The Transurban City Link Unit Trust Transurban City Link Limited F I N A N C I A L S T A T E M E N T S 2 0 0 1 The Financial Report of the Transurban City Link Unit Trust for the year ended 30 June 2001 CONTENTS Directors’ Report Statement of financial performance Statement of financial position Statement of cash flows Notes to the financial statements Directors’ declaration Independent Audit Report Page 2 6 7 8 9 23 24 1 directors’ report on the Transurban City Link Unit Trust REVIEW OF OPERATIONS (b) Mezzanine Debt A partial payment of Mezzanine Interest was made by the Trust on 15 December 2000. The Trust made no payment on 15 March 2001, a partial payment on 15 June 2001 with all outstanding interest then being paid on 31 July 2001 to Mezzanine Noteholders. The nonpayment of interest was a technical Event of Default under the Mezzanine Note Facility. The only effect of the Event of Default was that interest accrued at the Default Interest Rate, which is 200 basis points above the facility rate. The additional net interest cost over the period was $2 million. (c) Managed Investments Act On 30 March 2001, the Trustee became the Responsible Entity of the Trust and the Trust Manager was appointed under an investment management agreement to continue to undertake many of its existing functions. This change was a result of the provisions of Managed Investment Act 1998 (the Act) which came into effect on 14 August 1998. The Act created a new regulatory environment and changed the workings of the Trust generally. In particular, the Act provides for the governance of the Trust by a single responsible entity. Formerly, the governance of a Trust was effected through a dual entity structure involving a trustee and a manager. (a) Construction Payments At 30 June 2001 aggregate payments to the TOJV under the D&C Contract remained unchanged for the year at $112 million. The aggregate of paid and deferred claims is equivalent to 98.8 per cent of the contract value. Schedule Completion of the Southern Link was certified on 21 December 2000, 331 days after the contractual Date for Completion of 26 January 2000. As part of the certification of Completion, certain works related to groundwater monitoring and CTCS software were nominated for subsequent certification (Certifiable Works) and a total amount of $4 million was deposited with the State to secure the completion of these works. At 30 June 2001, two items of Certifiable Works remained outstanding and $2.7 million remained on deposit in respect of these items. These items were completed on 24 August 2001. Burnley Tunnel Failure On 19 February 2001, a structural failure in an arch section of the Burnley Tunnel resulted in a full closure of the Burnley Tunnel for nine days. Subsequently, one lane was closed over half the length of the tunnel to allow repair of the failed section. Full three-lane operation was restored on 17 June 2001. This failure is a defect in the works undertaken by TOJV and under the contract between Transurban and the TOJV, the TOJV is liable for the cost of rectifying the defect and any resultant damages suffered by Transurban. In this latter category, Transurban lost approximately $1.9 million in toll revenue and incurred $0.6 million in consulting costs. These amounts will be claimed from TOJV. Extensive investigations of the entire tanked section of tunnel were undertaken subsequent to the failure. As a consequence of these investigations, the TOJV has recommended the installation of a physical restraint at the arch floor joint throughout the tanked section of the tunnel. The purpose of this restraint is to provide a high degree of certainty that no further movements of the joint will occur. The TOJV has met the cost of this work. 2 directors’ report on the Transurban City Link Unit Trust Results The performance of the Trust, as represented by the results of its operations, was as follows: Revenue from ordinary activities Net profit from ordinary activities 2001 $’000 229,308 73,547 2000 $’000 115,675 42,873 DIRECTORS PRINCIPAL ACTIVITIES On 30 March 2001, under the Managed Investments Act 1998, Perpetual Trustee Company Limited became the Responsible Entity for the Trust (the Responsible Entity). Prior to 30 March 2001, a dual entity structure existed which comprised the Trustee and the Trust Manager (City Link Management Limited). The principal activities of the Trust during the year were the borrowing of funds to finance the Trust’s share of construction of the Melbourne City Link, the lending of funds to the Company to fund the Company’s share of operations and leasing of Project land and Trust Assets to the Company. The following persons held office as directors of the Trust Manager until 30 March 2001: Michael S Hamson Kenneth H Spencer W Richard Sheppard Anthony L Kahn (alternate for Richard Sheppard) The following persons held office as directors of the Responsible Entity from 30 March 2001 until the date of this report: MATTERS SUBSEQUENT TO THE END OF THE FINANCIAL YEAR At the date of this report, the directors are not aware of any circumstances that have arisen since 30 June 2001 that have significantly affected or may significantly affect the operations, and results of those operations or the state of affairs, of the Trust in financial years subsequent to 30 June 2001. Gai M McGrath Rohan W Mead (from 28 May 2001) Michael J Stefanovski Phillip A Vernon SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS The Trust was registered as a managed investment scheme by the Australian Securities and Investments Commission on 30 March 2001. Perpetual Trustee Company Limited, formerly the Trustee, was appointed as the responsible entity for the Trust. City Link Management Limited, formerly the Manager of the Trust, was appointed by the Responsible Entity as investment manager of the Trust. In the opinion of the directors’ of the Responsible Entity, there were no other significant changes in the state of affairs of the Trust that occurred during the year under review. 3 ENVIRONMENTAL REGULATION The operations of the Trust are subject to environmental regulations under both Commonwealth and State legislation. Transurban City Link Limited has the obligation to operate The Melbourne City Link which includes the Trust road. It has appointed Translink Operations Pty Limited (TLO to operate and maintain the Melbourne City Link. TLO must ensure it complies with EPA regulations. To meet this obligation, TLO monitors the emission of carbon monoxide, oxides of nitrogen and particulate matter from the Domain and Burnley Tunnel ventilation stacks. In addition, TLO monitors ambient air quality around the tunnels. Current monitoring indicates emission levels from the stacks are well below the EPA licence limits. TLO is also required to regularly test the quality of the groundwater being discharged into the Yarra River. Tests show the water meets the standards under State Environment Protection Policy for water. The Responsible Entity is not aware of any non compliance with any environmental regulations relating to the Trust Assets. 2001 $'000 510,000 - 510,000 2000 $'000 510,000 - 510,000 3,292,895 3,194,426 directors’ report on the Transurban City Link Unit Trust LIKELY DEVELOPMENTS AND EXPECTED RESULTS OF OPERATIONS The Trust has received $11.271 million from the TOJV under a Standstill arrangement pending the resolution of current litigation between Transurban City Link Limited, the TOJV and the Trust. This litigation relates the enforceability of liquidated damages and arbitration of TOJV’s disputation of the Independent Reviewer’s determination that TOJV is not entitled to extensions of time. However, Transurban and the TOJV are continuing discussions in an attempt to bring about a negotiated settlement on all matters in dispute between them. Both parties remain hopeful that a negotiated settlement can be achieved. As a result of the ongoing dispute, the $11.271 million has not been brought to account for the Statement of Financial Performance but have been accounted for as a liability due to the potential need to repay the provisional amounts if Transurban City Link Limited were found not to be entitled to Liquidated damages. Further information on likely developments in the operation of the Trust and the expected results of those operations have not been included in this report because the Responsible Entity believes it would be likely to result in unreasonable prejudice to the Trust. Interests in the Trust issued during the financial year Units on issue at the beginning of the year Units issued during the year Units on issue at the end of the year Value of Assets Value of Trust assets at 30 June OPTIONS Options over unissued Stapled Securities of Transurban City Link Limited and the Trust were granted to senior executives of Transurban City Link Limited under the Executive Option Plan on 26 April 2001. 2,350,000 options were issued during the year ended 30 June 2001. No Stapled Securities were issued during the year on the exercise of options. 