of preferred stock divided by basic shares outstanding at the end of the period.

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Management’s Report I]Z VXXdbeVcn^c\ ÄcVcX^Va hiViZbZcih VcY Vaa ^c[dgbVi^dc ^c I]Z 8]jgX]^aa 8dgedgVi^dc '%&% 6ccjVa GZedgi VgZ the responsibility of management. The financial statements have been prepared in accordance with Canadian generally accepted accounting principles and include certain estimates that reflect management’s best judgment. Financial ^c[dgbVi^dc XdciV^cZY i]gdj\]dji i]Z 6ccjVa GZedgi ^h Xdch^hiZci l^i] i]Z ÄcVcX^Va hiViZbZcih# BVcV\ZbZci bV^ciV^ch Veegdeg^ViZ hnhiZbh d[ ^ciZgcVa Xdcigda# Eda^X^Zh VcY egdXZYjgZh VgZ YZh^\cZY id \^kZ gZVhdcVWaZ assurance that transactions are properly authorized, assets are safeguarded and financial records are properly maintained to provide reliable information for the preparation of financial statements.

I]Z 7dVgY d[ 9^gZXidgh ]Vh VeegdkZY i]Z ^c[dgbVi^dc XdciV^cZY ^c i]Z Xdchda^YViZY ÄcVcX^Va hiViZbZcih# I]Z 7dVgY fulfills its responsibility in this regard mainly through its Audit Committee which has thoroughly reviewed the financial statements, including the notes thereto, with management and the external auditors.

James C. Houck

Daryl E. Sands, CA

EgZh^YZci VcY 8]^Z[ :mZXji^kZ D[ÄXZg

:mZXji^kZ K^XZ EgZh^YZci ;^cVcXZ 8]^Z[ ;^cVcX^Va D[ÄXZg

March 10, 2011

2010 ANNUAL REPORT

77

Independent Auditor’s Report To the Shareholders of The Churchill Corporation We have audited the accompanying consolidated financial statements of The Churchill Corporation, which comprise the consolidated balance sheets as at December 31, 2010 and December 31, 2009, and the consolidated statements of earnings, comprehensive income, retained earnings and cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Canadian generally accepted accounting principles, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility Djg gZhedch^W^a^in ^h id ZmegZhh Vc de^c^dc dc i]ZhZ Xdchda^YViZY ÄcVcX^Va hiViZbZcih WVhZY dc djg VjY^ih# LZ XdcYjXiZY our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of The Churchill Corporation as at December 31, 2010 and December 31, 2009 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.

Deloitte & Touche LLP Chartered Accountants March 10, 2011

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T H E C H U R C H I L L C O R P O R AT I O N

Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings Year Ended December 31, 2010 2009

($ thousands, except share and per share amounts)

Contract revenue Contract costs Contract income

$ 1,175,333 1,027,028 148,305

$ 601,241 509,290 91,951

980 614 (65,581) (15,233) (7,461) 61,624

643 464 (41,736) (4,435) (240) 46,647

Net earnings from continuing operations and comprehensive income Net earnings from discontinued operations (Note 4) Net earnings and comprehensive income

(16,231) (2,310) (18,541) 43,083 1,109 44,192

(22,758) 9,590 (13,168) 33,479 1,338 34,817

Retained earnings, beginning of period Adjustment arising from shares purchased under a normal course issuer bid (Note 17) Retained earnings, end of period

$

116,279 â&#x20AC;&#x201C; 160,471

83,132 (1,670) $ 116,279

Net earnings per common share: (Note 20) Basic from continuing operations Basic from discontinued operations Basic net earnings per share

$ $ $

2.09 0.05 2.14

$ $ $

1.90 0.08 1.98

$ $ $

1.98 0.05 2.03

$ $ $

1.87 0.07 1.94

Interest income Sundry income Indirect and administrative expenses Depreciation and amortization (Note 9 and 10) Interest expense (Note 15) Earnings before income taxes Income tax (expense) recovery (Note 16) Current income tax Future income tax

Diluted from continuing operations Diluted from discontinued operations Diluted net earnings per share Weighted average common shares: Basic Diluted

20,643,343 23,191,211

17,620,454 17,935,551

The accompanying notes are an integral part of these consolidated ďŹ nancial statements

2010 ANNUAL REPORT

79

Consolidated Balance Sheets December 31, 2010

($ thousands)

ASSETS Current Assets Cash and cash equivalents (Note 6) Accounts receivable (Note 8) Inventories and prepaid expenses Costs in excess of billings Income taxes recoverable Future income tax assets (Note 16) Current portion of long-term receivable

$

Restricted cash (Note 7) Long-term receivable Future income tax assets (Note 16) Property and equipment (Note 9) Assets held-for-sale (Note 4) Intangible assets (Note 10) Goodwill (Note 11) $ LIABILITIES Current Liabilities Accounts payable and accrued liabilities Contract advances and unearned income Income taxes payable Future income tax liabilities (Note 16) Current portion of long-term debt (Note 12)

$

Long-term deferred warranty claims (Note 7) Long-term debt (Note 12) Long-term stock-based compensation liability (Note 17) Convertible debentures (Note 13) Accrued pension obligation (Note 14) Future income tax liabilities (Note 16) EQUITY Share capital (Note 17) Contributed surplus (Note 18) Convertible debentures (Note 13) Retained earnings

December 31, 2009

70,848 348,569 4,867 33,098 21,017 15,001 1,612 495,012 4,779 188 3,760 62,181 2,627 73,274 234,278 876,099

$ 184,402 116,592 949 19,013 56 7,813 1,500 330,325 2,642 1,500 399 17,063 4,778 3,395 7,315 $ 367,417

267,604 108,764 1,572 14,669 2,017 394,626 2,430 73,924 3,887 74,454 9,078 16,847 575,246

$ 137,249 71,897 11,528 – 559 221,233 2,642 229 1,727 – – 79 225,910

120,734 9,988 9,660 160,471 300,853

16,732 8,496 – 116,279 141,507

876,099

$ 367,417

Commitments, Contingencies and Guarantees (Note 22) $ The accompanying notes are an integral part of these consolidated financial statements On behalf of the Board of Directors:

Albrecht W.A. Bellstedt, QC Chairperson 80

T H E C H U R C H I L L C O R P O R AT I O N

Allister J. McPherson Director

Consolidated Statements of Cash Flow Year Ended December 31, 2010 2009

($ thousands)

OPERATING ACTIVITIES Net earnings from continuing operations and comprehensive income Depreciation and amortization (Note 9 and 10) Loss (gain) on disposal of equipment Net change in accrued pension obligation Stock-based compensation (Note 17) Non-cash component of interest expense (Note 15) Change in long-term deferred warranty claims Future income taxes

$

Change in restricted cash Change in non-cash working capital balances relating to operations (Note 24) INVESTING ACTIVITIES Acquisition, net of cash and cash equivalents acquired (Note 3) Proceeds from long-term receivable Proceeds on disposal of equipment Additions to intangible assets (Note 10) Additions to property and equipment FINANCING ACTIVITIES Proceeds of long-term debt (Note 12) Issue costs of long-term debt (Note 12) Repayment of long-term debt (Note 12) Issuance of convertible debentures (Note 13) Issue costs of convertible debentures (Note 13) Issuance of common shares (Note 17) Share issuance costs of common shares (Note 17) Share purchase under a normal course issuer bid Cash (used in) provided by continuing operations Cash provided by discontinued operations (Note 4) (Decrease) increase in cash and cash equivalents during the period Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period SUPPLEMENTAL CASH FLOW INFORMATION Cash (paid) received during the period for: Interest (Note 15) Income taxes

$

$ $

43,083 15,233 41 (335) 5,396 1,707 (212) 2,310 67,223 (2,137) (91,856) (26,770)

$

33,479 4,435 (11) – 1,991 – – (9,590) 30,304 – 48,160 78,464

(329,829) 1,798 218 (8,519) (7,608) (343,940)

– – 259 (3,395) (5,131) (8,267)

198,276 (3,342) (125,656) 86,250 (3,401) 107,307 (4,429) – 255,005 (115,705) 2,151 (113,554) 184,402 70,848

– – (7,129) – – 158 – (970) (7,941) 62,256 21,378 $ 83,634 100,768 184,402

(5,754) (40,654)

$ 384 $ (10,023)

The accompanying notes are an integral part of these consolidated financial statements

2010 ANNUAL REPORT

81

Notes to the Consolidated Financial Statements (in thousands of dollars, except share and per share amounts)

The Churchill Corporation was incorporated on August 31, 1981 in Canada under the Companies Act of Alberta and lVh Xdci^cjZY jcYZg i]Z 7jh^cZhh 8dgedgVi^dch 6Xi 6aWZgiV dc ?jan (%! &.-*# I]Z eg^cX^eVa VXi^k^i^Zh d[ I]Z 8]jgX]^aa Corporation and its subsidiaries (collectively the “Corporation”) are to provide building construction, commercial electrical contracting, industrial insulation contracting, industrial electrical and instrumentation contracting, civil construction and related services within Canada. The Corporation’s common stock is traded on the Toronto Stock Exchange under the symbol “CUQ”.

1.

Summary of Significant Accounting Policies

These consolidated financial statements are presented in Canadian dollars rounded to the nearest thousand ($000), except where otherwise indicated, and have been prepared in accordance with Canadian generally accepted accounting principles ¹<66Eº VcY gZÅZXi i]Z [daadl^c\ eg^cX^eaZh/

(i)

Principles of Consolidation The consolidated financial statements include the accounts of The Churchill Corporation and all subsidiary XdbeVc^Zh# I]Z 8dgedgVi^dc¼h hjWh^Y^Vg^Zh ^cXajYZ HijVgi Dahdc 9db^c^dc 8dchigjXi^dc AiY# ¹HD98Aº ! >chjaVi^dc =daY^c\h >cX# ¹>=>º ! AV^gY :aZXig^X >cX# ¹AV^gYº ! 8VcZb =daY^c\h AiY# ¹8VcZbº ! VcY 7gdYV 8dchigjXi^dc >cX# ¹7gdYVº # 6aa hjWh^Y^Vgn XdbeVc^Zh VgZ l]daan dlcZY VcY ^ciZgXdbeVcn WVaVcXZh ]VkZ WZZc eliminated on consolidation. The Corporation proportionately consolidates its interests in joint ventures.

(ii)

Measurement Uncertainty 8dchda^YViZY ÄcVcX^Va hiViZbZcih egZeVgZY ^c VXXdgYVcXZ l^i] <66E gZfj^gZ bVcV\ZbZci id bV`Z Zhi^bViZh and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from these estimates. Uncertainty is inherent in estimating the cost of completing construction projects, percentage of completion of fixed price and unit price contracts, the estimated useful life of property and equipment and corresponding depreciation rates, the useful life of intangible assets and corresponding amortization rates, allowances for doubtful accounts receivable, future income taxes, provision for employee future benefits, fair value of assets held-for-sale, valuation of long-term deferred warranty claims, provision for legal contingencies, valuation of stock options, valuation of components of the convertible debentures, and the fair value of goodwill and other financial instruments. The impact on the consolidated financial statements of future changes in such estimates could be material.

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T H E C H U R C H I L L C O R P O R AT I O N

(iii)

Contract Revenue and Contract Costs GZkZcjZ [dg Xdhi eajh XdcigVXih ^h gZXdgYZY Vh i]Z hZgk^XZ ^h eZg[dgbZY VcY i]Z gZaViZY ZmeZchZh VgZ ^cXjggZY# JcYZg this method, the costs incurred and the related revenue are included in the consolidated statement of earnings as the work progresses. Contract revenue from fixed price and unit price contracts is recognized on the percentage of completion basis measured by the ratio of either the actual cost of work or the actual hours performed to date, to i]Z Zhi^bViZY idiVa Xdhi dg Zhi^bViZY idiVa ]djgh# GZkZcjZ dc XdcigVXih i]Vi XVccdci WZ [dgZXVhiZY [dg XdbeaZi^dc are accounted for based on the completed contract method. The Corporation recognizes revenue on the supply of rock crushing services (“ballast”) when the material is taken by the customer and invoiced. Undelivered ballast is accounted for as costs in excess of billings on the consolidated balance sheets. Costs in excess of billings also represent revenues earned in excess of amounts billed on incomplete contracts. Contract advances and unearned income represent the excess of amounts billed over revenues earned on incomplete contracts.

Contract costs include all direct material, labour and equipment costs and indirect costs related to contract performance such as indirect labour, supplies, and tool costs. Changes in job performance, job conditions and estimated profitability, including those arising from final contract settlements, may result in revisions to costs and revenue and are recognized in the period in which such adjustments are determined.

