www.leighton.com.au @LeightonGroup 2014 ANNUAL REPORT LEIGHTON HOLDINGS LIMITED ABN 57 004 482 982 construction l mining l engineering l ppps Leighton Holdings Limited Annual Report 2014 2014 Annual Report CONTENTS Section Page Executive Chairman and CEO’s Review 2 Directors’ Report 4 Operating and Financial Review 12 Remuneration Report 27 Financial Report 44 Shareholdings 150 Shareholder information 152 Glossary 153 In this Annual Report a reference to ‘Group’, ‘we’, ‘us’ or ‘our’ is a reference to Leighton Holdings Limited ABN 57 004 482 982 and the entities that it controls unless otherwise stated. The Leighton Holdings corporate governance statement is available on our website, in the section titled Board and Governance (www.leighton.com.au/our-approach/board-and-governance/corporate-governance-approach). 1 Leighton Holdings Limited Annual Report 2014 Executive Chairman and CEO’s Review Dear Shareholders, As the Leighton Holdings Executive Chairman and CEO, I am proud to provide you with this review of the Leighton Group’s progress during 2014. STRATEGIC REVIEW 2014 marked the commencement of the transformation of the Leighton Group. We began a significant restructure, making progress on the objectives we set in June 2014 of strengthening the balance sheet, streamlining our operating model, and improving project delivery. Our achievements included establishing dedicated, streamlined and efficient businesses focused on contract mining, construction, public private partnerships, and engineering. We also produced a sustainable reduction in overheads, divested John Holland and established a 50:50 investment partnership for the Services operations of Leighton Contractors and Thiess. The John Holland divestment and Services partnership are subject to customary approvals including from the Foreign Investment Review Board. PERFORMANCE OVERVIEW The John Holland divestment and Services partnership enabled the Leighton Group1 to realise a 2014 pre-tax profit of $973 million and positioned the Group to generate a net cash inflow of $1.2 billion, following completion of the sales. These proceeds will significantly deleverage and de-risk the Group’s balance sheet, reducing net debt2 to a positive net cash position of $20 million and gearing3 to slightly below zero following completion. For the 2014 year, the Group reported a net profit after tax of $677 million, a 33% improvement on the prior year, and underlying net profit after tax of $620 million, at the top of the guidance range. Further details on the Company’s performance, including the 40% increase in Leighton’s share price during the year, are contained in the Operating and Financial Review within this Annual Report. Recognising the result, we will pay a 100% franked, final dividend of 53 cents per share, based on a 60% underlying net profit after tax payout ratio, on 10 April 2015. In addition, shareholders will share in the value created by the divestments with the payment of a special dividend of 15 cents per share, 100% franked, also on 10 April 2015. OUTLOOK During the year, we continued to win and deliver work. Work in hand from continuing operations was more than $30 billion at 31 December 2014. The composition reflects a more disciplined and rigorous approach to pre-contract risk assessment as well as the momentum shift from resources to infrastructure development in Australia. Looking forward, our markets are continuing to offer an exciting range of new project opportunities, particularly as governments in Australia and Asia roll out initiatives to address significant infrastructure deficits. We currently have a record pipeline of tenders with individual values of over $1 billion. We continue to strengthen our tender risk management processes, giving us confidence that we are positioned to capitalise on this pipeline, particularly with respect to domestic infrastructure projects including PPPs. Our newly established PPP and engineering businesses will be essential to this strategy. The PPP business, Pacific Partnerships, combines and enhances our skills in PPPs and will operate at all levels of these projects: as the PPP manager, financing arranger, and operations and maintenance manager. Our engineering division has been established to drive internal engineering and design capabilities, and to promote greater technical self-reliance, thus enhancing our ability to manage risk and to deliver higher quality outcomes. By drawing together our engineering capabilities, we can better recognise and develop the engineering talent that exists within the Group. Our 2015 forecast is for a net profit after tax in the range of $450 million to $520 million, driven by substantial improvement in margins from improved project delivery, continuation of the current cost saving program and reduced finance costs from the deleveraging of the balance sheet. PEOPLE I want to extend my gratitude to all of the Leighton employees who contributed to our accomplishments during 2014 and express my enthusiasm about our shared future. Steering our Company into its next phase is an experienced management team who will translate the achievements of 2014 into a sustained benefit for all shareholders. Adolfo Valderas Martínez was appointed as Chief Operating Officer in 2013 and, following my appointment as CEO in March 2014, Javier Loizaga Jiménez was appointed as CFO. Managing Directors of our contract mining, construction, PPP and engineering businesses have also been confirmed. 