4 The number of Stapled Securities in the combined entity (comprising Transurban City Link Limited and Controlled Entity and The Transurban City Link Unit Trust) held by the Responsible Entity or its associates as at the end of the financial year are disclosed in note 18 to the financial statements. ROUNDING OFF Pursuant to Class Order 98/0100, issued by the Australian Securities and Investments Commission, amounts in the directors’ report and financial statements are rounded off to the nearest thousand dollars unless otherwise indicated. Signed in accordance with a resolution of the directors of Perpetual Trustee Company Limited. directors’ report on the Transurban City Link Unit Trust INSURANCE AND INDEMNIFICATION No insurance premiums are paid for out of the assets of the Trust in regards to insurance cover provided to the Responsible Entity or any of its agents. So long as the officers of the Responsible Entity act in accordance with the Trust Constitution and the Act, they remain fully indemnified out of the assets of the Trust against any losses incurred while acting on behalf of the Trust. The auditor of the Trust is in no way indemnified out of the assets of the Trust. FEES PAID TO AND INTEREST HELD IN THE TRUST BY THE RESPONSIBLE ENTITY OR ITS ASSOCIATES Fees paid to the Responsible Entity out of Trust property are disclosed in note 18 to the financial statements. No fees were paid to the directors of the Responsible Entity during the year out of Trust property. Phillip A Vernon Director 28 August 2001 5 statement of financial performance for the year ended 30 June 2001 Revenue from ordinary activities Expenses from ordinary activities Borrowing costs Other expenses Net profit from ordinary activities Basic earnings per unit Diluted earnings per unit Notes 3 4 4 22 22 2001 $’000 229,308 147,345 8,416 73,547 Cents 14.4 14.4 2000 $’000 115,675 67,231 5,571 42,873 Cents 8.8 8.8 The above Statement of financial performance should be read in conjunction with the accompanying notes. 6 statement of financial position as at 30 June 2001 CURRENT ASSETS Cash assets Receivables Other Total Current Assets NON-CURRENT ASSETS Property, plant and equipment Other financial assets Total Non-Current Assets TOTAL ASSETS CURRENT LIABILITIES Payables Non interest bearing liabilities Interest bearing liabilities Total Current Liabilities NON-CURRENT LIABILITIES Interest bearing liabilities Non interest bearing liabilities Total Non-Current Liabilities TOTAL LIABILITIES NET ASSETS UNITHOLDERS’ FUNDS Issued units Undistributed income Notes 6 7 8 9 10 11 12 13 14 15 16 16 2001 $’000 61,821 187 101 62,109 263,618 2,967,168 3,230,786 3,292,895 17,866 13,326 20,237 51,429 1,488,988 4,107 1,493,095 1,544,524 2000 $’000 77,818 332 183 78,333 270,274 2,845,819 3,116,093 3,194,426 4,609 11,294 8,058 23,961 1,495,641 - 1,495,641 1,519,602 1,748,371 1,674,824 1,631,951 116,420 1,631,951 42,873 TOTAL UNITHOLDERS’ FUNDS 1,748,371 1,674,824 The above Statement of financial position should be read in conjunction with the accompanying notes. 7 statement of cash flows for the year ended 30 June 2001 Notes Cash flows from operating activities Payments to suppliers (inclusive of GST) Interest received (inclusive of GST) Other revenue Borrowing costs Net cash (outflow)/inflow from operating activities 21 Cash flows from investing activities Payments for property, plant and equipment Advances of loans to Company Other advances of loans Repayment of loans by Company Repayment of other loans Net cash inflow/(outflow) from investing activities Cash flows from financing activities Repayment of borrowings Proceeds from borrowings Proceeds from issue of new units Proceeds from issue of new units under the Deferred Equity Subscription Agreement Net cash (outflow)/inflow from financing activities Net (decrease)/increase in cash held Cash at the beginning of the financial year Cash at the end of the financial year Financing arrangements and credit facilities 6 14 2001 $’000 (1,161) 17,809 - (120,963) (104,315) - (45,877) - 141,563 690 96,376 (8,058) - - - (8,058) (15,997) 77,818 61,821 2000 $’000 (5,582) 79,814 40,811 (67,203) 47,840 (7,516) (1,834,474) (94,549) 180,068 - (1,756,471) (1,151) 122,842 1,576,600 54,450 1,752,741 44,110 33,708 77,818 The above Statement of Cash Flows should be read in conjunction with the accompanying notes. 8 notes to the financial statements for the year ended 30 June 2001 1. SUMMARY OF SIGNIFICANT ACCOUNTING (f) Amortisation and Depreciation of Fixed Assets POLICIES a) Basis of Accounting The financial statements are a general purpose financial report prepared in accordance with Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board, Urgent Issues Group Consensus Views, the Corporations Act 2001 and the Trust Deed dated October 1995 (as amended). b) Historical Cost Convention The financial statements are prepared on the basis of the historical cost convention and, except where stated, do not take into account current valuations of non-current assets. Cost is based on the fair values of the consideration given in exchange for assets. The fair value of cash consideration with deferred settlement terms is determined by discounting any amounts payable in the future to their present value as at the date of acquisition. Present values are calculated using rates applicable to similar borrowing arrangements of the economic entity. The entity has not adopted a policy of revaluing its non-current assets on a regular basis. (c) Transurban City Link Limited Transurban City Link Limited is referred to as the Company. CityLink Fixed Assets Amounts classified as CityLink fixed assets are amortised over the estimated term of the Crown Lease granted to the Trust (currently 33 years and 6 months), or the assets estimated useful lives, whichever is less. Amortisation commenced with operations on 3 January 2000 and is calculated on a straight line basis. The period of amortisation is assessed annually. Other Plant and Equipment Leasehold Improvements included in CityLink fixed assets are depreciated on a straight line basis so as to write off the net cost of plant and equipment over their expected useful lives. Estimates of remaining useful lives will be made on a regular basis for all assets, with annual reassessments for major items. The expected useful lives are as follows: Leasehold Improvements 3 – 15 years g) Income Tax Income tax has not been brought to account in the financial statements of the Trust as under the terms of the Trust Deed and pursuant to the provisions of the Income Tax Legislation, the Trust is not liable to income tax provided that its taxable income (including assessable realised capital gains) is fully distributed to unit holders. (d) Revenue Recognition h) CPI Bonds Revenue for rental of land is recognised as earned in accordance with the lease contract. e) Recoverable Amount of Non-Current Assets The recoverable amount of an asset is the net amount expected to be recovered through the net cash inflows arising from its continued use and subsequent disposal. The expected net cash flows included in determining recoverable amounts of non-current assets are discounted to their present value using a market-referenced, risk-adjusted discount rate. Where net cash inflows are derived from a group of assets working together, the recoverable amount is applied to the relevant group of assets. Where the carrying amount of a non-current asset is greater than its recoverable amount the asset is revalued to its recoverable amount. The Trust has issued CPI Bonds which mature on 15 March 2023. The CPI Bond principal outstanding is adjusted for inflation, consistent with the provisions of the Income Tax Legislation. i) Financial Instruments Financial instruments, in the form of interest rate swap contracts, are used to manage financial risks. Gains and losses on interest rate swaps used as hedges are accounted for on the same basis as the interest payments they are hedging. Realised hedge gains and losses are brought to account in the statement of financial performance when the gains and losses arising on the related physical exposures are recognised. 9 notes to the financial statements for the year ended 30 June 2001 n) Goods and Services Tax (GST) The amount of GST incurred by the Trust that is not recoverable from the Australian Taxation Office (ATO) is recognised as an expense or as part of the cost of acquisition of an asset. The Trust qualifies for Reduced Input Tax Credits at the rate of 75% on various services such as Responsible Entity fees. These expenses have been recognised in the statement of financial performance net of the amount of GST recoverable from the ATO. Receivables and payables are stated at amounts inclusive of GST. The net amount of GST recoverable from the ATO is included in receivables in the statement of financial position. Cashflows relating to GST are included in the statement of cash flows on a gross basis. o) Rounding of amounts Amounts in the financial report are rounded off to the nearest thousand dollars in accordance with Class Order 98/0100 issued by the Australian Securities and Investments Commission. 