Dc Vaa XdcigVXih l]ZgZ XjggZci Zhi^bViZh ^cY^XViZ Vc jai^bViZ adhh! i]Z [jaa Vbdjci d[ i]Z egd_ZXiZY adhh ^h recognized immediately. Construction claims are included in revenue when realization is probable and can be reliably estimated.

(iv)

Cash and Cash Equivalents Cash and cash equivalents are comprised of bank balances and short-term investments with original terms to maturity of three months or less.

(v)

Inventories Inventories are recorded at the lower of cost and net realizable value.

(vi)

Property and Equipment EgdeZgin VcY Zfj^ebZci VgZ gZXdgYZY Vi dg^\^cVa Xdhi VcY YZegZX^ViZY jh^c\ i]Z higV^\]i"a^cZ bZi]dY dkZg i]Z^g estimated useful lives as described below. Depreciation is not taken on assets under construction until the asset is placed into use. During the year, the Corporation revised its useful lives of buildings and improvements, construction and automotive equipment, office furniture and computer hardware. The estimated impact of this change for the year ended December 31, 2010 is a $350 increase in depreciation expense.

Asset

Land improvements Buildings and improvements Leasehold improvements Construction and automotive equipment Office furniture and equipment Computer hardware and software

Basis

Rate

Straight-line Straight-line Straight-line Straight-line Straight-line Straight-line

30 years 10 – 25 years Lesser of estimated useful life or lease term 5 – 20 years 3 – 5 years 1 – 3 years

2010 ANNUAL REPORT

83

(vii) Accounting for Impairment of Long-Lived Assets The Corporation tests for the impairment of long-lived assets held for use through a two-step process, with the first step determining when an impairment has occurred and the second step measuring the amount of the impairment. An impairment loss is recognized when the carrying amount of a long-lived asset exceeds the fair value. The amount of the impairment is measured as the excess of the carrying amount of the long-lived asset over the fair value.

(viii) Intangible Assets >ciVc\^WaZ VhhZih Xdch^hi d[ :ciZgeg^hZ GZhdjgXZ EaVcc^c\ ¹:GEº VhhZih VcY Äc^iZ a^[Z ^ciVc\^WaZ VhhZih Xdch^hi^c\ d[ WVX`ad\ VcY V\ZcXn! XdcigVXih! XjhidbZg gZaVi^dch]^eh! VcY igVYZcVbZh CdiZ ( # I]Z :GE VhhZih VgZ bZVhjgZY at cost and are amortized using a straight-line basis over the useful life of 10 years, which became available for use ^c 9ZXZbWZg '%&%# 7VX`ad\ VcY V\ZcXn ^ciVc\^WaZh VgZ Vbdgi^oZY WVhZY dc bVcV\ZbZci¼h ZmeZXiVi^dc d[ l]Zc i]Z related revenues will be earned over the next 2 to 3 years. The contracts, customer relationships and tradenames are all straight-line amortized over 5 to 15 years.

(ix)

Goodwill <ddYl^aa ^h i]Z gZh^YjVa Vbdjci i]Vi gZhjaih l]Zc i]Z ejgX]VhZ eg^XZ d[ Vc VXfj^gZY Wjh^cZhh ZmXZZYh i]Z hjb of the amounts allocated to the identifiable assets acquired, less liabilities assumed, based on their fair values. <ddYl^aa ^h VaadXViZY Vh d[ i]Z YViZ d[ i]Z Wjh^cZhh XdbW^cVi^dc# <ddYl^aa ^h cdi Vbdgi^oZY VcY ^h iZhiZY [dg impairment annually in the fourth quarter, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test is carried out in two steps. In the first step, the carrying amount of the reporting unit is compared with its fair value, which is measured using the income approach. When the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not to be impaired and the second step of the impairment test is unnecessary. The second step is carried out when the carrying amount of a reporting unit exceeds its fair value, in which case the implied fair value of the reporting unit’s goodwill is compared with its carrying amount to measure the amount of the impairment loss, if any. When the carrying amount of goodwill exceeds the implied fair value, an impairment loss is recognized in an amount equal to the excess.

(x)

Income Taxes The Corporation uses the asset and liability method of accounting for future income taxes. Under this method, future income tax assets and future income tax liabilities are recorded based on temporary differences between the carrying amount of balance sheet items and their corresponding tax bases. In addition, the future benefits of income tax assets, including unused tax losses, are recognized, subject to a valuation allowance, to the extent it is more likely than not such future benefits will ultimately be realized. Future income tax assets and liabilities are measured using substantively enacted tax rates and laws expected to apply when the tax liabilities or assets are to be either settled or realized.

84

T H E C H U R C H I L L C O R P O R AT I O N

xi)

Stock-Based Compensation Plans The Corporation utilizes a fair value based method of accounting for stock options. Under this method, the estimated fair value of the stock options granted is recognized over the applicable vesting period as a charge to stock-based compensation expense and a credit to contributed surplus. When these options are exercised, the proceeds received and the related amounts of contributed surplus are credited to share capital. For options that are forfeited before vesting, the compensation expense that has previously been recognized in indirect and administrative expenses and contributed surplus is reversed.

Di]Zg hidX`"WVhZY XdbeZchVi^dc eaVch VgZ VXXdjciZY [dg Vh a^VW^a^in VlVgYh# I]ZhZ ^cXajYZ EZg[dgbVcXZ H]VgZ Jc^ih ยนEHJhยบ VcY 9Z[ZggZY H]VgZ Jc^ih ยน9HJhยบ # I]Z a^VW^a^i^Zh [dg i]ZhZ eaVch VgZ XVaXjaViZY WVhZY dc i]Z cjbWZg of award units outstanding at the end of the reporting period. Each unit is equivalent in value to the fair market kVajZ d[ V Xdbbdc h]VgZ d[ i]Z 8dgedgVi^dc# I]Z a^VW^a^i^Zh [dg i]Z EHJh VgZ VXXgjZY VcY ZmeZchZY dc V higV^\]i" line basis over the vesting period. DSUs generally vest immediately and are recorded upon grant. Any ๏ฌ uctuation in the common share price changes the value of the units, which affects the stock-based compensation expense.

Jedc hZiiaZbZci d[ i]Z EHJh VcY 9HJh! XVh] eVnbZcih VgZ bVYZ id i]Z ]daYZgh l^i] V XdggZhedcY^c\ gZYjXi^dc ^c i]Z hidX`"WVhZY XdbeZchVi^dc a^VW^a^in# EHJh VgZ hZiiaZY l^i]^c .% YVnh d[ i]Z kZhi^c\ eZg^dY VcY 9HJh VgZ cdi hZiiaZY jci^a iZgb^cVi^dc! YZVi] dg gZi^gZbZci# ;dg jckZhiZY EHJh i]Vi VgZ [dg[Z^iZY! i]Z a^VW^a^in ^h gZYjXZY VcY i]Z stock-based compensation expense that has previously been recognized in indirect and administrative expenses is reversed.

(xii) Business Combinations The Corporation accounts for its business combinations using the purchase method of accounting. Under this method, the Corporation allocates the purchase price to tangible and intangible assets acquired and liabilities assumed based on estimated fair value, at the date of acquisition, with the excess of the purchase price amount allocated to goodwill.

(xiii) Earnings per Share 7Vh^X ZVgc^c\h eZg h]VgZ VgZ XdbejiZY Wn Y^k^Y^c\ cZi ZVgc^c\h Wn i]Z lZ^\]iZY VkZgV\Z cjbWZg d[ Xdbbdc h]VgZh outstanding during each reporting period. The dilutive effect of stock options and convertible debentures are determined using the treasury stock method.

(xiv) Employee Future Bene๏ฌ ts I]Z 8dgedgVi^dc VcY ^ih hjWh^Y^Vg^Zh bV^ciV^c YZร cZY WZcZร i eaVch ยน97ยบ ! YZร cZY Xdcig^Wji^dc eaVch ยน98ยบ !

V GZ\^hiZgZY GZi^gZbZci HVk^c\h EaVc ยนGGHEยบ VcY Vc :beadnZZ H]VgZ EjgX]VhZ EaVc ยน:HEEยบ l^i] XZgiV^c d[ ^ih ZbeadnZZh# I]Z 8dgedgVi^dc Xdcig^WjiZh id i]Z GGHE VcY :HEE eaVch WVhZY dc i]Z Vbdjci d[ ZbeadnZZ contributions. The Corporation accounts for contributions as an expense in the period that they are made. The GGHE eZgb^ih ZbeadnZZh id kdajciVg^an Xdcig^WjiZ je id * d[ i]Z^g \gdhh WVhZ hVaVgn# I]Z 8dgedgVi^dc bViX]Zh all contributions made by the employees. The combined contributions are invested by the individual employees, Vi i]Z^g Y^hXgZi^dc! ^c Vcn d[ hZkZgVa bjijVa [jcYh d[[ZgZY Wn i]Z eaVc# I]Z :HEE eZgb^ih ZbeadnZZh id kdajciVg^an contribute up to 10% of their gross base salary. The Corporation matches all contributions by the employees up to a maximum of 5% of the gross base salary. The combined contributions are invested by the plan in common shares of the Corporation purchased on the retail market.

2010 ANNUAL REPORT

85

L^i] i]Z VXfj^h^i^dc d[ HZVXa^[[ dc ?jan &(! '%&% CdiZ ( ! i]Z 8dgedgVi^dc ^c]Zg^iZY i]Z aZ\VXn HZVXa^[[ eZch^dc plans of two of its subsidiaries: Dominion Company Inc. (“Dominion”) and Canem. These plans are comprised d[ ild cdc"Xdcig^Wjidgn 97 eZch^dc eaVch i]Vi XdkZg hVaVg^ZY ZbeadnZZh l]d Y^Y cdi XdckZgi id HZVXa^[[¼h ild 98 eZch^dc eaVch! l]^X] XVbZ ^cid Z[[ZXi ^c '%%*# DcXZ i]Z 98 eZch^dc eaVch WZ\Vc! cZl bZbWZgh lZgZ cd adc\Zg VXXZeiZY ^cid i]Z 97 eZch^dc eaVch# Jedc VXfj^h^i^dc! i]Z 8dgedgVi^dc ]VaiZY cZl bZbWZgh]^e id i]Z 98 eZch^dc eaVc ^c 9db^c^dc0 ]dlZkZg! i]Z 98 eZch^dc eaVc ^c 8VcZb Xdci^cjZh id VXXZei i]Z ZcigVcXZ d[ cZl employees. In Canem’s DC pension plan, employees are automatically enrolled following completion of one year of service for employees hired after April 4, 2004.

I]Z 97 eZch^dc eaVch ^c Wdi] 9db^c^dc VcY 8VcZb ]VkZ V ÅZm^"WZcZÄi l]ZgZWn VXi^kZ bZbWZgh bVn bV`Z ÅZm^" contributions, which must be used to provide benefit enhancements at retirement, termination, or death. Current hZgk^XZ Xdhih VgZ ZmeZchZY ^c i]Z nZVg# I]Z Xdhi d[ i]Z 97 eaVch VgZ VXijVg^Vaan YZiZgb^cZY jh^c\ i]Z egd_ZXiZY benefit method prorated on services and using management’s estimates of expected return on plan assets, which are based on market-related value, rates of compensation increase and retirement ages of employees. Future salaries and cost escalation are considered in the benefit. For the purposes of calculating the expected return on plan assets, the plan assets are valued at fair value. Adjustments arising from plan amendments, changes in assumptions, experience gains and losses and the difference between the actuarial present value of accrued benefits and the market value of the pension fund assets are amortized over the expected average remaining service life of the employee group. Cumulative actuarial gains or losses in excess of 10% of the greater of the accrued benefit obligation and the fair value of the plan assets are deferred and amortized over the expected average remaining service life of the plan participants.

The DC pension plans are registered pension plans regulated by provincial pension legislation and are also noncontributory plans. Current service costs are expensed as incurred based on a contribution schedule where employee age, length of continuous service and pensionable earnings determine the contribution. The plan assets are held by a third party custodian who invests the contributions on behalf of the participating employees. The DC pension plans cover salaried employees and provide participants with an annual contribution of 3% to 7% of annual base salary based on a participant’s age and service.

(xv) Share Capital The Corporation records proceeds from share issuances net of share issuance costs.

(xvi) Convertible Debentures The Corporation’s convertible debentures are segregated into their debt and equity components at the date of issue. The debt component of the debentures is classified as a liability, and recorded as the present value of the Corporation’s obligation to settle the redemption value of the instrument. The carrying value of the debt component is accreted to the original face value of the instrument, over the term of the convertible debt instrument, using the effective interest method. The value of the conversion option makes up the equity component of an instrument and is recorded using the residual value approach. Upon conversion, any gain or loss arising from the extinguishment of the debt is recorded in operations of the current period.