1 Group financial performance includes joint ventures and associates. It also includes John Holland and Services which were sold in December 2014 and which are shown in the Financial Statements as discontinued operations. 2 Net cash/(debt) plus operating leases. 3 Gearing is expressed as the ratio of net debt and operating leases to net debt, operating leases and shareholders’ equity. 2 Leighton Holdings Limited Annual Report 2014 In addition to a strong management team, I am pleased that we have a Board with a broad range of commercial experience, including strong capabilities in corporate governance, strategy, risk, safety, finance and legal affairs to govern and direct this Company. In May 2014, at the completion of HOCHTIEF Australia’s proportional takeover offer, HOCHTIEF had increased its shareholding to 69.62%. The Board appointed two Directors – Pedro López Jiménez and José Luis del Valle Pérez. Further changes were made to the Board, including the retirement of Robert Humphris OAM as Chairman, who I thank for his commitment to Leighton for close to 10 years. I was subsequently appointed as Executive Chairman and three Independent Non-executive Directors – Kirstin Ferguson, Russell Chenu, and Trevor Gerber – were appointed to the Board. GOVERNANCE AND SUSTAINABILITY Our Board is focused on high standards of governance, compliance, business conduct, safety and environmental performance – all of which are vital to Leighton’s performance and sustainability. It is our belief that high quality corporate governance supports long-term value creation for shareholders and other stakeholders. With this in mind, in 2014 we reviewed our corporate governance and reporting practices to enable us to early-adopt the third edition of the ASX Principles and Recommendations. In line with the decision to early adopt, our corporate governance statement has been made available on our website this year, in the section titled Board and Governance (www.leighton.com.au/our-approach/board-and- governance/corporate-governance-approach). I encourage you to visit our website to read it. In terms of sustainability, I am pleased to report that in 2014, Leighton’s performance was recognised by its continuing inclusion in the Dow Jones Sustainability Indices, the ‘DJSI Australia’. The DJSI is an independent benchmarking system for leading sustainability-driven companies worldwide. Inclusion in the DJSI acknowledges the quality of the Group’s sustainability practices across a range of different factors. We have maintained the highest rating in Risk and Crisis Management, and Resource Conservation and Resource Efficiency for two years in a row. The Group also led the Industrials sector of the ASX 200/NZX 50 CDP (Carbon Disclosure Project) Investor Index for the second year in a row with a disclosure score of 97 and a performance band of B. This compares favourably with the ASX 200 average disclosure score of 76 and performance band of C. SAFETY In safety, we made improvements. The Group’s Total Recordable Injury Frequency Rate measured per million hours worked improved both in our Australian and International operations to 4.6 at 31 December 2014 and is below our target of 5.5. The TRIFR in our Australian operations decreased to 7.0 for the year ending 31 December 2014 from 8.2 in the previous year. In our International operations, the TRIFR increased slightly to 2.7 for the year ending 31 December 2014 from 2.1 in the previous year. The downward trending TRIFR rates have been underpinned by safety initiatives rolled out at our Operating Companies. Thiess has continued to improve its safety performance through the introduction of tailored lead indicators; LAIO has continued to enhance and develop its Strive for LIFE initiative, and has been recognised as a leader in the training and development of its workers; and Leighton Contractors has focused on safety performance through continuing to update its Safety Essentials program. Despite this achievement, I am deeply saddened to report the death of three of our colleagues due to work-related incidents