2. TRUST FORMATION AND TERMINATION The Trust was established on 19 October 1995 and will continue in operation for 80 years from this date pursuant to the provisions of the Trust Deed unless terminated earlier. The Trust was registered as a managed investment scheme by the Australian Securities and Investments Commission on 30 March 2001. Unrealised gains and losses on interest rate swaps not effectively hedging an underlying exposure are recognised in the statement of financial performance. j) Borrowing Costs Borrowing costs are recognised as expenses in the period in which they are incurred and include: • Interest on short term and long term borrowings, and • Costs incurred in connection with the arrangement of borrowings. k) Cash Flows For the purpose of the Statement of Cash Flows, cash includes cash on hand, deposits held at call with banks and investments in money market instruments. l) Conditional Receipts Where the Trust has received payments that are provisional or subject to legal dispute, the total value of the receipts will be accounted for as a liability and will not be reclassified as revenue until the nature of the receipt is virtually certain and supports the classification as revenue. m) Earnings per Unit (i) Basic Earnings per Unit Basic earnings per unit is determined by dividing the net result from ordinary activities by weighted average number of units outstanding during the year. (ii) Diluted Earnings per Unit Diluted earnings per unit adjusts the figures used in the determination of basic earnings per unit by taking into account the weighted average number of units assumed to have been issued for no consideration in relation to dilutive potential units. 10 notes to the financial statements for the year ended 30 June 2001 3. REVENUE Revenue from operating activities Rental income Revenue from outside the operating activities Interest 4. OPERATING PROFIT Expenses Operating result includes the following specific expenses: Depreciation and amortisation - CityLink Administrative costs Borrowing costs Interest and finance charges paid/payable Interest rate hedging charges paid/payable 5. INCOME TAX Tax Losses at beginning of year Tax (Income)/Losses for the year Tax Losses at end of year 2001 $’000 83,600 145,708 229,308 7,347 1,069 145,634 1,711 147,345 85,089 (57,903) 27,186 2000 $’000 40,811 74,864 115,675 5,052 519 66,801 430 67,231 122,008 (36,919) 85,089 Potential future income tax benefits at 30 June 2001 for tax losses not brought to account for the Trust are $27,186,000. These losses cannot be used directly by the Trust for the reason outlined in note 1g, but may be available for the benefit of unit holders in the future. These benefits of tax losses will only be realised for the benefit of unit holders in the Trust if: (i) the entity derives future assessable income of a nature and of an amount sufficient to enable the benefit from the deductions for the losses to be realised; (ii) the entity continues to comply with the conditions for deductibility imposed by tax legislation; and (iii) no changes in tax legislation adversely affect the ability of the entity to realise the benefit from the deductions for the losses. The above tax position is based on tax ruling requests relating to borrowing costs and interentity transactions. However, the ATO has not given its opinion in relation to all of these requests. 11 notes to the financial statements for the year ended 30 June 2001 6. CASH ASSETS – CURRENT ASSETS Cash at bank The cash at the end of the year as shown in the Statement of Cash Flows is as above. Included in the above amount, is $61.5 million which is held in a Debt Service Reserve account and is not available for general use. (2000: $71.0 million) 7. RECEIVABLES – CURRENT ASSETS Sundry debtors 8. OTHER – CURRENT ASSETS Prepayments 2001 $’000 61,821 61,821 187 187 101 101 2000 $’000 77,818 77,818 332 332 183 183 9. PROPERTY, PLANT AND EQUIPMENT – NON CURRENT ASSETS a) CityLink Fixed Assets CityLink Less: Accumulated depreciation 276,017 (12,399) 263,618 275,326 (5,052) 270,274 12 notes to the financial statements for the year ended 30 June 2001 b) Reconciliations Reconciliations of the carrying amount of each class of property, plant and equipment are set out below. Trust Carrying amount at the start of the year Additions Depreciation/amortisation expense Carrying amount at year end Refer to note 14 for information on non-current assets pledged as security by the Trust . 10. OTHER FINANCIAL ASSETS – NON CURRENT ASSETS CityLink 2001 $’000 270,274 691 (7,347) 263,618 2001 $’000 CityLink 2000 $’000 262,787 12,539 (5,052) 270,274 2000 $’000 Advances to Company Other loans 2,873,313 93,855 2,967,168 2,751,270 94,549 2,845,819 Other loans is made up of a loan to Macquarie Bank Limited for a period of 5 years at a fixed interest rate of 8.5% pa. 11. PAYABLES – CURRENT LIABILITIES Sundry creditors 12. NON INTEREST BEARING LIABILITIES - CURRENT LIABILITIES Unearned Income Liquidated Damages 17,866 17,866 2,055 11,271 13,326 4,609 4,609 - 11,294 11,294 13 notes to the financial statements for the year ended 30 June 2001 13. INTEREST BEARING LIABILITIES – CURRENT LIABILITIES Secured Project Debt - Tranche A Project Debt - Tranche B Project Debt - Tranche C 14. INTEREST BEARING LIABILITIES – NON-CURRENT LIABILITIES Secured CPI Bonds Project Debt - Tranche A Project Debt - Tranche B Project Debt - Tranche C Mezzanine Debt 2001 $’000 19,952 148 137 20,237 361,607 738,267 98,241 90,873 200,000 1,488,988 2000 $’000 8,058 - - 8,058 348,023 758,221 98,388 91,009 200,000 1,495,641 Financing Arrangements and Credit Facilities c) Project Debt Facility – Tranche C Credit facilities are provided as part of the overall debt funding structure and comprise Tranche A, B and C project debt facilities, a CPI Bond facility and a Mezzanine Debt facility. $91 million multi option facility which was fully utilised at 30 June 2001. The facility is for a term of 16 years from 31 March 1999. Details of each facility are as follows:- a) Project Debt Facility – Tranche A $778 million multi option facility which can be drawn as cash advances or letters of credit. The facility is for a term of 17 years from 4 March 1996. As at 30 June 2001, $758 million had been utilised in the form of cash advances (2000: $766 million) and $20 million had been used as a letter of credit (2000: $20 million). b) Project Debt Facility – Tranche B $98 million multi option facility which was fully utilised as at 30 June 2001. The facility is for a term of 19 years from 4 March 1996. d) CPI Bond Facility $350 million CPI Bond facility with a term of 27 years from March 1996 which was fully drawn as at 30 June 2001. The facility is being amortised by equal quarterly payments which cover principal and interest. These payments are indexed according to movements in the CPI. e) Mezzanine Note Facility $200 million multi option facility which was fully utilised at 30 June 2001. The facility is for a term of 24 years from 31 March 1999. 14 notes to the financial statements for the year ended 30 June 2001 Details of the utilisation of borrowing facilities are as follows: - Available facilities Amount utilised Amount unutilised The utilisation excludes adjustments to the CPI Bond principal for inflation. The facilities are available subject to the requirements of the relevant contracts and deed being met. All assets are pledged as security for Transurban’s liabilities. 15. NON-INTEREST BEARING LIABILITIES – NON-CURRENT LIABILITIES Unearned Income 16. UNITHOLDERS’ FUNDS The issued units of the Trust are a component of a parcel of Stapled Securities (issued at a value of $1.00 each), each parcel comprising one share in the Company issued at $0.01 and one unit in the Trust issued at $0.99. The individual securities comprising a parcel of Stapled Securities cannot be traded separately. 2001 $’000 1,517,619 (1,517,619) - 2000 $’000 1,903,677 (1,898,165) 5,512 4,107 4,107 - - a) Paid up Units 510,000,000 units in the Trust - fully paid b) Undistributed Income Undistributed income bought forward Net profit from ordinary activities Available for distribution Distributions to unitholders during the year Undistributed income carried forward 1,631,951 1,631,951 1,631,951 1,631,951 42,873 73,547 116,420 - 116,420 - 42,873 42,873 - 42,873 15 notes to the financial statements for the year ended 30 June 2001 the relevant Exercise Condition Test Period which have been in the S&P/ASX 200 Industrials for the full term of the Exercise Condition Test Period (Test Companies) measured over the same period. TSR measures the total return on investment of a security. It takes into account both capital appreciation and distribution income. Transurban and each of the Test Companies will be ranked according to their respective TSRs over the Exercise Condition Test Period. The ranking determines the extent to which vested options may be exercised. If Transurban’s TSR exceeds the 65th percentile of the ranking, 100% of the vested options may be exercised. If Transurban’s TSR is below the 25th percentile of the ranking, none of the vested options may be exercised. If the TSR falls between these percentiles, the percentage of vested options that may be exercised will be calculated according to a formula. 