86

T H E C H U R C H I L L C O R P O R AT I O N

(xvii) Financial Instruments Financial assets and financial liabilities are initially recognized at fair value and are subsequently accounted for based on their classification as described below. The classification depends on the purpose for which the financial instruments were acquired and their characteristics. Except in very limited circumstances, the classification is not changed subsequent to initial recognition. Transaction costs related to held-for-trading financial assets are expensed as incurred. Transaction costs related to available-for-sale financial assets, held-to-maturity financial assets, other liabilities and loans and receivables are added to the carrying value of the asset or netted against the liability and are recognized over the expected life of the instrument using the effective interest method.

Held-for-Trading Financial assets and financial liabilities that are purchased and incurred with the intention of generating profits in the near term are classified as held-for-trading. These instruments are accounted for at fair value with the change in the fair value recognized in indirect and administrative expenses.

Available-for-Sale Financial assets classified as available-for-sale are carried at fair value with the changes in fair value recorded in other comprehensive income. The fair value of a financial instrument on initial recognition is normally the transaction price. Subsequent to initial recognition, fair values for financial assets are determined by bid prices quoted in active markets. Securities that are classified as available-for-sale and do not have a readily available market value are recorded at cost. Available-for-sale securities are written down to fair value through income whenever it is cZXZhhVgn id gZÅZXi di]Zg"i]Vc"iZbedgVgn ^beV^gbZci# <V^ch VcY adhhZh gZVa^oZY dc Y^hedhVa d[ VkV^aVWaZ"[dg"hVaZ securities, which are calculated on an average cost basis, are recognized in sundry income.

Held-to-Maturity Securities that have a fixed maturity date, where the Corporation intends and has the ability to hold to maturity, are classified as held-to-maturity and accounted for at amortized cost using the effective interest rate method.

Loans, Receivables and Other Liabilities AdVch! gZXZ^kVWaZh VcY di]Zg a^VW^a^i^Zh VgZ VXXdjciZY [dg Vi Vbdgi^oZY Xdhi jh^c\ i]Z Z[[ZXi^kZ ^ciZgZhi gViZ method.

2010 ANNUAL REPORT

87

The Corporation has the following financial assets and liabilities:

Financial assets Cash and cash equivalents Accounts receivable Restricted cash Long-term receivable Financial liabilities Accounts payable and accrued liabilities Long-term deferred warranty claims Long-term debt Convertible debentures

Classification

Measurement

Available for sale Loans and receivables Available for sale Loans and receivables

Fair value Amortized cost Fair value Amortized cost

Other liabilities Other liabilities Other liabilities Other liabilities

Amortized cost Amortized cost Amortized cost Amortized cost

(xviii) Accumulated Other Comprehensive Income and Retained Earnings The Corporation applies the standards for reporting and displaying other comprehensive income, defined as gZkZcjZ! ZmeZchZh! VcY \V^ch VcY adhhZh l]^X]! ^c VXXdgYVcXZ l^i] eg^bVgn hdjgXZh d[ <66E! VgZ gZXd\c^oZY ^c comprehensive income but excluded from net earnings. The application of these standards did not have any impact on the Corporation’s financial statement presentation during the years ended December 31, 2010 or 2009 as the Corporation has no other comprehensive income components.

The Corporation has also applied the standards for the presentation of equity and changes in equity during the reporting period. The requirements in this section are in addition to those of comprehensive income and recommend that an enterprise present separately the following components of equity: retained earnings, accumulated other comprehensive income, the total of retained earnings and accumulated other comprehensive income, contributed surplus, share capital, and reserves. The Corporation has elected to present a combined consolidated statement of earnings, comprehensive income and retained earnings.

(xix) Long-Term Deferred Warranty Claims The Corporation maintains Subcontractor Default Insurance, which was created to provide general contractors with more comprehensive coverage in respect of subcontractor default. The liabilities on the consolidated balance sheets relate to management’s best estimate of exposures and costs associated with prior or existing subcontractor performance, and the risk of potential default. Management conducts a thorough review of the liability every quarter and takes into consideration the Corporation’s experience to date with those subcontractors that are enrolled in the program, and changes to factors that tend to affect the construction sector.

2.

Future Changes in Accounting Standards International Financial Reporting Standards (“IFRS”) ;^ghi"i^bZ VYdei^dc d[ EVgi > · >ciZgcVi^dcVa ;^cVcX^Va GZedgi^c\ HiVcYVgYh ¹EVgi >º d[ i]Z 8VcVY^Vc >chi^ijiZ d[ 8]VgiZgZY 6XXdjciVcih ¹8>86º =VcYWdd` ^h bVcYVidgn [dg 8VcVY^Vc ejWa^Xan VXXdjciVWaZ ZciZgeg^hZh Vh d[ ?VcjVgn &! '%&&# 6XXdgY^c\an! i]Z Z[[ZXi^kZ igVch^i^dc YViZ [dg i]Z 8dgedgVi^dc ^h ?VcjVgn &! '%&%! l^i] i]Z Äghi

88

T H E C H U R C H I L L C O R P O R AT I O N

gZedgi^c\ eZg^dY jcYZg >;GH WZ^c\ i]Z i]gZZ bdci]h ZcYZY BVgX] (&! '%&&! ^cXajY^c\ gZhiViZbZci d[ XdbeVgVi^kZ eZg^dYh# >;GH jhZh V XdcXZeijVa [gVbZldg` h^b^aVg id 8VcVY^Vc <66E0 ]dlZkZg! i]ZgZ VgZ h^\c^Ă&#x201E;XVci Y^[[ZgZcXZh in recognition, measurement and disclosures.

3.

Acquisition of Seacliff Construction Corp.

Dc ?jan &(! '%&%! i]Z 8dgedgVi^dc XdbeaZiZY i]Z VXfj^h^i^dc d[ &%% d[ i]Z ^hhjZY VcY djihiVcY^c\ h]VgZh d[ HZVXa^[[! ejghjVci id Vc VggVc\ZbZci jcYZg i]Z 7jh^cZhh 8dgedgVi^dch 6Xi 7g^i^h] 8dajbW^V # JcYZg i]Z iZgbh d[ i]Z VggVc\ZbZci! Seacliff shareholders received $17.14 in cash for each Seacliff common share, resulting in total cash consideration of $381,833.

Seacliff was a diversiďŹ ed construction company providing general contracting construction, electrical contracting and earthmoving services to a wide array of clients in both the public and private sectors. Seacliff operated through three deZgVi^c\ jc^ih/ ^ 9db^c^dc ^^ 8VcZb VcY ^^^ 7gdYV# 9db^c^dc d[[Zgh Y^kZgh^Ă&#x201E;ZY \ZcZgVa XdcigVXi^c\! XdchigjXi^dc management and design-build services in Western Canada, primarily to institutional, commercial and light industrial clients. Canem provides a broad range of electrical contracting services including designing, building, maintaining and servicing electrical and data communication systems for institutional, commercial, light industrial and multi-family gZh^YZci^Va XjhidbZgh# 7gdYV egdk^YZh ]ZVkn XdchigjXi^dc VcY heZX^Va^oZh ^c V\\gZ\ViZ egdXZhh^c\! ZVgi] ldg`! X^k^a construction and concrete production.

The acquisition was accounted for using the purchase method and the results of the operations are included from the date of the acquisition. The total purchase price of the acquisition was $387,386, including the assumption of Seacliffâ&#x20AC;&#x2122;s indebtedness. Details of the acquisition are as follows: Net assets acquired, at fair value Cash and cash equivalents Accounts receivable Costs in excess of billings Inventories and prepaid expenses Long-term receivables Property and equipment Intangible assets (Note 10) Goodwill (Note 11) Less: Accrued pension obligation (Note 14) Accounts payable and accrued liabilities Income taxes payable Contract advances and unearned income Long-term debt Future income tax liabilities

Purchase price Cash consideration Transaction fees

$

57,557 123,256 17,525 24,340 598 44,152 70,210 226,963 564,601

9,413 107,077 6,772 28,817 5,318 19,818 $ 387,386

$ 381,833 5,553 $ 387,386 2010 ANNUAL REPORT

89

7VhZY jedc i]Z kVajVi^dch Y^hXadhZY VWdkZ! \ddYl^aa gZXd\c^oZY dc i]Z VXfj^h^i^dc VbdjciZY id ''+!.+(! l]^X] ^h cdi ZmeZXiZY id WZ YZYjXi^WaZ [dg iVm ejgedhZh# I]Z ejgX]VhZ eg^XZ VaadXVi^dc ¹EE6º lVh ÄcVa^oZY Vi 9ZXZbWZg (&! '%&% V[iZg XZgiV^c VY_jhibZcih lZgZ gZXdgYZY# I]Z h^\c^ÄXVci X]Vc\Zh ^c i]Z EE6! Vh XdbeVgZY id i]Z i]^gY fjVgiZg! gZaViZ primarily to the completion of all construction project status assessments, which identified increases in the estimated costs to complete for various projects. These changes result in a decrease in revenue recognized and the immediate recognition of losses on certain projects totalling a $3,185 reduction of net assets. In addition, the value assigned to intangible assets decreased by $3,600 due to the increase in estimated costs on various projects in progress and an additional $4,030 receivable was booked. These adjustments resulted in an offsetting reduction in the future tax liability of $2,721.

Eg^dg id i]Z XdbeaZi^dc d[ i]Z VXfj^h^i^dc! i]Z 8dgedgVi^dc gZeaVXZY i]Z Zfj^in Wg^Y\Z [VX^a^in l^i] V '%%!%%%! ("nZVg hZc^dg hZXjgZY gZkdak^c\ XgZY^i [VX^a^in l^i] V hncY^XViZ d[ X]VgiZgZY WVc`h CdiZ &' # I]Z gZbV^cYZg d[ i]Z ÄcVcX^c\ [dg i]Z VXfj^h^i^dc lVh dWiV^cZY i]gdj\] V egdheZXijh ÄaZY dc ?jcZ -! '%&%! l]^X] ^cXajYZY Vc Zfj^in ÄcVcX^c\ d[ +!%%%!%%% subscription receipts for gross proceeds of $100,500, and an aggregate of $75,000 principal amount of 6% convertible ZmiZcY^WaZ jchZXjgZY hjWdgY^cViZY YZWZcijgZh# Dc ?jcZ &*! '%&%! i]Z Zfj^in VcY YZWZcijgZ ÄcVcX^c\ XadhZY VcY Vc additional $11,250 of convertible debentures were issued pursuant to the exercise of the underwriters’ over-allotment dei^dc CdiZ &( # Dc ?jan -! '%&%! i]Z jcYZglg^iZgh XdbeaZiZY V eVgi^Va ZmZgX^hZ d[ i]Z^g dkZg"VaadibZci dei^dc dc i]Z subscription receipts for 324,500 additional subscription receipts. Concurrent with the closing of the acquisition, the subscription receipts were automatically exchanged on a one-to-one basis for common shares of the Corporation for a idiVa d[ +!(')!*%% h]VgZh VcY idiVa \gdhh egdXZZYh d[ &%*!.(* CdiZ &, #

4.

Assets Held-For-Sale and Discontinued Operations

Assets held-for-sale include agricultural lands and a commercial building. Commencing on the date of disposition of August 12, 2009, the results of operations attributable to these assets and liabilities are reported as discontinued operations for the years ended December 31, 2010 and 2009. The related operations and cash flows have been eliminated from the ongoing operations of the Corporation.

9jg^c\ i]Z nZVg! i]Z 8dgedgVi^dc hdaY i]Z aVcY! Zfj^ebZci VcY Wj^aY^c\h d[ i]Z 7dccnk^aaZ egdeZgin! l]^X] lVh ^cXajYZY in assets held-for-sale at December 31, 2009. The Corporation received cash proceeds on the sale of $2,195 with a net book value of $407, resulting in a gain of $1,788. In addition, the Corporation recorded a gain on settlement of liabilities of $1,269 that were recorded in accounts payable at December 31, 2009.

90

T H E C H U R C H I L L C O R P O R AT I O N

The following table presents summary balance sheets, statements of earnings and statements of cash flows of the discontinued operations included in the consolidated financial statements: Statements of Earnings 2010

Revenue Contract income Gain on sale Expenses Future tax (expense) recovery Current tax recovery Net earnings from discontinued operations

$

$

– – 3,057 (800) (1,739) 591 1,109

2009

$

$

27,954 1,308 4,965 (6,452) 1,517 – 1,338

Balance Sheets 2010

Property and equipment Future income tax assets Assets held-for-sale

$ $

2,279 348 2,627

2009

$ $

2,691 2,087 4,778

Statements of Cash Flows 2010

Operating activities Financing activities Investing activities Cash provided by discontinued operations

5.

$

$

(44) – 2,195 2,151

2009

$

$

6,897 1,235 13,246 21,378

Joint Ventures

The Corporation and its subsidiaries are partners in incorporated and unincorporated joint ventures. These consolidated financial statements include the proportionate share of assets, liabilities, revenue, expenses, net income and cash flow of these joint ventures as follows: 2010

Current and total assets Current and total liabilities Contract revenue Contract costs and expenses Net earnings Cash flow provided by operating activities

$

37,272 30,635 53,496 49,423 4,073 3,347

2009

$

18,363 17,836 10,609 9,189 1,419 15,154

2010 ANNUAL REPORT

91

6.

Cash and Cash Equivalents

>cXajYZY ^c i]Z XVh] VcY XVh] Zfj^kVaZcih WVaVcXZ ^h '&!-,. 9ZXZbWZg (&! '%%. · &*!*%' ]ZaY ^c _d^ci kZcijgZ WVc` accounts. Cash and cash equivalents are comprised of:

Cash Short-term investments

$ $

7.

2010

2009

70,848 – 70,848

$ 153,317 31,085 $ 184,402

Restricted Cash and Long-Term Deferred Warranty Claims

GZhig^XiZY XVh] gZaViZh id i]Z \ZcZgVa XdcigVXi^c\ hZ\bZci¼h HjW\jVgY Egd\gVb gZegZhZci^c\ Vc V\gZZbZci l^i] Zurich Insurance Company (“Zurich”) that establishes a pre-funded deductible/co-pay insurance program. The [jcYh egdk^YZY id Ojg^X] Vh Vi 9ZXZbWZg (&! '%&% VbdjciZY id )!,,. 9ZXZbWZg (&! '%%. · '!+)' VcY VgZ presented as restricted cash on the consolidated balance sheets. The long-term deferred warranty claims of '!)(% 9ZXZbWZg (&! '%%. · '!+)' gZegZhZci i]Z Zhi^bViZY Xdhih VhhdX^ViZY l^i] egd_ZXi VcY hjWXdcigVXidg heZX^ÄX risks and exposure of the deductible amounts established with Zurich.

8.

Accounts Receivable

Accounts receivable are comprised of: 2010

Trade receivables (Note 21) Construction holdbacks, due within one business cycle Other receivables

$

231,117 106,080 11,372 348,569

$

2009

$

53,440 57,270 5,882 $ 116,592

Di]Zg gZXZ^kVWaZh Xdch^hih d[ Vc VaadlVcXZ [dg YdjWi[ja VXXdjcih CdiZ '& ! _d^ci kZcijgZ gZXZ^kVWaZh CdiZ * ! VcY <HI gZXZ^kVWaZh#

9.

Property and Equipment

December 31, 2010

Land and improvements Buildings and improvements Leasehold improvements Construction and automotive equipment Office furniture and equipment Computer hardware and software Assets under construction

92

T H E C H U R C H I L L C O R P O R AT I O N

Cost

$

709 3,798 9,656 73,281 3,858 12,259 353 $ 103,914

Accumulated Depreciation

$

$

24 2,711 3,729 23,145 2,490 9,634 – 41,733

Net Book Value

$

$

685 1,087 5,927 50,136 1,368 2,625 353 62,181

December 31, 2009

Land and improvements Buildings and improvements Leasehold improvements Construction and automotive equipment Office furniture and equipment Computer hardware and software Assets under construction

Accumulated Depreciation

Cost

$

$

709 1,921 5,655 16,123 1,737 5,734 413 32,292

$

$

24 1,475 1,249 7,228 837 4,416 – 15,229

Net Book Value

$

$

685 446 4,406 8,895 900 1,318 413 17,063

>cXajYZY ^c XdchigjXi^dc VcY Vjidbdi^kZ Zfj^ebZci ^h &+!%+' '%%. · )!',' d[ VhhZih gZaVi^c\ id XVe^iVa aZVhZh VcY ÄcVcXZ XdcigVXih VcY )!%') '%%. · (!'', d[ VXXjbjaViZY YZegZX^Vi^dc [dg V cZi Wdd` kVajZ d[ &'!%(- '%%. · $1,045). The majority of the increase over the prior year is related to new assets under capital lease acquired from Seacliff CdiZ ( # >cXajYZY ^c YZegZX^Vi^dc VcY Vbdgi^oVi^dc dc i]Z Xdchda^YViZY hiViZbZcih d[ ZVgc^c\h ^h +!(-( d[ YZegZX^Vi^dc gZaViZY id egdeZgin VcY Zfj^ebZci 9ZXZbWZg (&! '%%. · )!)(* #

10. Intangible Assets Intangible assets December 31, 2010

Enterprise Resource Planning assets Backlog and agency Contracts, customer relationships and tradenames

Accumulated Amortization

Cost

$

$

11,914 19,700 50,510 82,124

$

$

Intangible assets December 31, 2009

Enterprise Resource Planning assets Backlog and agency Contracts, customer relationships and tradenames

$

$

$

Accumulated Amortization

Cost

$

36 6,083 2,731 8,850

Net Book Value

3,395 – – 3,395

$

$

– – – –

11,878 13,617 47,779 73,274 Net Book Value

$

$

3,395 – – 3,395

I]Z ^ciVc\^WaZ Vbdgi^oVi^dc d[ -!-*% 9ZXZbWZg (&! '%%. · c^a ^h ^cXajYZY ^c YZegZX^Vi^dc VcY Vbdgi^oVi^dc dc i]Z consolidated statements of earnings for the year ended December 31, 2010.

11. Goodwill Goodwill General Contracting segment Industrial Services segment Commercial Systems segment

2010

$

$

118,116 19,324 96,838 234,278

2009

$

$

– 7,315 – 7,315

2010 ANNUAL REPORT

93

<ddYl^aa Xdch^hih d[ ,!(&* gZaViZY id i]Z VXfj^h^i^dc d[ AV^gY ^c '%%( VcY i]Z gZbV^c^c\ ''+!.+( gZaViZh id i]Z HZVXa^[[ VXfj^h^i^dc CdiZ ( # <ddYl^aa ^h VhhZhhZY [dg ^beV^gbZci ^cY^XVidgh ZVX] VXXdjci^c\ eZg^dY# I]Z 8dgedgVi^dc eZg[dgbZY an impairment test on goodwill at December 31, 2010, and based on this analysis concluded that the fair value of goodwill exceeded the carrying amount.

12. Long-Term Debt 2010

Senior secured revolving credit facility, interest at prime plus 2.0%, depending on certain financial ratios, secured by all present and future assets.

$

Financing fees, net of amortization (Note 15) Finance contracts, secured by construction and automotive equipment with an aggregate carrying value of $6,722, interest varying from 0.0% to 8.4%, blended monthly repayments of $85, maturing between January 2011 and September 2015.

Capital leases, secured by construction and automotive equipment with an aggregate carrying value of $5,316, interest varying from 0.0% to 10.0%, blended monthly repayments of $308, maturing between March 2011 and December 2014.

Total long-term debt Less current portion $

(i)

76,000

2009

$

–

(2,785) 73,215

– –

1,774

752

952 2,726 75,941 (2,017) 73,924

36 788 788 (559) 229

$

Revolving Credit Facility Dc ?jan &'! '%&%! i]Z 8dgedgVi^dc dWiV^cZY V '%%!%%%! ("nZVg hZc^dg hZXjgZY gZkdak^c\ XgZY^i [VX^a^in l^i] V hncY^XViZ d[ X]VgiZgZY WVc`h# I]Z [VX^a^in bVijgZh dc ?jan &'! '%&(0 ]dlZkZg! Yjg^c\ i]Z .% YVn eZg^dY WZ[dgZ each anniversary date, the Corporation may extend the revolving credit facility for an additional year.

As such, there is no current portion of long-term debt related to the revolving credit facility. The revolving credit facility is secured by comprehensive security over all assets of the Corporation. Interest is charged at a rate eZg Vccjb ZfjVa id i]Z 8VcVY^Vc eg^bZ gViZ! A^Wdg gViZ dg 7Vc`Zgh¼ 6XXZeiVcXZ gViZ Vh Veea^XVWaZ VcY ^c Z[[ZXi during the interest period, plus additional interest based on a pricing rate schedule. The additional interest per the pricing rate schedule depends upon the debt to earnings before interest, taxes, depreciation and amortization ¹:7>I96º gVi^d VcY gVc\Zh [gdb V adl d[ '%% WVh^h ed^cih [dg 8VcVY^Vc eg^bZ gViZ adVch id V ]^\] d[ )*% WVh^h ed^cih [dg A^Wdg VcY 7Vc`Zgh¼ 6XXZeiVcXZh# I]Z gZkdak^c\ XgZY^i [VX^a^in XdciV^ch egdk^h^dch [dg hiVbe^c\ [ZZh dc 7Vc`Zgh¼ 6XXZeiVcXZh VcY A^Wdg adVch VcY hiVcYWn [ZZh dc jcji^a^oZY XgZY^i a^cZh i]Vi kVgn YZeZcY^c\ dc XZgiV^c consolidated financial ratios.

Total interest expense for the year ended December 31, 2010 on the revolving credit facility is $2,513 representing the interest paid on the debt. Total deferred financing fees are $3,342 and are net of amortization of $557, which ^h Vahd ^cXajYZY ^c ^ciZgZhi ZmeZchZ CdiZ &* #

94

T H E C H U R C H I L L C O R P O R AT I O N

For the year ended December 31, 2010, there were nil in asset additions acquired through capital leases and ďŹ nance contracts and as such, were accounted for as non-cash transactions in the consolidated statements of cash ďŹ&#x201A;ows 9ZXZbWZg (&! '%%. ¡ )- #

(ii)

Principal Payments on Finance Contracts and Capital Leases are Due as Follows:

2011 2012 2013 2014 2015

$

$

2,017 554 121 30 4 2,726

13. Convertible Debentures 2010

Principal amount â&#x20AC;&#x201C; debt component Accretion (Note 15) Financing fees, net of amortization (Note 15) Convertible unsecured subordinated debentures â&#x20AC;&#x201C; debt component

$

$

76,250 888 (2,684) 74,454

2009

$

$

2010

Principal amount â&#x20AC;&#x201C; equity component Financing fees (1) Convertible unsecured subordinated debentures â&#x20AC;&#x201C; equity component

$ $

10,000 (340) 9,660

â&#x20AC;&#x201C; â&#x20AC;&#x201C; â&#x20AC;&#x201C; â&#x20AC;&#x201C; 2009

$ $

â&#x20AC;&#x201C; â&#x20AC;&#x201C; â&#x20AC;&#x201C;

(1) Financing fees are net of future income taxes of $116.

Dc ?jcZ &*! '%&%! i]Z 8dgedgVi^dc ^hhjZY Vc V\\gZ\ViZ d[ ,*!%%% eg^cX^eVa Vbdjci d[ + XdckZgi^WaZ ZmiZcY^WaZ jchZXjgZY hjWdgY^cViZY YZWZcijgZh d[ i]Z 8dgedgVi^dc Vi V eg^XZ d[ dcZ i]djhVcY YdaaVgh eZg YZWZcijgZ# Dc ?jcZ &*! '%&%! Vc VYY^i^dcVa &&!'*% d[ i]Z XdckZgi^WaZ YZWZcijgZh lZgZ ^hhjZY ejghjVci id i]Z ZmZgX^hZ d[ i]Z jcYZglg^iZghÂź dkZg"VaadibZci dei^dc# IdiVa \gdhh egdXZZYh [gdb i]Z d[[Zg^c\ VbdjciZY id -+!'*%# CZi egdXZZYh d[ i]Z d[[Zg^c\! V[iZg payment of the underwritersâ&#x20AC;&#x2122; fee and other expenses of the offering of $3,401, were $82,849.