2001 $’000 13 3 2000 $’000 19 11 Gai M McGrath, Rohan W Mead, Michael J Stefanovski, Phillip A Vernon. The name of each person who was a director of the Trust Manager from the beginning of the financial year until 30 March 2001 is as follows: Michael S Hamson, W Richard Sheppard, Kenneth H Spencer, Anthony L Kahn (alternate for W R Sheppard). c) Options 2,350,000 options were granted on 26 April 2001 under the Transurban Executive Options Plan to eight senior executives of Transurban City Link Limited. These options represent 2,350,000 potential units in the Trust and therefore the equivalent number of Stapled Securities. At 30 June 2001, no Stapled Securities had been issued pursuant to these options. Each option is granted at no cost to the Optionholder. The exercise price is $3.817, which was the weighted average market price over the week preceding the issue. Options vest in three equal tranches on the second, third and fourth anniversaries of their issue. The Exercise is subject to an Exercise Condition. The Exercise Condition involves a comparison between Total Shareholder Return (TSR) of Transurban’s Stapled Securities over the two years prior to a vesting date of options and the TSR of each of the other companies in the S&P/ASX 200 Industrials as at the end of 17. REMUNERATION OF AUDITORS Remuneration for audit or review of the financial reports of the Trust Remuneration for other services provided by the Trust’s auditors 18. RELATED PARTY INFORMATION Controlling Entities The Trust is an ultimate chief entity. Directors On 30 March 2001, under the Managed Investment Act 1998, Perpetual Trustee Company Limited became the Responsible Entity for the Trust. Prior to 30 March 2001, a dual entity structure existed which comprised the Trustee (Perpetual Trustee Company Limited) and the Trust Manager (City Link Management Limited). The name of each person who was a director of the Responsible Entity at any time from 30 March 2001 until the end of the financial year are as follows: 16 notes to the financial statements for the year ended 30 June 2001 Transactions of Directors of the Responsible Entity and the Trust Manager and their Director-Related Entities Concerning Stapled Securities The aggregate numbers of Stapled Securities acquired or disposed of and held at 30 June 2001 by directors of the Responsible Entity and Trust Manager or their director-related entities were as follows: Beneficial 170,000 (170,000) - Non Beneficial - - - Total 170,000 (170,000) - Balance at 1 July 2000 held by Trust Manager & Director related entities Affect of Trustee becoming Responsible Entity on 30 March 2001: - Stapled Securities held by Trust Manager Balance at 30 June 2001 Directors of the Trust Manager and their director-related entities will receive normal distributions on these Stapled Securities. All transactions relating to Stapled Securities of the combined entity were on the same basis as similar transactions with other Stapled Security holders. 17 notes to the financial statements for the year ended 30 June 2001 Other Related Parties Related entities of the Responsible Entity held nil stapled securities as at 30 June 2001. Aggregate amounts that were charged to the statement of financial performance that resulted from transactions with other related parties were as follows: Fees to Trust Manager/Investment Manager Fees to Trustee/Responsible Entity Aggregate amounts payable to and receivable from other related parties at balance date: 2001 $’000 356 485 2000 $’000 472 336 Current liabilities 431 403 19. FINANCIAL INSTRUMENTS DISCLOSURE Interest Rate Swap Contracts The Trust in its own right and on behalf of the Company is party to financial instruments with off-balance sheet risks in the normal course of business in order to hedge exposure to interest rate fluctuations. These instruments are not included in the assets or liabilities (as the case may be) of the Trust, except to the extent detailed hereunder. The Trust’s policy is to protect funds exposure to variations in interest rate fluctuations. Additional swaps have been entered into that hedge interest paid on funds borrowed to lend to the Company for the construction of Exhibition Street Extension. The Trust has variable interest rate facilities in place to fund operations. Interest rate swap agreements are in place to hedge the borrowing of such funds. Under these swap agreements the Trust is obliged to pay interest at fixed rates in the range 1.65 per cent to 9.54 per cent per annum and has the right to receive interest at variable rates. At 30 June 2001, the notional principal amounts and periods of expiry of the interest rate swap contracts are: Less than a year 1 2 3 4 5 - - - - - 2 years 3 years 4 years 5 years 10 years 10 - 16 years 18 2001 $’000 2000 $’000 41,080 54,317 64,021 36,001 46,787 471,362 196,450 910,018 23,484 41,080 54,317 64,021 36,001 385,451 329,148 933,502 notes to the financial statements for the year ended 30 June 2001 Credit Risk Credit risk represents the loss that would be recognised if counterparties failed to perform as contracted. 2001 Financial Corporates Total Institutions $’000 $’000 $’000 Financial Institutions $’000 2000 Corporates Total $’000 $’000 On-balance sheet financial assets Cash Sundry Debtors 61,821 187 - - 61,821 187 77,818 332 - - 77,818 332 Advance to Company - 2,873,313 2,873,313 - 2,751,270 2,751,270 Advance to Macquarie Bank Limited 93,855 - 93,855 94,549 - 94,549 Total Credit Risk 155,863 2,873,313 3,029,176 172,699 2,751,270 2,923,969 Interest Rate Risk The Trust’s exposure to interest rate risk and the effective rates on financial assets and liabilities at 30 June 2001 were: Floating interest rate $’000 Notes 6 7 61,821 - Financial Assets Cash Sundry debtors Advance to Company 10 1,296,713 Advance to Macquarie Bank Limited 10 - Total Financial Assets 1,358,534 Weighted average interest rate 10.82% Financial Liabilities Sundry creditors CPI Bonds 11 14 - - Project debt borrowings 13,14 1,147,618 Fixed Interest Rate Maturity 1 year between 1 or less and 5 years $’000 $’000 more than 5 years $’000 Non interest bearing $’000 Total $’000 - - - - - - - - - - - - 93,855 93,855 8.50% - - - - - - - - - - 361,607 - - 187 61,821 187 1,576,600 2,873,313 - 93,855 1,576,787 3,029,176 - - 17,866 17,866 - - - 361,607 1,147,618 - Interest rate swaps (910,018) 41,080 201,126 667,812 Total Financial Liabilities 237,600 41,080 201,126 1,029,419 17,866 1,527,091 Weighted average interest rate 6.40% 6.36% 6.36% 8.86% - - Net Financial Assets/(Liabilities) 1,120,934 (41,080) (107,271) (1,029,419) 1,558,921 1,502,085 19 notes to the financial statements for the year ended 30 June 2001 The Trust’s exposure to interest rate risk and the effective rates on financial assets and liabilities at 30 June 2000 were: Floating interest rate $’000 Notes 6 7 77,818 - Financial Assets Cash Sundry debtors Advance to Company 10 1,174,670 Advance to Macquarie Bank Limited 10 - Total Financial Assets 1,252,488 Weighted average interest rate 9.59% Financial Liabilities Sundry creditors CPI Bonds 11 14 - - Project debt borrowings 13, 14 1,155,676 Fixed Interest Rate Maturity 1 year between 1 or less and 5 years $’000 $’000 more than 5 years $’000 Non interest bearing $’000 Total $’000 - - - - - - - - - - - - 94,549 94,549 8.50% - - - - - - - - - - 348,023 - - 332 77,818 332 1,576,600 2,751,270 - 94,549 1,576,932 2,923,969 - - 4,609 4,609 - - - 348,023 1,155,676 - Interest Rate Swaps (933,502) 23,484 195,419 714,599 Total Financial Liabilities 222,174 23,484 195,419 1,062,622 4,609 1,508,308 Weighted average interest rate 7.38% 5.79% 5.79% 7.19% - - Net Financial Assets/(Liabilities) 1,030,314 (23,484) (100,870) (1,062,622) 1,572,323 1,415,661 Reconciliation of Net Financial Assets to Net Assets Net financial assets as above Non-financial assets and liabilities Property, plant and equipment Other assets Other liabilities Net assets per balance sheet Notes 9 8 12,15 2001 $’000 2000 $’000 1,502,085 1,415,661 263,618 101 (17,433) 1,748,371 270,274 183 (11,294) 1,674,824 20 notes to the financial statements for the year ended 30 June 2001 Liabilities under the CPI Bond Facility have been classified as fixed rate liabilities maturing beyond five years for the following reasons: • The amount of principal expected to be retired through annuity payments over the next four years is not material; and • The outstanding principal, while subject to indexation for movements in the CPI, is effectively hedged against the effect of such movements as toll revenue which is the major component of the combined entity’s revenues, is also indexed for movements in the CPI. Net Fair Values of Financial Assets and Liabilities The carrying amount and net market value of financial assets and liabilities brought to account at balance date are the same. The aggregate net fair value of interest rate swaps not recognised in the balance sheet (refer note 1 held at 30 June 2001 is a liability of $81.1 million (2000: $85 million). As these contracts are hedging anticipated future interest payments, any unrealised gains and losses on the contracts, together with the cost of the contracts, are deferred and will be recognised in the measurement of the underlying transaction. The valuation of interest rate swaps reflects the estimated amounts which the Trust expects to pay or receive to terminate the contracts (net of transaction costs) or replace the contracts at their current market rates as at 30 June 2001. This is based on independent market quotations and is determined using accepted valuation techniques. 20. SEGMENT INFORMATION The Trust operates in one geographic segment in Victoria, Australia and one industry segment being the operation of the Melbourne City Link. 21. RECONCILIATION OF NET RESULT FROM ORDINARY ACTIVITIES TO NET CASH FLOW FROM OPERATING ACTIVITIES Net profit from ordinary activities Depreciation and amortisation Decrease/(Increase) in prepayments Increase in creditors Increase in unearned income Decrease/(Increase) in debtors Increase in CPI Bonds Income capitalised into loans to Company Net cash (outflow)/inflow from operating activities 2001 $’000 73,547 7,347 4 12,564 6,160 203 13,584 (217,724) (104,315) 2000 $’000 42,873 5,052 (12) 102 - (175) - - 47,840 21 notes to the financial statements for the year ended 30 June 2001 22. EARNINGS PER UNIT Net tangible asset backing per unit Basic earnings per unit Diluted earnings per unit 2001 2000 $3.43 14.4 cents 14.4 cents $3.28 8.8 cents 8.8 cents Weighted average number of units used in calculating basic earnings per unit 510,000,000 486,191,781 Weighted average number of units and potential units used (as denominator) in calculating diluted earnings per unit 510,476,438 486,191,781 Information concerning the classification of units (a) Stapled Securities Stapled Securities, and therefore units, are fully paid and have been recognised in the determination of basic earnings per unit. (b) Options Options granted to executives of Transurban City Link Limited under the Transurban Executive Option Plan are considered to be potential Stapled Securities and have been included in the calculation of diluted earnings per Unit. 22 directors’ declaration for the Transurban CityLink Unit Trust In the opinion of the directors of Perpetual Trustee Company Limited the Responsible Entity for The Transurban City Link Unit Trust (the Trust): 1 the financial statements and notes set out on pages 6 to 22 are in accordance with the Corporations Act 2001, including: (a) giving a true and fair view of the financial position of the Trust as at 30 June 2001 and of its performance, as represented by the results of its operations and its cash flows, for the financial year ended on that date; and (b) complying with the Accounting Standards and Corporations Regulations 2001. 2 there are reasonable grounds to believe that the Trust will be able to pay its debts as and when they become due and payable, and 3 the financial statements and notes set out on pages 6 to 22 are in accordance with the provisions of the Constitution. Signed in accordance with a resolution of the directors of Perpetual Trustee Company Limited Phillip A Vernon Director Sydney 28 August 2001 23 independent audit report The Financial Report of the Transurban City Link Limited and Controlled Entity ABN 65 070 810 678 for the year ended 30 June 2001 CONTENTS Directors’ Report Statement of Financial Performance Statement of Financial Position Statement of Cash Flows Notes to the Financial Statements Directors’ Declaration Independent Audit Report Page 26 35 36 37 38 59 60 25 directors’ report on the Financial Report of Transurban City Link Limited and Controlled Entity. Directors‘ Report on the Financial Report of Transurban City Link Limited and Controlled Entity. Your directors present their report on the consolidated entity consisting of Transurban City Link Limited and the entity it controlled at the end of, and during, the year ended 30 June 2001. COMPANY ACCOUNTS The Company and The Transurban City Link Unit Trust (the Trust) have entered into a Concession Deed with the State of Victoria in relation to the Melbourne City Link project (CityLink) and have issued securities, which are stapled into parcels (Stapled Securities). A Stapled Security comprises one share in the Company with a nominal price of $0.01 and one unit in the Trust with a nominal price of $0.99. None of the components can be traded separately. DIRECTORS The following persons were directors of Transurban City Link Limited during the whole of the financial year and up to the date of this report: Laurence G Cox Jeremy G A Davis Kimberley Edwards Susan M Oliver W H John Barr Geoffrey R Phillips Peter C Byers Geoff O Cosgriff was appointed a director on 19 December 2000 and continues in office at the date of this report. PRINCIPAL ACTIVITIES The principal continuing activities of the consolidated entity during the year were the design, construction and operation of CityLink. RESULTS The result of operations for the financial year ended 30 June 2001 was an operating loss of $221 million (1999: $163 million). DIVIDENDS There were nil dividends in the year (2000: nil). REVIEW OF OPERATIONS (a) Traffic The Burnley Tunnel was opened to traffic on 22 December 2000 and tolling commenced on 28 December 2000. From the first day, the tunnel was accepted well by users and traffic volumes rose quickly to approximately the same level as the Domain Tunnel. Traffic volumes using the Western Link also increased due to the reduction in delays on the Westgate Freeway and the delivery of continuous freeway standard operations for eastbound traffic. The Burnley Tunnel wall failure, which occurred on 19 February 2001 is estimated to have reduced transaction volumes for the year by 0.9 per cent. This reduction is due to the closure of the tunnel between 19 and 25 February to allow a full investigation of the cause of the failure to be completed and the effects of closure of one lane of the tunnel until 16 June to allow repairs to be completed. Overall traffic ramp-up is generally in accord with expectations but has been impacted by both the wall failure and the opening of the Wurundjeri Way in the Docklands Precinct. At 30 June 2001, the 5 day moving average of weekday transactions was 584,512. This is 94.3 per cent of the transaction volumes for 2001 predicted by the Base Case Traffic Model after allowing for the ramp-up factors included in the prospectus and of the diversion of traffic on to Wurundjeri Way in the Docklands precinct. The shortfall relative to projected volumes is almost entirely on the Elevated Roadway and Bolte Bridge sections of the Western Link. (b) Customer Service CityLink’s customer base grew strongly over the year with the number of account holders increasing by 29 per cent to 478,870, while the number of e-TAG’s associated with these accounts increased by 28 per cent to 680,825. This substantial growth in the customer base and in usage posed a challenge for the delivery of customer service and some problems were experienced over the Christmas/New Year holiday period due to the coincidence of the opening of the Burnley Tunnel with a high demand for CityLink Passes due to the large number of visitors to Melbourne for the holidays. Progress over the year in reducing customer service costs was less than planned, due to the disruptions over the Christmas/New Year period and delays in the implementation of new technology. "Touch" kiosks in Shell service stations and an automated telephone channel using 26 directors’ report on the Financial Report of Transurban City Link Limited and Controlled Entity. interactive voice response technology were successfully introduced, but the introduction of natural language speech recognition technology and modifications to the Central Toll Computer System (‘CTCS’) software to automate certain customer service processes which are presently being performed manually was delayed. Subsequent review has validated annualised savings of $11.2 million, of which a minimum of $7.5 million will be realised in the 2001-2 year. The target for customer service costs for 2001-2 year is $33 million. The previously- established long term target level of $2.2 million per month is expected to be achieved in 2002-03 following changes to CTCS software (see below). (c) Construction Payments As at 30 June 2001 aggregate payments to the TOJV under the C&C Contract remained unchanged for the year at $1,176 million. Further claims of $2 million have been deferred bringing the total claims deferred as a consequence of late delivery to $24 million. The aggregate of paid and deferred claims is equivalent to 99.5 per cent of the contract value. Schedule Completion of the Southern Link was certified on 21 December 2000, 331 days after the contractual Date for Completion of 26 January 2000. As part of the certification of completion, certain works related to groundwater monitoring and CTCS software were nominated for subsequent certification (Certifiable Works) and a total amount of $4 million was deposited with the State to secure the completion of these works. At 30 June 2001, two items of Certifiable Works remained outstanding and $2.7 million remained on deposit in respect of these items. These items are expected to be completed by 24 August 2001. Burnley Tunnel Failure On 19 February 2001, a structural failure in an arch section of the Burnley Tunnel resulted in a full closure of the Burnley Tunnel for nine days. Subsequently, one lane was closed over half the length of the tunnel to allow repair of the failed section. Full three-lane operation