I]Z bVijg^in YViZ d[ i]Z YZWZcijgZh ^h ?jcZ (%! '%&*# I]Z YZWZcijgZh WZVg ^ciZgZhi Vi Vc VccjVa gViZ d[ + eVnVWaZ ^c ZfjVa ^chiVaabZcih hZb^"VccjVaan ^c VggZVgh dc 9ZXZbWZg (& VcY ?jcZ (% ^c ZVX] nZVg! XdbbZcX^c\ 9ZXZbWZg (&! '%&%# Each debenture is convertible into common shares of the Corporation at the option of the holder at any time after the VXfj^h^i^dc Xadh^c\ YViZ CdiZ ( VcY eg^dg id i]Z ZVga^Zg d[ i]Z bVijg^in YViZ VcY i]Z YViZ d[ gZYZbei^dc d[ i]Z YZWZcijgZ! at an initial conversion price of $22.75 per common share, or a conversion rate of approximately 43.9560 common shares per one thousand dollar principal amount of debentures. The Corporation has reserved 3,791,205 common shares for issuance upon conversion of the debentures.

2010 ANNUAL REPORT

95

;gdb ?jcZ (%! '%&(! dg ^c i]Z ZkZci d[ V X]Vc\Z d[ Xdcigda! VcY Vi Vcn i^bZ eg^dg id i]Z ÄcVa bVijg^in YViZ! i]Z 8dgedgVi^dc may, at its discretion, redeem the debentures, in whole or in part from time to time, provided that the current market price is at least 125% of the conversion price or $28.44 per common share, at a redemption price equal to the principal amount thereof plus accrued and unpaid interest. The Corporation may, at its discretion, elect to satisfy its obligation to pay the principal amount of the debentures by issuing and delivering common shares. The Corporation may also elect to satisfy its obligations to pay interest on the debentures by delivering common shares. The Corporation does not expect to exercise its right to settle the obligations through the issuance of common shares and as a result the potentially dilutive ^beVXi ]Vh WZZc ZmXajYZY [gdb i]Z XVaXjaVi^dc d[ [jaan Y^ajiZY ZVgc^c\h eZg h]VgZ CdiZ '% # I]Z cjbWZg d[ Vcn h]VgZh issued will be determined based on market prices at the time of issuance.

The Corporation presents and discloses its financial instruments in accordance with the substance of its contractual arrangement. Accordingly, upon issuance of the debentures, the Corporation recorded a liability of $76,250, less related offering fees of $2,945. Total interest expense for the year ended December 31, 2010 on $86,250 of debentures is $3,953 representing the 6% coupon on the debentures, accretion related to the portion of the debentures recorded in equity and Vbdgi^oVi^dc d[ YZ[ZggZY ÄcVcX^c\ [ZZh XVaXjaViZY jh^c\ i]Z Z[[ZXi^kZ ^ciZgZhi bZi]dY CdiZ &* # I]Z Zhi^bViZY [V^g kVajZ of the holder’s option to convert debentures to common shares in the amount of $10,000 has been separated from the fair value of the liability and is included in equity, net of its pro rata share of financing fees of $456.

14. Employee Future Benefits 6i ?jan &(! '%&%! i]Z 8dgedgVi^dc ]VY gZXd\c^oZY i]Z [V^g kVajZ d[ i]Z eZch^dc dWa^\Vi^dc d[ .!)&( CdiZ ( [dg i]Z 97 eZch^dc eaVch# I]Z 8dgedgVi^dc ]Vh ^cXajYZY i]Z adc\"iZgb a^VW^a^in dc i]Z Xdchda^YViZY WVaVcXZ h]ZZih Vh Vc VXXgjZY eZch^dc dWa^\Vi^dc d[ .!%,- Vh Vi 9ZXZbWZg (&! '%&% 9ZXZbWZg (&! '%%. · c^a # >c[dgbVi^dc VWdji i]Z 97 eZch^dc plans as at the date of acquisition and December 31, 2010 is as follows: 2010

Accrued benefit obligations Balance, July 13, 2010 Current service cost Interest cost Benefits paid Employee contributions Actuarial gains Balance, December 31, 2010 Plan assets Fair value, July 13, 2010 Employee and employer contributions Actual return on plan assets Benefits paid Fair value, December 31, 2010 Funded status – plan deficit Unamortized net actuarial gains Unamortized transitional assets Unamortized past service costs Accrued pension obligation, December 31, 2010 96

T H E C H U R C H I L L C O R P O R AT I O N

$

$ $

$

$

28,258 524 803 (734) 90 (1,214) 27,727 18,845 1,028 1,716 (734) 20,855 6,872 2,206 – – 9,078

The measurement date used to determine the plan assets and the accrued benefit obligation was December 31, 2010. >cXajYZY ^c i]Z Vbdjcih VWdkZ VgZ ^cY^k^YjVa 97 eZch^dc eaVch l^i] VXXgjZY WZcZÄi dWa^\Vi^dch ^c ZmXZhh d[ i]Z [V^g kVajZ of plan assets as follows: 2010

Canem Accrued benefit obligation Fair value of plan assets Funded status – plan deficit, December 31, 2010 Dominion Accrued benefit obligation Fair value of plan assets Funded status – plan deficit, December 31, 2010

$ $ $ $

9,641 7,487 2,154 18,086 13,368 4,718

The Corporation uses actuarial reports prepared by independent actuaries for funding and accounting purposes. The Corporation completed actuarial valuations for funding and accounting purposes for both Dominion and Canem as at December 31, 2010. The actuarial valuations for funding purposes will be filed with the regulators in 2011. The next actuarial valuations for both Dominion and Canem for funding purposes are required to be performed as of December 31, 2013. The significant actuarial assumptions adopted in measuring the Corporation’s accrued benefit obligations and cZi eZch^dc eaVc ZmeZchZ jcYZg i]Z 97 eZch^dc eaVch VgZ Vh [daadlh/ 2010

Discount rate on benefit obligations Discount rate on benefit costs Rate of compensation increase for 15 years Expected long-term rate of return on plan assets Inflation rate Average remaining service period of active employees

5.5% 5.7% 3.5% 7.0% 2.5% 9 – 11 years

6 hjbbVgn d[ i]Z ZaZbZcih d[ YZÄcZY WZcZÄi Xdhi [dg i]Z 97 eZch^dc eaVch ^h Vh [daadlh/ 2010

Current service cost Interest cost Expected return on plan assets Net defined benefit pension plan expense

$

524 803 (712) 615

$

The Corporation’s pension plan asset allocation and the current weighted average permissible range for each major asset class are as follows: 2010

Asset allocation: Equity securities Debt securities

71.0% 29.0%

2010 ANNUAL REPORT

97

The Corporation’s investment strategy is to achieve a long-term (5 to 10 year period) real rate of return of 7.0% net of all fees and expenses. In identifying the asset allocation ranges, consideration was given to the long-term nature of the underlying plan liabilities, the solvency and going concern financial position of the plan, long-term return expectations and the risks associated with key asset classes, as well as the relationships of their returns with each other, inflation and interest rates. ;dg i]Z eZg^dY ZcY^c\ 9ZXZbWZg (&! '%&%! i]Z 8dgedgVi^dc [jcYZY i]Z 97 eZch^dc eaVch Wn .'+ 9ZXZbWZg (&! '%%. · c^a ! VcY i]Z 98 eZch^dc eaVch Wn (%+ 9ZXZbWZg (&! '%%. · c^a # 9jg^c\ i]Z nZVg ZcYZY 9ZXZbWZg (&! '%&%! i]Z 8dgedgVi^dc bVYZ Xdcig^Wji^dch id i]Z GGHE d[ &!*+( 9ZXZbWZg (&! '%%. · &!'.( # 8dcig^Wji^dch bVYZ Wn i]Z 8dgedgVi^dc Yjg^c\ i]Z nZVg id i]Z :HEE lZgZ &!,,* 9ZXZbWZg (&! '%%. · &!&-* #

15. Interest Expense Interest expense includes the following: 2010

Interest expense on revolving credit facility (Note 12) Interest expense on convertible debentures (Note 13) Other interest expense Total cash interest expense Non-cash interest expense: Amortization of deferred financing fees on revolving credit facility (Note 12) Accretion on convertible debentures (Note 13) Amortization of deferred financing fees on convertible debentures (Note 13) Total non-cash interest expense Total interest expense

$

$

2,513 2,803 438 5,754

$ $

557 888 262 1,707 7,461

2009

$

$

– – 240 240

$ $

– – – – 240

16. Income Taxes The Corporation’s tax expense differs from the provision computed at statutory rates as follows: 2010

Earnings before income taxes Non-deductible expenses Income subject to tax Income tax at statutory rate of 28% (2009 – 29%) of taxable income Valuation allowance on non-capital loss carryforwards Effect of change in tax rates for future income tax and tax recovery Utilization of net capital loss carryforward Rate difference in other provinces Other Income tax expense

98

T H E C H U R C H I L L C O R P O R AT I O N

$ $ $

$

61,624 4,374 65,998 18,479 125 (317) – 211 43 18,541

2009

$ $ $

$

46,647 303 46,950 13,616 18 (50) (580) 187 (23) 13,168

The components of the future income tax assets and liabilities are as follows: 2010

Tax loss carryforwards Equipment and other assets Intangible assets Financing costs Pension and other compensation Valuation allowance on loss carryforwards Unbilled work-in-progress and holdbacks Other

$

$ Classified as Current asset Long-term asset Current liability Long-term liability

$

$

2009

5,051 (7,701) (15,812) 2,430 4,892 (499) (2,753) 1,637 (12,755)

$

15,001 3,760 (14,669) (16,847) (12,755)

$

$

$

286 113 – – – (79) 7,813 – 8,133 7,813 399 – (79) 8,133

I]Z 8dgedgVi^dc ]Vh VXXjbjaViZY cZi XVe^iVa adhhZh [dg ^cXdbZ iVm ejgedhZh d[ &!&.* '%%. · (!&,' l]^X] bVn WZ carried forward indefinitely to reduce future capital gains. The value of these losses has not been recognized in these consolidated financial statements.

The Corporation has accumulated non-capital losses for income tax purposes of $17,647 related to continuing operations, which expire as follows:

2014 2015 2026 2027 2028 2029 2030 $

99 240 91 296 209 4,083 12,629 17,647

2010 ANNUAL REPORT

99

17. Equity (i)

Share Capital Authorized Jca^b^iZY EgZ[ZggZY H]VgZh ^hhjVWaZ ^c hZg^Zh l^i] g^\]ih hZi Wn i]Z Y^gZXidgh Unlimited Common Shares Issued 2010 Shares

Common Shares: Issued, beginning of year Shares repurchased Subscription receipts exercised (1) Stock options exercised Issued, end of year

17,619,259 – 6,324,500 189,968 24,133,727

Share Capital

$

16,732 – 102,630 1,372 $ 120,734

2009 Shares

17,822,091 (272,600) 69,768 17,619,259

Share Capital

$

$

16,663 (257) 326 16,732

(1) Subscription receipts include transaction fees of $4,429, net of future income taxes of $1,124.

(ii)

Stock-Based Compensation Stock Options (Equity-Settled): The Corporation amended its stock option plan on March 10, 2010 to permit unexercised vested options to be surrendered in exchange for the fair market value of common shares less the option exercise price, or the net settlement. The net settlement value can be paid out in either common shares or cash and is at the sole discretion d[ i]Z 7dVgY d[ 9^gZXidgh# I]ZgZ ^h cd VXXdjci^c\ ^beVXi d[ i]^h VbZcYbZci dc eg^dg eZg^dYh# >c '%&%! ''%!-,- dei^dch lZgZ hjggZcYZgZY [dg V idiVa d[ &%*!)+- Xdbbdc h]VgZh VcY &) 9ZXZbWZg (&! '%%. · c^a # 6h Vi 9ZXZbWZg (&! '%&%! i]Z 8dgedgVi^dc ]VY &!&(&!&,' dei^dch djihiVcY^c\ 9ZXZbWZg (&! '%%. · &! '&(!')( ! d[ l]^X] ',)!(.. VgZ XjggZcian ZmZgX^hVWaZ 9ZXZbWZg (&! '%%. · '+'!%,) #

100

T H E C H U R C H I L L C O R P O R AT I O N

I]Z [daadl^c\ iVWaZ hjbbVg^oZh ^c[dgbVi^dc VWdji hidX` dei^dch djihiVcY^c\ jcYZg i]Z EaVc Vi December 31, 2010:

Exercise Price

18.26 16.05 16.50 6.43 7.29 8.08 10.83 10.68 13.15 19.63 18.34 19.73 17.60

Expiry Date

Options Outstanding Dec. 31, 2010

Options Exercisable Dec. 31, 2010

37,000 85,828 56,845 89,496 233,334 93,643 1,716 1,978 292,416 154,416 65,000 4,500 15,000 1,131,172

37,000 85,828 37,897 53,698 – 30,260 572 659 28,485 – – – – 274,399

October 3, 2012 March 17, 2013 August 14, 2013 November 19, 2013 January 4, 2014 March 24, 2014 May 14, 2014 July 9, 2014 March 24, 2014 March 22, 2015 July 20, 2015 August 24, 2015 December 10, 2015

For the year ended December 31, 2010, the Corporation recognized stock-based compensation expense of $2,616 9ZXZbWZg (&! '%%. · &!.'. # 9jg^c\ i]Z nZVg! '+-!.&+ dei^dch lZgZ ^hhjZY l^i] V lZ^\]iZY VkZgV\Z \gVci YViZ fair value of $8.15. The fair value of each common share option granted by the Corporation was estimated using i]Z 7aVX`"HX]daZh dei^dc"eg^X^c\ bdYZa Vi i]Z \gVci YViZ! l^i] i]Z [daadl^c\ lZ^\]iZY VkZgV\Z Vhhjbei^dch/

Risk-free interest rate Expected life Expected volatility Expected dividends

2010

2009

2.29% 4.0 years 53.18% –

1.92% 4.0 years 62.12% –

I]Z Vbdjcih XdbejiZY! VXXdgY^c\ id i]Z 7aVX`"HX]daZh eg^X^c\ bdYZa! bVn cdi WZ ^cY^XVi^kZ d[ i]Z VXijVa kVajZh realized upon the exercise of these options by the holders.

A summary of the Corporation’s outstanding share options under the plan at December 31, 2010 and 2009, indicating changes during the years ended, is presented below: 2010 Number of Stock Options

Outstanding, beginning of year Granted Forfeited Exercised / surrendered Outstanding, end of year

1,213,243 268,916 (45,609) (305,378) 1,131,172

Weighted Average Exercise Price

$

$

13.04 19.06 17.71 8.11 12.81

2009 Number of Stock Options

519,660 859,574 (96,223) (69,768) 1,213,243

Weighted Average Exercise Price

$

$

2010 ANNUAL REPORT

11.13 4.99 5.71 1.55 13.04

101

Performance Share Units (Cash-Settled): EHJh VgZ e]Vcidb h]VgZh i]Vi egdk^YZ Za^\^WaZ eVgi^X^eVcih l^i] Vc Zfj^kVaZci XVh] kVajZ d[ Xdbbdc h]VgZh# Each grant has a cliff vesting of three years, subject to certain performance criteria. The Corporation has set the EHJ eZg[dgbVcXZ Xg^iZg^V Vh XdbeVgVi^kZ IdiVa H]VgZ]daYZg GZijgc šIHGº gZaVi^kZ id V XdbeZi^i^kZ eZZg \gdje# When each grant vests at three years, payout can be between 0% and 150% of the vested units, depending on the 8dgedgVi^dcŸh gZaVi^kZ edh^i^dc^c\ l^i] gZheZXi id IHG# 8jggZcian i]Z 8dgedgVi^dc ^h jh^c\ Vc Vhhjbei^dc d[ &%% kZhi^c\ id VXXgjZ ZmeZchZh [dg Vaa djihiVcY^c\ EHJh# :VX] \gVci d[ EHJh VgZ ^cY^k^YjVaan ZkVajViZY gZ\jaVgan with regard to vesting assumptions.

I]Z 8dgedgVi^dc l^aa hZiiaZ i]Z EHJh ^c XVh] l^i]^c .% YVnh V[iZg i]Z kZhi^c\ YViZ# I]Z dg^\^cVa Xdhi d[ i]Z EHJ ^h equal to the fair market value at the date of grant. Changes in the amount of the liability due to fair value changes after the initial grant date at each reporting period are recognized as a compensation expense of the period in which i]Z X]Vc\Zh dXXjg# EHJ ]daYZgh VgZ Zci^iaZY id XjbjaVi^kZ Y^k^YZcY VlVgYh ^[ Y^k^YZcYh VgZ ^hhjZY ^c i]Z eZg^dY# 6 hjbbVgn d[ i]Z 8dgedgVi^dcÂźh djihiVcY^c\ EHJh Vi 9ZXZbWZg (&! '%&% VcY '%%.! ^cY^XVi^c\ X]Vc\Zh Yjg^c\ i]Z year is presented below:

Outstanding, beginning of year Granted Forfeited Outstanding, end of year

2010

2009

Number of PSUs

Number of PSUs

243,734 73,324 (25,767) 291,291

85,195 205,849 (47,310) 243,734

>c '%&%! i]Z 8dgedgVi^dc gZXd\c^oZY XdbeZchVi^dc ZmeZchZ d[ &!+&. 9ZXZbWZg (&! '%%. ¡ &!%%. ^c gZheZXi d[ i]Z EHJ EaVc# 6h Vi 9ZXZbWZg (&! '%&%! i]Z 8dgedgVi^dc ]VY '.&!'.& EHJh djihiVcY^c\ 9ZXZbWZg (&! '%%. ¡ ')(!,() ! d[ l]^X] cdcZ VgZ kZhiZY VcY Vaa gZfj^gZ i]Vi i]Z ]daYZg gZbV^c ^c hZgk^XZ jci^a i]Z kZhi^c\ YViZ# I]Z Ă&#x201E;ghi kZhi^c\ VcY eVndji l^aa WZ ^c BVgX] '%&& [dg EHJh \gVciZY ^c '%%-! VcY Vh Vi 9ZXZbWZg (&! '%&%! +&. 9ZXZbWZg (&! '%%. ¡ c^a ^h ^cXajYZY ^c VXXdjcih eVnVWaZ VcY VXXgjZY a^VW^a^i^Zh dc i]Z Xdchda^YViZY WVaVcXZ h]ZZih# I]Z adc\"iZgb edgi^dc d[ EHJh VcY 9HJh d[ (!--, 9ZXZbWZg (&! '%%. ¡ &!,', is classiďŹ ed as long-term stock-based compensation liability on the consolidated balance sheets. The total fair kVajZ d[ i]Z a^VW^a^in [dg kZhiZY WZcZĂ&#x201E;ih ^h &!-'& 9ZXZbWZg (&! '%%. ¡ ++% ! l]^X] gZĂ&#x2026;ZXih Vaa d[ i]Z 9HJh djihiVcY^c\! Vh cdcZ d[ i]Z adc\"iZgb EHJh ]VkZ kZhiZY#

Deferred Share Units (Cash-Settled): I]Z 8dgedgVi^dc ]Vh V 9HJ eaVc l]^X] gZXZ^kZY WdVgY VeegdkVa dc CdkZbWZg (! '%%.# JcYZg i]Z 9HJ eaVc participants may invest between 1% and 25% of their annual remuneration (employees and non-employee directors), retainer and meeting fees (non-employee directors), or the Corporationâ&#x20AC;&#x2122;s cash bonus plan (employees). DSUs are phantom shares which provide the holder with the right to receive a cash payment equal to the value of a common share. DSUs are cash settled only when an employee or director ceases to be an employee or director. The terms of

102

T H E C H U R C H I L L C O R P O R AT I O N

i]Z eaVc Vaadl [dg Y^hXgZi^dcVgn \gVcih Wn i]Z 7dVgY d[ 9^gZXidgh# 9^hXgZi^dcVgn \gVcih kZhi ^bbZY^ViZan# 6h 9HJh are cash settled, a liability is established and compensation expense is recognized in earnings upon grant. Changes in the amount of the liability due to fair value changes after the initial grant date are recognized as a compensation expense of the period in which the changes occur. DSUs are also adjusted for corporate dividends as they arise.

A summary of the Corporation’s outstanding DSUs at December 31, 2010 and 2009, indicating changes during the year is presented below:

Outstanding, beginning of year Granted Outstanding, end of year

2010

2009

Number of DSUs

Number of DSUs

32,934 64,349 97,283

– 32,934 32,934

In 2010, the Corporation granted 39,157 DSUs to directors as part of their annual remuneration. During the year, directors and employees voluntarily elected to defer compensation related to retainer and meeting fees, salary or cash bonuses for grants of 25,192 DSUs. These DSU grants and elections resulted in $1,161 9ZXZbWZg (&! '%%. · ++% d[ hidX`"WVhZY XdbeZchVi^dc ZmeZchZ [dg i]Z nZVg#

(iii)

Normal Course Issuer Bid: Dc DXidWZg &*! '%%-! i]Z 8dgedgVi^dc XdbbZcXZY V CdgbVa 8djghZ >hhjZg 7^Y ¹C8>7º l]^X] lVh Z[[ZXi^kZ [dg dcZ nZVg! Zme^g^c\ dc DXidWZg &)! '%%.# JcYZg i]^h C8>7! i]Z 8dgedgVi^dc lVh Vji]dg^oZY id repurchase and cancel up to 1,391,000 common shares, of which 432,500 were actually repurchased from the inception of the program.

18. Contributed Surplus For stock options granted to employees and directors the Corporation records compensation expense using the fair kVajZ bZi]dY Vh djia^cZY ^c CdiZ &, ^^ # 8dbeZchVi^dc Xdhih VgZ gZXd\c^oZY dkZg i]Z kZhi^c\ eZg^dY Vh hidX`"WVhZY compensation expense and an increase to contributed surplus. When options are exercised, the fair-value amount in contributed surplus is credited to share capital. During the years ended December 31, 2010 and 2009, contributed surplus has changed as follows: 2010

Balance, beginning of year Stock-based compensation expense Stock options exercised/surrendered Stock options forfeited Balance, end of year

$

$

8,496 2,682 (1,124) (66) 9,988

2009

$

$

2010 ANNUAL REPORT

6,734 2,102 (167) (173) 8,496

103

19. Management of Capital The Corporation’s objective in managing capital is to ensure sufficient liquidity to pursue its growth and expansion strategy, while taking a prudent approach towards financial leverage and management of financial risk.

The Corporation’s capital is composed of equity and long-term indebtedness. The Corporation’s primary uses of capital are to finance its growth strategies and capital expenditure programs.

The Corporation does not currently pay a dividend so that it has maximum flexibility to finance growth and expansion, and is able to take advantage of acquisition opportunities. The merits of introducing a dividend are evaluated by the 8dgedgVi^dc¼h 7dVgY d[ 9^gZXidgh [gdb i^bZ id i^bZ# The Corporation intends to maintain a flexible capital structure consistent with the objectives stated above and to respond to changes in economic conditions and the risk characteristics of underlying assets. In order to maintain or adjust its capital structure, the Corporation may issue new shares, raise debt or refinance existing debt.

I]Z eg^bVgn cdc"<66E bZVhjgZh jhZY Wn i]Z 8dgedgVi^dc id bdc^idg ^ih ÄcVcX^Va aZkZgV\Z VgZ ^ih gVi^dh d[ adc\"iZgb ^cYZWiZYcZhh id Wdd` XVe^iVa^oVi^dc VcY adc\"iZgb ^cYZWiZYcZhh id :7>I96# ;dg i]Z ejgedhZh d[ XVe^iVa bVcV\ZbZci! long-term indebtedness includes long-term debt and the debt component of convertible debentures, both net of deferred ÄcVcX^c\ [ZZh# :7>I96 ^h cdi V bZVhjgZ i]Vi ]Vh Vcn hiVcYVgY^oZY bZVc^c\ egZhXg^WZY Wn 8VcVY^Vc <66E VcY ^h Xdch^YZgZY id WZ V cdc"<66E bZVhjgZ# I]ZgZ[dgZ! i]^h bZVhjgZ bVn cdi WZ XdbeVgVWaZ id h^b^aVg bZVhjgZh egZhZciZY by other companies. This measure has been described and presented in the manner in which the chief operating decisionmaker assesses performance. These metrics are indicative of the Corporation’s overall financial strength.

The Corporation has changed its capital management strategy to reflect the increased size of the Corporation and the gZaViZY XVe^iVa higjXijgZ eji ^c eaVXZ id ÄcVcXZ i]Z HZVXa^[[ igVchVXi^dc CdiZ ( # DkZg i]Z adc\"iZgb! i]Z 8dgedgVi^dc strives to maintain a target long-term indebtedness to book capitalization percentage in the range of 20 to 4%, calculated as follows: 2010

Long-term indebtedness: Long-term debt, excluding current portion, net of deferred financing fees Convertible debentures – debt component, net of deferred financing fees Total long-term indebtedness Total equity Total capitalization Indebtedness to capitalization percentage

104

T H E C H U R C H I L L C O R P O R AT I O N

$

$

73,924 74,454 148,378 300,853 449,231 33%

2009

$

229 – 229 141,507 $ 141,736 0%

I]Z 8dgedgVi^dc iVg\Zih V adc\"iZgb ^cYZWiZYcZhh id :7>I96 gVi^d d[ &#*m id (m dkZg V i]gZZ id ÄkZ nZVg eaVcc^c\ ]dg^odc# 6i 9ZXZbWZg (&! '%&%! i]Z adc\"iZgb ^cYZWiZYcZhh id :7>I96 lVh &#,)m 9ZXZbWZg (&! '%%. · %#%m XVaXjaViZY on a trailing twelve-month basis as follows: 2010

Total long-term indebtedness Net earnings and comprehensive income Add: Interest Income tax expense Depreciation and amortization EBITDA Long-term indebtedness to EBITDA ratio

$ $

$

148,378 44,192 7,461 18,541 15,233 85,427 1.74x

2009

$ $

$

229 34,817 240 13,168 4,435 52,660 0.0x

The Corporation also manages its capital through a rolling forecast of financial position and expected operating results.