was restored on 17 June 2001. This failure is a defect in the works undertaken by TOJV and under the contract between Transurban and the TOJV, the TOJV is liable for the cost of rectifying the defect and any resultant damages suffered by Transurban. In this latter category, Transurban lost approximately $1.9 million in toll revenue and incurred $0.6 million in consulting costs. These amounts will be claimed from the TOJV. Extensive investigations of the entire tanked section of tunnel were undertaken subsequent to the failure. As a consequence of these investigations, the TOJV has recommended the installation of a physical restraint at the arch floor joint throughout the tanked section of the tunnel. The purpose of this restraint is to provide a high degree of certainty that no further movements of the joint will occur. The TOJV will meet the cost of this work. (d) Income Tax Transurban has advice from Senior Counsel that the concession fees are immediately deductible expenditure. The Company Accounts have been prepared on this basis (see note 4). Deductions in respect of concession fees account for $509.3 million of the Company’s carried forward taxable loss of $809.2 million at 30 June 2001. The Australian Taxation Office (ATO) and Transurban have been unable to agree on the treatment to be applied to concession fees and as a consequence the ATO issued an assessment in respect of the Company’s income tax return for the year ended 30 June 1998. Transurban lodged an objection to this assessment on 16 August 2000 and on 17 November 2000 the ATO disallowed the objection. On 21 December 2000, Transurban lodged an appeal in the Federal Court against the ATO decision to disallow the objection. The appeal is still progressing through directions and discovery processes and no date is set down for hearing of the matter. If the ATO’s position on deductibility of the Concession Notes is confirmed, the after tax internal rate of return for an investor subject to the corporate tax rate will be reduced to approximately 85 per cent of the return which would have been achieved if the Concession Fees were immediately deductible. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS (a) Commencement of Full Operations Following certification on 21 December 2000 of the completion of the Burnley Tunnel and the introduction of full tolls on all sections of the CityLink, the focus of the Company moved to operations and the Company’s ongoing 27 directors’ report on the Financial Report of Transurban City Link Limited and Controlled Entity. right to receive liquidated damages ceased. Action to recover the outstanding liquidated damages owed by the TOJV will continue. The construction activities of the Company are now limited to management of the defects correction period. (b) Refinance of Infrastructure Bonds The interest rate on Transurban’s $1,249 million infrastructure borrowing facilities has been reduced from 8.4 per cent per annum to 7.5 per cent per annum with effect from 1 July 2001. The basis for altering the interest rate going forward has also changed from being subject to adjustment in the corporate taxation rate to now being subject to changes in the top marginal personal taxation rate. The result of the change is a saving in interest costs of $11.2 million per annum, resulting in aggregate savings of $41.2 million over the balance of the term of the infrastructure facilities. (c) CTCS Development As part of the Interim Settlement Agreement with TOJV of 2 November 2000, agreement was reached on the functionality of the CTCS to be provided by the TOJV on final handover of the system. This agreed functionality excludes some works that TOJV undertook to complete as part of the D&C Contract. This functionality is not critical to Transurban’s ability to meet its obligations under the Concession Deed or to deliver satisfactory customer service, and a financial settlement on the value of these excluded works has been reached. On final handover, Transurban will take responsibility for the future development of the CTCS and has established an in- house development team for this purpose. This will ensure that the CTCS is developed to further improve customer service delivery and reduce customer service costs. MATTERS SUBSEQUENT TO THE END OF THE FINANCIAL YEAR At the date of this report, the directors are not aware of any circumstances that have arisen since 30 June 2001 that have significantly affected or may significantly affect the operations, and results of those operations or the state of affairs, of the consolidated entity in financial years subsequent to 30 June 2001. 28 LIKELY DEVELOPMENTS AND EXPECTED RESULTS OF OPERATIONS The major likely developments in operations in the next six months are as follows: (a) Liquidated Damages Transurban and TOJV will continue litigation in the Supreme Court relating to the enforceability of liquidated damages and arbitration of TOJV’s disputation of the Independent Reviewer’s determination that TOJV is not entitled to extensions of time. However, Transurban and the TOJV are continuing discussions in an attempt to bring about a negotiated settlement on all matters in dispute between them. (b) Burnley Tunnel A programme of enhancements to the arch toe of the Burnley Tunnel has been recommended by the TOJV. The enhancements are the result of the review of the Burnley Tunnel following the structured failure in February 2001. The design package for the enhancements is being reviewed and work is expected to commence early September 2001 for completion by the end of the year. (c) Customer Service Customer service delivery improvement is to continue over the year. The improvements will concentrate on the development and enhancement of self service channels (internet, kiosk and telephone) with the aim of improving customer access and reducing service delivery costs. The reduction in customer service costs over the year is targeted at $7.5 million ($11.2 million annualised) with a target for customer service costs of $33 million for 2001 – 2002. (d) New Business Opportunities Transurban wishes to use the skills and knowledge gained in the development and operation of CityLink to increase shareholder value by participating in new projects. In order to achieve this aim, Transurban is discussing with the State of Victoria the removal of the provisions in the Concession Deed which limit Transurban’s activities to the operation of CityLink, (the Single Purpose Constraint). EXPECTED RESULTS OF OPERATIONS Information on the expected results of operations has not been included in this report because the directors believe such information would be likely to result in unreasonable prejudice to the combined entity. directors’ report on the Financial Report of Transurban City Link Limited and Controlled Entity. ENVIRONMENTAL REGULATION As Operator, TLO must ensure it complies with EPA regulations. To meet this obligation, TLO monitors the emission of carbon monoxide, oxides of nitrogen and particulate matter from the Domain and Burnley Tunnel ventilation stacks. In addition, the Operator monitors ambient air quality around the tunnels. Current monitoring indicates emission levels from the stacks are well below the EPA licence limits, and that there has been an improvement in air quality since the tunnels opened. TLO is also required to regularly test the quality of the groundwater being discharged into the Yarra River. Tests show the water meets the standards under State Environment Protection Policy for water. INFORMATION ON DIRECTORS Laurence G Cox AO, B Com, FCPA, FSIA Mr Laurie Cox has had many years’ experience in Australia’s financial markets. He was the Chairman of the Australian Stock Exchange Limited from 1989 to 1994. Prior to joining Transurban, Mr Cox was Executive Chairman of the Potter Warburg Group of Companies and a Director of S G Warburg Securities of London. He is a director of Macquarie Bank Limited and Smorgon Steel Group Ltd and Chairman of Argosy Asset Management Australia Ltd, The Murdoch Childrens Research Institute and SMS Management Group and Technology Ltd. Age 62. Kimberley Edwards BE, MAdmin (Bus), FIE (Aust) Mr Kim Edwards has extensive experience managing major commercial and infrastructure projects in Australia, UK and the Middle East. Prior to joining Transurban, he was General Manager - Projects for Transfield, and was responsible for assembling the successful bid for the Melbourne City Link Project. He was Project Director for Jennings Group’s $650 million Southgate development in Melbourne and has worked overseas on large port infrastructure projects. Age 50. W H John Barr AM Mr John Barr has considerable experience in the Australian minerals and metals industry. He was Managing Director of the Australian subsidiary of Metallgesellschaft AG from 1974 until his retirement in June 1994. He is Chairman of Utilities of Australia Pty Ltd and The Swish Group Ltd, and a director of Iluka Resources Ltd and Oxiana Resources NL. Age 64. Peter C Byers B Com (Hons) Mr Peter Byers is a founding director and current Chairman of the Investment Committee of the Superannuation Scheme for Australian Universities. He was formerly business manager and deputy