In addition, the Corporation establishes and reviews operating and capital budgets and cash flow forecasts in order to manage overall capital with respect to financial covenants. The Corporation’s revolving credit facility and surety programs were subject to the following covenants. The Corporation was in full compliance with the debt covenants at December 31, 2010. · 9ZWi id :7>I96

· IVc\^WaZ cZi ldgi]

· HZc^dg YZWi id :7>I96

· >ciZgZhi XdkZgV\Z

· Ldg`^c\ XVe^iVa

20. Earnings per Share Weighted average number of common shares (basic) Effect of dilutive securities: Incremental shares – stock options Incremental shares – convertible debentures Weighted average number of common shares (diluted)

2010

2009

20,643,343

17,620,454

470,495 2,077,373 23,191,211

315,097 – 17,935,551

7Vh^X ZVgc^c\h eZg h]VgZ ^h XdbejiZY dc i]Z WVh^h d[ i]Z lZ^\]iZY VkZgV\Z cjbWZg d[ Xdbbdc h]VgZh djihiVcY^c\# Fully diluted earnings per share is computed on the basis of the weighted average number of common shares outstanding, plus the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. These include the outstanding stock options and the convertible debentures, assuming that all of the debenture holders converted at time of issuance. For the dilutive earnings per share calculation, the interest expense, accretion and amortization of deferred financing fees has been tax effected and added back to net earnings in order to calculate the diluted net earnings. For the year ended December 31, 2010, the adjustment is $2,807 9ZXZbWZg (&! '%%. · c^a #

2010 ANNUAL REPORT

105

21. Financial Instruments Financial instruments consist of recorded amounts of receivables and other like amounts that will result in future cash receipts, as well as accounts payable, short-term borrowings, and any other amounts that will result in future cash outlays.

(i)

Financial Instruments – Carrying Values

Financial assets: Cash and cash equivalents Accounts receivable Restricted cash Long-term receivable, including current portion Financial liabilities: Accounts payable and accrued liabilities Long-term deferred warranty claims Long-term debt, including current portion Convertible debentures – debt component

(ii)

2010

2009

$

70,848 348,569 4,779 1,800

$ 184,402 116,592 2,642 3,000

$

267,604 2,430 75,941 74,454

$ 137,249 2,642 788 –

Financial Instruments – Fair Values Financial instruments consist of recorded amounts of receivables and other like amounts that will result in future cash receipts, as well as accounts payable, short-term borrowings and any other amounts that will result in future cash outlays.

The Corporation has determined that the fair value of its financial assets, including cash and cash equivalents, accounts receivable and financial liabilities, including trade and other payables, approximates their respective carrying amounts as at the consolidated balance sheet dates because of the short-term maturity of those instruments. The fair values of the Corporation’s interest-bearing financial liabilities, including the revolving credit facility, capital leases and financed contracts, also approximates their respective carrying amounts due to the floating rate nature of the debt.

The fair value of the liability and equity components of the convertible debentures is $90,653 at 9ZXZbWZg (&! '%&% 9ZXZbWZg (&! '%%. · c^a ! l]^X] ^h WVhZY dc i]Z bVg`Zi igVY^c\ eg^XZ d[ i]^h ^chigjbZci#

Fair Value Hierarchy The Corporation values instruments carried at fair value using quoted market prices, where available. Quoted market eg^XZh gZegZhZci V AZkZa & kVajVi^dc# L]Zc fjdiZY bVg`Zi eg^XZh VgZ cdi VkV^aVWaZ! i]Z 8dgedgVi^dc bVm^b^oZh i]Z use of observable inputs within valuation models. When all significant inputs are observable, the valuation is XaVhh^ÄZY Vh AZkZa '# KVajVi^dch i]Vi gZfj^gZY i]Z h^\c^ÄXVci jhZ d[ jcdWhZgkVWaZ ^cejih VgZ Xdch^YZgZY AZkZa (# I]Z 8dgedgVi^dc ZmZgX^hZh AZkZa & kVajVi^dch [dg ^ih [V^g kVajZ YZiZgb^cVi^dc d[ i]Z XdckZgi^WaZ YZWZcijgZh#

106

T H E C H U R C H I L L C O R P O R AT I O N

(iii)

Financial Income and Expense 2010

Interest income – cash and cash equivalents Interest expense – revolving credit facility Interest expense – convertible debentures Interest expense – other Bad debt expense, net

$ $

$

(iv)

980 (2,513) (2,803) (438) (852) (5,626)

2009

$ $

643 – – (240) (73) 330

$

Financial Risk Management The Corporation has exposure to credit, interest rate and liquidity risks. The Corporation is not exposed to Vcn Y^gZXi [dgZ^\c XjggZcXn g^h`# I]Z 8dgedgVi^dc¼h 7dVgY d[ 9^gZXidgh ]Vh dkZgVaa gZhedch^W^a^in [dg i]Z establishment and oversight of the Corporation’s risk management framework and reviews the corporate policies on an ongoing basis.

Credit Risk The Corporation invests its cash with the objective of maintaining safety of principal and providing adequate liquidity to meet all current payment obligations. The Corporation invests its cash and cash equivalents with XdjciZgeVgi^Zh i]Vi VgZ d[ ]^\] XgZY^i fjVa^in Vh VhhZhhZY Wn gZejiVWaZ gVi^c\ V\ZcX^Zh# <^kZc i]ZhZ ]^\] XgZY^i gVi^c\h! the Corporation does not expect any counterparties holding cash equivalents to fail to meet their obligations.

The Corporation assesses accounts receivable for impairment on a case-by-case basis when they are past due or when objective evidence is received that a customer will default. The Corporation takes into consideration the customer’s payment history, credit worthiness and the current economic environment in which the customer deZgViZh id VhhZhh ^beV^gbZci# Eg^dg id VXXZei^c\ cZl XjhidbZgh! i]Z 8dgedgVi^dc VhhZhhZh i]Z XjhidbZg¼h XgZY^i quality and establishes the customer’s credit limit. The Corporation accounts for specific bad debt provisions when management considers that the expected recovery is less than the actual amount of the accounts receivable.

The provision for doubtful accounts has been included in indirect and administrative expenses in the consolidated statements of earnings, and is net of any recoveries that were provided for in a prior period. Allowance for doubtful VXXdjcih Vh Vi 9ZXZbWZg (&! '%&% ^h (!+-* 9ZXZbWZg (&! '%%. · &!&&, ! d[ l]^X] '!*-% gZaViZh id Vbdjcih djihiVcY^c\ dkZg .% YVnh 9ZXZbWZg (&! '%%. · &!&&, # IgVYZ gZXZ^kVWaZh CdiZ - ^cXajYZ i]Z [daadl^c\ Vbdjcih i]Vi VgZ eVhi YjZ Vi i]Z ZcY d[ i]Z gZedgi^c\ eZg^dY# I]Z Corporation does not hold any collateral over these balances and does not have a legal right of offset against any amounts owed by the Corporation to the counterparty.

2010

Past due 0-90 days Past due 90-120 days Past due more than 120 days

$

$

216,164 14,023 930 231,117

2009

$

$

50,261 2,868 311 53,440

2010 ANNUAL REPORT

107

In determining the quality of trade receivables, the Corporation considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the end of the reporting period. Included in the total greater than 90 days past due, $4,922 (33%) was concentrated in an oil sands customer account, of which nil remains outstanding as of March 10, 2011. There are no other concentrations of credit risk in geographical areas, customer markets or other areas as at December 31, 2010.

Interest Rate Risk The financial risk is the risk to the Corporation’s earnings that arises from fluctuations in interest rates and the degree of volatility of these rates. The Corporation is exposed to interest rate risk on its revolving credit facility l^i] eVnbZci iZgbh Vh Y^hXadhZY ^c CdiZ &'# I]Z 8dgedgVi^dc YdZh cdi jhZ YZg^kVi^kZ ^chigjbZcih id gZYjXZ ^ih exposure to this risk.

At the reporting date, the interest rate profile of the Corporation’s interest-bearing financial instruments was: Carrying Amount 2010

Fixed rate instruments Financial assets Financial liabilities Variable rate instruments Financial assets Financial liabilities

2009

$

– 74,454

$

– –

$

70,848 75,941

$ 184,402 788

Fixed rate sensitivity

The Corporation does not account for any fixed rate financial assets and liabilities at fair value and the Corporation YdZh cdi YZh^\cViZ Vcn YZg^kVi^kZh ^ciZgZhi gViZ hlVeh Vh ]ZY\^c\ ^chigjbZcih0 i]ZgZ[dgZ! V X]Vc\Z ^c ^ciZgZhi rates at the reporting date would not affect profit or loss for those instruments.

Variable rate sensitivity

A change of 100 basis points in interest rates at the reporting date would have increased or decreased Zfj^in VcY egdÄi dg adhh Wn *%% 9ZXZbWZg (&! '%%. · &!(&% gZaViZY id ÄcVcX^Va VhhZih VcY Wn *)% 9ZXZbWZg (&! '%%. · * gZaViZY id ÄcVcX^Va a^VW^a^i^Zh#

Liquidity Risk A^fj^Y^in g^h` ^h i]Z g^h` i]Vi i]Z 8dgedgVi^dc l^aa ZcXdjciZg Y^[ÄXjai^Zh ^c bZZi^c\ ^ih ÄcVcX^Va a^VW^a^in dWa^\Vi^dch# The Corporation manages this risk through cash and debt management. In managing liquidity risk, the Corporation has access to committed short and long-term debt facilities as well as equity markets, the availability of which is dependent on market conditions. The Corporation believes it has sufficient funding through the use of these facilities to meet foreseeable borrowing requirements.

108

T H E C H U R C H I L L C O R P O R AT I O N

The following are the contractual obligations, including estimated interest payments. Interest payments on the revolving credit facility have not been included in the table below since they are subject to variability based upon outstanding balances at various points throughout the year.

Accounts payable and accrued liabilities Long-term debt, including current portion (Note 12) Convertible debentures (Note 13) Lease commitments (Note 22)

Carrying Amount

Contractual Cash Flows

0–6 Months

$ 267,604

$ 267,604

$ 267,604

75,941 74,454 – $ 417,999

75,941 112,125 27,790 $ 483,460

1,009 2,588 2,947 $ 274,148

6 – 12 Months

$

–

$

1,008 2,587 2,948 6,543

12 – 24 Months

$

–

$

554 5,175 5,297 11,026

After 24 Months

$

–

73,370 101,775 16,598 $ 191,743

22. Commitments, Contingencies and Guarantees The Corporation leases certain construction equipment, vehicles, office premises and equipment under operating leases, and is committed to future annual payments in respect of a service agreement. Future minimum lease payments over the next five years and thereafter are as follows:

2011 2012 2013 2014 2015 Thereafter

$

$

(i)

5,895 5,297 4,769 3,578 2,913 5,338 27,790

Contingencies At December 31, 2010, the Corporation was involved in various legal claims arising in the normal course of operations. Management believes that it has adequately provided for these legal claims and that the results of these actions will not have any material effect on the financial position of the Corporation.

Subsidiaries of the Corporation are contingently liable for normal contractor obligations relating to performance and completion of construction contracts as well as obligations of associates in certain joint ventures.

(ii)

Commitments and Guarantees I]Z 8dgedgVi^dc ]Vh V cdc"Y^hXgZi^dcVgn ÄkZ nZVg Xdbb^ibZci idiVa^c\ &!%%% id H6>I EdaniZX]c^X! d[ l]^X] $400 is remaining.

2010 ANNUAL REPORT

109

The Corporation is a participant in joint ventures for which it has provided joint and several guarantees, increasing the maximum potential payment to the full value of the work remaining under the contract. The Corporation has issued several parental guarantees in support of significant projects being undertaken by the general contracting and industrial services segments. The cost of completing the contracts cannot reasonably be determined, and may be greater or less than the unbilled portion of the contracts. Furthermore, there are various outstanding parental guarantees provided by the Corporation in respect of the obligations and performance of the Corporation’s operating segments.