principal of the University of Tasmania. He is a director of Adelaide Airport Ltd and Hills Motorway Ltd, a director of the responsible entity of Hills Motorway Trust and a director of the Blair Athol Group. He is an alternate director for Hancock Victorian Plantations Holdings Ltd. Age 60. Geoffrey O Cosgriff BAppSc, Company Director Diploma, FIE (Aust), FAICD Geoff Cosgriff is the Managing Director of Energy and Utilities Logica Pty Ltd following the sale of the MITS business to Logica Pty Ltd. He was the Managing Director of MITS Limited since the company commenced operation in 1990. Over this period, MITS grew to 600 staff and nearly $100m in sales of information technology solutions. He is also director of Utility Services Corporation and Skilltech Consulting Services. Previously Geoff held executive management roles with Melbourne & Metropolitan Board of Works and has had extensive experience in the information technology industry. Age 48. Jeremy G A Davis BEc, MBA, MA, FAICD Professor Jeremy Davis holds the AMP Chair of Management in the Australian Graduate School of Management at the University of NSW. His academic interests are in the fields of business policy and corporate performance. He is Chairman of Capral Aluminium Ltd and a Fellow of the Australian Institute of Company Directors. Professor Davis is a former vice-president and director of the Boston Consulting Group, and a former director of the Australian Stock Exchange, AIDC Ltd and Nucleus Ltd. Age 58. Susan M Oliver BP&C Ms Susan Oliver is chair of Screen Sound Australia – The National Screen and Sound Archive and a director of Medical Benefits Fund and Programmed Maintenance Services Ltd. Ms Oliver was formerly a Senior Manager of Andersen Consulting. She has held board positions with the Victorian Institute of Marine Sciences, Interact Events Limited, FHA Design Pty Ltd and The Swish Group Ltd. Ms Oliver was also Managing Director of the Australian Commission for the Future Ltd. Age 50. Geoffrey R Phillips BE (Chem), MBA, MAICD Mr Geoffrey Phillips was appointed Finance Director on 28 August 1998 and has been with Transurban for five years. Prior to joining Transurban, he worked for the Potter Warburg Group for 6 years as director in both the Corporate Finance and Fixed Interest Divisions. He is currently a director of Yarra Valley Water Limited. Age 57. 29 directors’ report on the Financial Report of Transurban City Link Limited and Controlled Entity. MEETINGS OF DIRECTORS The numbers of meetings of the company’s board of directors and each board committee held during the year ended 30 June 2001, and the numbers of meetings attended by each director were: Name Directors’ Meeting Audit Committee Compliance Committee Nomination & Remuneration Committee Strategy Marketing Committee Eligible Attended Eligible Attended Eligible Attended Eligible Attended Eligible Attended to attend to attend to attend to attend to attend L G Cox K Edwards 2 W H J Barr P C Byers J G A Davis S M Oliver G R Phillips 2 G O Cosgriff 1 19 19 19 19 19 19 19 9 19 19 18 18 17 17 19 7 3 3 3 3 3 3 3 3 3 3 3 2 2 2 2 2 2 2 2 2 3 3 3 3 1 2 G O Cosgriff was appointed a director on 19 December 2000 K Edwards and G R Phillips are not members of the Audit, Compliance, Nomination & Remuneration and Strategy & Marketing Committees, but have been in attendance at all of these meetings. DIRECTORS’ INTERESTS The following are particulars of Stapled Securities as at the date of this Directors’ Report in which directors of the Company have disclosed a relevant interest. Number of Stapled Securities 775,000 61,000 15,000 50,000 4,745 10,000 35,000 Name L G Cox K Edwards W H J Barr P C Byers G O Cosgriff J G A Davis S M Oliver 30 directors’ report on the Financial Report of Transurban City Link Limited and Controlled Entity. DIRECTORS’ AND EXECUTIVES’ EMOLUMENTS The Nomination and Remuneration Committee has four members who recommend and review remuneration and benefit packages for directors and senior executives. Directors are paid an annual fee, the total of which does not exceed the amount specified in the constitution of the Company. No additional payments are made for attendance at committee meetings. All directors receive a superannuation guarantee contribution which is 8 per cent of their fees. They are permitted to make additional superannuation contributions through sacrifice of a corresponding amount of their annual fee. On retirement, non-executive directors with more than three years service are entitled to receive a lump sum payment equivalent to the total emoluments received during a third of the director’s total period of service or three years, whichever is the lesser. The following table shows remuneration details for each non- executive director of the Company: Name L G Cox W H J Barr P C Byers G O Cosgriff J G A Davis S M Oliver The following table shows remuneration details for the executive directors of the Company: Name and Position K Edwards - Managing Director G R Phillips - Finance Director Director’s Fee $ Superannuation $ Retirement $ 128,125 10,250 47,454 47,454 25,908 47,454 47,454 3,796 3,796 2,073 3,796 3,796 - - - - - - Total $ 138,375 51,250 51,250 27,981 51,250 51,250 Base Salary $ 510,600 287,037 Bonus $ 125,000 57,000 Superannuation $ Total $ 39,400 675,000 22,963 367,000 In addition to the above amounts, the following table sets out amounts, which have been accrued in respect of payments to which the executive directors are entitled following completion of construction. Name and Position K Edwards - Managing Director G R Phillips - Finance Director Total $ 700,000 256,500 31 directors’ report on the Financial Report of Transurban City Link Limited and Controlled Entity. The remuneration packages of executives include a base salary, superannuation and annual performance related incentives. The package is reviewed annually by the Nomination and Remuneration Committee. The base salary reflects the size of the job and level of skill and experience of the individual. The annual incentive is based on performance goals set at the start of the year. The following table shows remuneration details for the most highly remunerated executive officers of the Company: Name and Position B Bourke - General Manager, Customer Services & Marketing K Daley -Executive General Manager, Operations P O’Shea - General Counsel K Reynolds -General Manager, Construction C Tizi - Chief Information Officer Base Salary $ Bonus $ Superannuation $ Options $ Total $ 178,622 90,000 21,378 229,783 519,783 216,667 45,000 17,333 229,783 508,783 195,062 38,000 13,249 196,957 443,268 167,556 34,000 12,449 196,957 410,962 184,184 - 14,735 196,957 395,876 The amounts disclosed above for remuneration relating to options is the assessed fair values of options at the date they were granted to executive officers during the year ended 30 June 2001. A methodology to precisely value an option which is both subject to an exercise condition and capable of exercise on multiple dates is not available. A value for the options has been inferred from the values of similar options for which explicit valuation methodologies are available. Factors taken into account include the exercise price, the term of the option, the current price and expected price volatility of the underlying Stapled Security and the expected dividend yield. In addition to the above amounts, the following table sets out amounts which have been accrued in respect of payments to which the executive officers are entitled as a consequence of the completion of construction. 32 directors’ report on the Financial Report of Transurban City Link Limited and Controlled Entity. Name and Position K Daley - Executive General Manager, Operations P O’Shea - General Counsel K Reynolds - General Manager, Construction OPTIONS GRANTED TO EXECUTIVE OFFICERS Options over stapled securities of Transurban City Link Ltd that were granted during or since the end of the financial year to the most highly remunerated officers of the Company as part of their remuneration were as follows: Name and Position B Bourke - General Manager, Customer Services & Marketing K Daley - Executive General Manager, Operations P O’Shea - General Counsel K Reynolds - General Manager, Construction The options were granted under the Executive Option Plan on 26 April 2001. 