(iii)

Letters of Credit In addition, the Corporation has provided several letters of credit in the amount of $23,939 in connection with kVg^djh egd_ZXih VcY _d^ci kZcijgZh 9ZXZbWZg (&! '%%. · &&!,-, # I]ZhZ aZiiZgh d[ XgZY^i VgZ ^hhjZY ji^a^o^c\ i]Z credit facilities of the Corporation and reduce the maximum availability under the revolving credit facility.

23. Related Party Transactions I]Z 8dgedgVi^dc ^cXjggZY aZ\Va [ZZh d[ (*) 9ZXZbWZg (&! '%%. · +&% Yjg^c\ i]Z nZVg [dg hZgk^XZh gZaViZY id various legal matters with a law firm of which a director of the Corporation was a partner at December 31, 2010.

6i 9ZXZbWZg (&! '%&%! ) 9ZXZbWZg (&! '%%. · '. ^h ^cXajYZY ^c VXXdjcih eVnVWaZ# I]Z 8dgedgVi^dc ^cXjggZY [VX^a^in Xdhih d[ &)+ 9ZXZbWZg (&! '%%. · &)+ gZaViZY id gZciVa d[ V Wj^aY^c\ l]^X] ^h dlcZY Wn V Y^gZXidg d[ i]Z 8dgedgVi^dc# 6i 9ZXZbWZg (&! '%&% i]ZgZ lVh c^a 9ZXZbWZg (&! '%%. · c^a ^cXajYZY ^c accounts payable.

The Corporation incurred facility costs related to an office lease agreement with a company controlled by the presidents of one of Churchill’s operating companies. For the year ended December 31, 2010, the Corporation incurred facility Xdhih d[ &-) 9ZXZbWZg (&! '%%. · c^a # 6i 9ZXZbWZg (&! '%&%! c^a 9ZXZbWZg (&! '%%. · c^a ^h ^c VXXdjcih eVnVWaZ# GZaViZY eVgin igVchVXi^dc Xdhih lZgZ ^cXjggZY ^c i]Z dgY^cVgn XdjghZ d[ Wjh^cZhh l]ZgZ cdgbVa igVYZ iZgbh Veean VcY are measured at the carrying amount. These costs have all been included in indirect and administrative expenses on the consolidated statements of earnings.

24. Change in Non-Cash Working Capital Balances Relating to Operations 2010

Accounts receivable Inventories and prepaid expenses Costs in excess of billings Income taxes recoverable Accounts payable and accrued liabilities Contract advances and unearned income Income taxes payable

$

$

(108,721) 20,422 3,440 (20,961) 22,642 8,050 (16,728) (91,856)

2009

$

$

2,656 336 (1,321) 3,559 3,055 30,809 9,066 48,160

The comparative amount for accounts payable and accrued liabilities reflects a retrospective reclassification of the longiZgb edgi^dc d[ EHJh VcY 9HJh CdiZ '+ # 110

T H E C H U R C H I L L C O R P O R AT I O N

25. Segmented Information The Corporation operates as a construction and maintenance services provider, primarily in Western Canada. The 8dgedgVi^dc Y^k^YZh ^ih deZgVi^dch ^cid [djg Wjh^cZhh hZ\bZcih VcY gZedgih ^ih gZhjaih jcYZg i]Z XViZ\dg^Zh d[/ <ZcZgVa 8dcigVXi^c\! >cYjhig^Va HZgk^XZh! 8dbbZgX^Va HnhiZbh! VcY 8dgedgViZ VcY Di]Zg# I]Z VXXdjci^c\ eda^X^Zh VcY egVXi^XZh d[ i]Z gZedgiVWaZ hZ\bZcih VgZ i]Z hVbZ Vh i]dhZ YZhXg^WZY ^c CdiZ &# General Contracting – <ZcZgVa 8dcigVXi^c\ Xdch^hih d[ HD98A# HD98A XdchigjXih XdbbZgX^Va! ^chi^iji^dcVa! a^\]i"^cYjhig^Va VcY bjai^"jc^i gZh^YZci^Va Wj^aY^c\h# ;daadl^c\ i]Z HZVXa^[[ igVchVXi^dc Xadh^c\! HijVgi Dahdc 8dchigjXidgh >cX# ¹HijVgi Dahdcº VcY 9db^c^dc 8dbeVcn >cX# ¹9db^c^dcº lZgZ XdbW^cZY id [dgb HD98A# HijVgi Dahdc VcY Dominion have been general contractors since 1939 and 1911 respectively and during the last several years both have become key players in Western Canada’s building markets.

Industrial Services · >cYjhig^Va HZgk^XZh Xdch^hih d[ AV^gY! >=> VcY 7gdYV# AV^gY ^h ]ZVYfjVgiZgZY ^c :Ybdcidc! VcY provides electrical, instrumentation and power-line construction and maintenance services to resource and industrial Xa^Zcih! eg^bVg^an ^c i]Z ;dgi BXBjggVn VcY \gZViZg :Ybdcidc gZ\^dch# >=> ^h Vahd ]ZVYfjVgiZgZY ^c :Ybdcidc! hZgk^c\ ^cYjhig^Va Xa^Zcih l^i] ^chjaVi^dc! VhWZhidh VWViZbZci! h^Y^c\ Veea^XVi^dc! =K68 VcY eaVci bV^ciZcVcXZ hZgk^XZh# >ih Xa^Zcih VgZ ^c i]Z d^a hVcYh! d^a VcY \Vh! eZigdX]Zb^XVa! [dgZhi egdYjXih! edlZg! ji^a^i^Zh VcY b^c^c\ ^cYjhig^Zh# 7gdYV ^h ]ZVYfjVgiZgZY ^c Eg^cXZ 6aWZgi! HVh`ViX]ZlVc! egdk^Y^c\ V\\gZ\ViZ egdXZhh^c\! ZVgi]ldg`! X^k^a XdchigjXi^dc! XdcXgZiZ production and related services. It serves a broad range of organizations, including two major Canadian railway corporations and a number of Saskatchewan’s major potash, uranium, and infrastructure.

Commercial Systems · 8dbbZgX^Va HnhiZbh! Xdch^hi^c\ d[ 8VcZb l^i] ^ih ]ZVY d[ÄXZ adXViZY ^c G^X]bdcY! 7#8#! YZh^\ch! builds, maintains and services electrical and data communication systems for institutional, commercial, light industrial and multi-family residential customers. Its services include the design of electrical distribution systems within a building dg XdbeaZm0 egdXjgZbZci VcY ^chiVaaVi^dc d[ ZaZXig^XVa Zfj^ebZci VcY bViZg^Vah0 dc"XVaa hZgk^XZ [dg ZaZXig^XVa bV^ciZcVcXZ VcY igdjWaZh]ddi^c\0 egZkZciVi^kZ VcY hX]ZYjaZY bV^ciZcVcXZ [dg Xg^i^XVa XdbedcZci ^chiVaaVi^dch0 WjY\Zi^c\ VcY egZ"XdchigjXi^dc hZgk^XZh0 VcY bVcV\ZbZci d[ gZ\^dcVa VcY cVi^dcVa XdcigVXih [dg bjai^"h^iZ ^chiVaaVi^dch# Corporate and Other · 8dgedgViZ VcY Di]Zg ^cXajYZh XdgedgViZ Xdhih cdi VaadXViZY Y^gZXian id Vcdi]Zg Wjh^cZhh hZ\bZci as well as any miscellaneous investments. It provides strategic direction, operating advice, financing, infrastructure services and management of public company requirements to each of its business segments.

2010 ANNUAL REPORT

111

The segmented information for the year ending and as at December 31, 2010 and 2009 is as follows: Year ended December 31, 2010

Revenues EBITDA from continuing operations (1) Depreciation and amortization Interest expense (recovery) Earnings (loss) before tax Income taxes Net earnings from continuing operations Intangible assets and goodwill Total assets Capital expenditures

Year ended December 31, 2009

Revenues EBITDA from continuing operations (1) Depreciation and amortization Interest expense (recovery) Earnings (loss) before tax Income taxes Net earnings from continuing operations Intangible assets and goodwill Total assets Capital expenditures

General Contracting

Industrial Systems

$ 812,239

$ 300,546

65,275 2,445 119 62,711

24,600 3,291 208 21,101

$

$

Commercial Services

Corporate and Other

Total

$

80,308

$

–

$ (17,760)

$ 1,175,333

$

11,730 671 16 11,043

(16,309) 8,994 7,436 $ (32,739)

$

(978) (168) (318) (492)

$

84,318 15,233 7,461 61,624 (18,541)

$ – $ (30,411) $ 277

$ $ $ $

$ 141,644 $ 352,417 $ 2,496

$ 21,739 $ 158,170 $ 2,855

$ 132,291 $ 48,336 $ 475

$ 11,878 $ 347,587 $ 10,024

General Contracting

Industrial Systems

Commercial Services

Corporate and Other

$ 484,128

$ 117,555

51,424 2,229 38 49,157

$ – $ 228,606 $ 3,120

$

Intersegment Eliminations

$

–

$

$

11,886 1,416 42 10,428

$

– – – –

$ $ $

7,315 46,666 1,546

$ $ $

– – –

–

Intersegment Eliminations

43,083 307,552 876,099 16,127

Total

$

(442)

$

(11,123) 781 746 $ (12,650)

$

(865) 9 (586) (288)

$

$ 3,395 $ 115,007 $ 3,886

$ – $ (22,862) $ (26)

$ $ $ $

601,241 51,322 4,435 240 46,647 (13,168) 33,479 10,710 367,417 8,526

(1) EBITDA represents earnings or loss before interest, income taxes, depreciation and amortization. EBITDA is not a measure that has any standardized

meaning prescribed by Canadian GAAP and is considered to be a non-GAAP measure. Therefore, this measure may not be comparable to similar measures presented by other companies. This measure has been described and presented in the manner in which the chief operating decision-maker makes operating decisions and assesses performance.

;dg i]Z ejgedhZh d[ egZhZciVi^dc! XVe^iVa ZmeZcY^ijgZh d[ c^a 9ZXZbWZg (&! '%%. · )- gZaVi^c\ id XVe^iVa aZVhZh VcY finance contracts have been treated as non-cash transactions and as such have not been reflected on the consolidated hiViZbZcih d[ XVh] Ådl CdiZ &' # >c '%&%! gZkZcjZ [gdb V h^\c^ÄXVci XjhidbZg lVh &)&!+%& 9ZXZbWZg (&! '%%. · &&%!((- ! l]^X] gZegZhZciZY \gZViZg than 10% of contract revenue earned. This revenue was earned in the general contracting segment.

26. Comparative Figures I]Z XdbeVgVi^kZ Vbdjcih gZÅZXi V gZigdheZXi^kZ gZXaVhh^ÄXVi^dc d[ i]Z adc\"iZgb edgi^dc d[ EHJh VcY 9HJh d[ &!,',! previously included in accounts payable and accrued liabilities, to long-term stock-based compensation liability on the consolidated balance sheets. This reclassification did not have any effect on net income, equity, cash flows, or externally imposed financial covenants to which the Corporation was subject for the year ended December 31, 2009.

112

T H E C H U R C H I L L C O R P O R AT I O N

Corporate & Shareholder Information OfďŹ cers

Directors

Executive OfďŹ ces

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President and Chief Executive OfďŹ cer

Chair

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Executive Vice President Finance and Chief Financial OfďŹ cer

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"OESFX "QFEPF # $PNN Vice President, Investor Relations and Corporate Secretary

(PSE #SPEB President and Chief Operating OfďŹ cer, Broda Construction Inc.

+PFUUF %FDPSF #4D .#" Vice President, Corporate Development

"NZ (BVDIFS $" Vice President, Finance and Administration

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Member of the Audit Committee

Principal Bank

(2)

Member of the Human Resources & Compensation Committee

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(3)

Member of the Corporate Governance & Nominating Committee

Bonding and Insurance

(4)

Member of the Health, Safety and Environment Committee

President and Chief Operating OfďŹ cer, Insulation Holdings Inc.

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Registrars and Transfer Agents

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President and Chief Operating OfďŹ cer, Stuart Olson Dominion Construction Ltd.

Common Shares:

Convertible Debentures:

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Notice of Annual Meeting Printed in Canada

Designed and produced by Merlin Edge Inc. www.merlinedge.com

President, Canem Systems

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Legal Counsel

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+BDL +FOLJOT # 4D .#" Vice President, Human Resources and Strategic Planning

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400, 4954 Richard Road Calgary, AB T3E 6L1 Phone: 403 685-7777 Fax: 403 685-7770

www.churchillcorporation.com