2,350,000 options were issued during the year ended 30 June 2001. No Stapled Securities were issued during the year on the exercise of options. Total $ 202,500 171,000 153,000 Options granted 350,000 350,000 300,000 300,000 33 directors’ report on the Financial Report of Transurban City Link Limited and Controlled Entity. INDEMNIFICATION AND INSURANCE Article 12.1 of the Articles of Association of the Company provides that to the extent permitted by law, each person who is or has been an officer of the Company shall be indemnified against liability incurred by the person in his capacity as an officer of the Company unless the liability arises out of conduct on the part of the officer which involves a lack of good faith. The Company also indemnifies each person who is or has been an officer of the Company against liability for costs or expenses incurred by the person in his or her capacity as an officer of the Company in defending civil or criminal proceedings in which judgment is given in favour of the person or the person is acquitted or in connection with an application in which the Court grants relief to the person under the Corporations Law. Pursuant to this indemnification, the Company has paid a premium for an insurance policy for the benefit of directors, secretaries and executive officers of the Company and related bodies corporate of the Company. In accordance with common practice, the insurance policy prohibits disclosure of the nature of the liability covered and the amount of the premium. ROUNDING OFF The Company is of a kind referred to in Class Order 98/0100, issued by the Australian Securities & Investment Commission, relating to the ‘rounding off’ of amounts in the directors’ report and financial statements. Amounts in the directors’ report and financial statements have been rounded off in accordance with that Class Order to the nearest thousand dollars. AUDITOR PricewaterhouseCoopers continues in office in accordance with section 327 of the Corporations Act 2001. This report is made in accordance with a resolution of the directors. Transurban City Link Limited Laurence G Cox AO Chairman Melbourne 28 August, 2001 Kimberley Edwards Managing Director 34 statement of financial performance for the year ended 30 June 2001 Consolidated Parent Entity Notes 2001 $’000 2000 (a) $’000 2001 $’000 2000 (a) $’000 Revenue from ordinary activities 2 294,773 103,076 293,790 102,415 Expenses from ordinary activities: Operational costs Administration Concession Fees Valuation adjustments on Concession Notes Rental of land from Trust Depreciation and amortisation expenses Borrowing costs expense 3 3 3 (62,474) (20,632) (95,600) 74,171 (40,073) (62,474) (40,073) (10,492) (47,800) (20,632) (10,480) (95,600) (47,800) 36,135 74,171 36,135 (83,600) (40,811) (83,600) (40,811) (86,830) (42,633) (86,267) (42,633) (241,190) (120,760) (241,189) (120,760) Loss from ordinary activities before income tax (221,382) (163,358) (221,801) (164,007) Income tax on operating loss - - - - Loss from ordinary activities after income tax . (221,382) (163,358) (221,801) (164,007) Basic earnings per Stapled Security Diluted Earnings per Stapled Security Cents (43.0) (43.0) 29 29 Cents (34.0) (34.0) (a) Operations commenced on 3 January 2000. Amounts in the statement of financial performance for 2000 relate to the period 3 January 2000 to 30 June 2000. The above statement of financial performance should be read in conjunction with the accompanying notes 35 statement of financial position as at 30 June 2001 CURRENT ASSETS Cash assets Receivables Other Total Current Assets NON-CURRENT ASSETS Property, plant and equipment Total Non-Current Assets TOTAL ASSETS CURRENT LIABILITIES Payables Interest bearing liabilities Non-interest bearing liabilities Provisions Total Current Liabilities NON-CURRENT LIABILITIES Interest bearing liabilities Non-interest bearing liabilities Provisions Total Non-Current Liabilities TOTAL LIABILITIES NET (LIABILITIES) EQUITY Contributed Equity Retained Losses TOTAL EQUITY Consolidated Parent Entity Notes 2001 $’000 2000 $’000 2001 $’000 2000 $’000 5 6 7 42,819 20,779 693 64,291 25,032 12,839 1,160 39,031 42,819 20,779 36,537 100,135 24,532 12,839 37,580 74,951 8 2,822,278 2,886,495 2,785,342 2,849,495 2,822,278 2,886,495 2,785,342 2,849,495 2,886,569 2,925,526 2,885,477 2,924,446 9 10 11 12 13 14 15 16 17 37,504 434 24,869 137 37,480 24,438 434 137 121,223 96,550 121,223 96,550 2,568 580 2,568 580 161,729 122,136 161,705 121,705 1,391,262 1,269,653 1,391,262 1,269,653 1,712,282 1,690,853 1,712,282 1,690,853 936 1,142 936 1,142 3,104,480 2,961,648 3,104,480 2,961,648 3,266,209 3,083,784 3,266,185 3,083,353 (379,640) (158,258) (380,708) (158,907) 5,100 5,100 5,100 5,100 (384,740) (163,358) (385,808) (164,007) (379,640) (158,258) (380,708) (158,907) The above statement of financial position should be read in conjunction with the accompanying notes. 36 statement of cash flows for the year ended 30 June 2001 Cash flows from operating activities Receipts from customers (inclusive of GST) Payments to suppliers (inclusive of GST) Interest received Other revenue Deposits paid Borrowing costs Net cash inflows/(outflows) from Consolidated Entity Parent Entity Notes 2001 $’000 2000 $’000 2001 $’000 2000 $’000 158,116 (89,255) 142,002 3,111 (2,667) 26,945 157,540 26,945 (169,296) (89,226) (169,284) 71,626 1,212 141,973 3,111 - (2,667) 70,966 1,212 - (106,968) (36,321) (106,968) (36,752) operating activities 28 104,339 (105,834) 103,763 (106,913) Cash flows from investing activities Payments for property, plant and equipment (17,514) (1,310,770) (17,014) (1,272,260) Net cash outflow from investing activities (17,514) (1,310,770) (17,014) (1,272,260) Cash flows from financing activities Proceeds from Infrastructure Notes Proceeds of borrowings from the Trust Proceeds from provisional payments - 454,000 - 454,000 45,877 26,850 1,834,475 69,000 45,877 26,850 1,834,475 69,000 Repayment of borrowings from the Trust (141,563) (180,068) (141,563) (180,068) Proceeds of other borrowings Proceeds from issue of new Shares Repayment of EIBs Repayment of lease liability - - - 101,262 5,091 (454,090) 576 101,262 - - 5,091 (454,090) (202) (127) (202) (127) Net cash (outflow)/inflow from financing activities (69,038) 1,829,543 (68,462) 1,829,543 Net increase in cash at bank and cash collateral 17,787 412,939 18,287 Cash at bank and cash collateral at the beginning of the year 1,274,032 861,093 1,273,532 450,370 823,162 Cash at bank and cash collateral at the end of the financial year 5 1,291,819 1,274,032 1,291,819 1,273,532 Less cash collateral Cash at bank at the end of the financial year 13 5 1,249,000 1,249,000 1,249,000 1,249,000 42,819 25,032 42,819 24,532 Financing arrangements and credit facilities 13 The above statement of cash flows should be read in conjunction with the accompanying notes. 37 notes to the financial statements for the year ended 30 June 2001 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a) Basis of Accounting The financial statements are a general purpose financial report prepared in accordance with Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board, Urgent Issues Group Consensus Views and the Corporations Act 2001. The consolidated financial statements incorporate the assets and liabilities of the entity controlled by Transurban City Link Ltd (parent entity) as at 30 June 2001 and the results of the controlled entity for the year then ended. Transurban City Link Ltd and its controlled entity are together referred to in this financial report as the consolidated entity. The effects of all transactions between entities in the consolidated entity are eliminated in full. Unless otherwise stated, the accounting policies adopted are consistent with those of the previous year. b) Historical Cost Convention The financial statements are prepared on the basis of the historical cost convention and, except where stated, do not take into account current valuations of non-current assets. Cost is based on the fair values of the consideration given in exchange for assets. The fair value of cash consideration with deferred settlement terms is determined by discounting any amounts payable in the future to their present value as at the date of acquisition. Present values are calculated using rates applicable to similar borrowing arrangements of the Company. The consolidated entity has not adopted a policy of revaluing its non-current assets on a regular basis. (c) Revenue recognition Toll charges and related fees are recognised when the charge is incurred. d) Recoverable Amount of Non-Current Assets The recoverable amount of an asset is the net amount expected to be recovered through the net cash inflows arising from its continued use and subsequent disposal. The expected net cash flows included in determining recoverable amounts of non-current 38 assets are discounted to their present value using a market-referenced, risk-adjusted discount rate. Where net cash inflows are derived from a group of assets working together, the recoverable amount is applied to the relevant group of assets. Where the carrying amount of a non-current asset is greater than its recoverable amount the asset is revalued to its recoverable amount. e) Amortisation and Depreciation of Fixed Assets CityLink Fixed Assets Amounts classified as CityLink fixed assets are amortised over the estimated term of the right granted to the Company to operate CityLink (currently 33 years and 6 months), or the assets estimated useful lives, whichever is less. Amortisation commenced with operations on 3 January 2000 and is calculated on a straight line basis. The period of amortisation will be assessed annually. Other Plant and Equipment Depreciation is calculated on a straight line basis so as to write off the net cost of plant and equipment over their expected useful lives. Estimates of remaining useful lives will be made on a regular basis for all assets, with annual reassessments for major items. The expected useful lives are as follows: Plant and Equipment 3 – 15 years f) Leased Non-Current Assets Leases of plant and equipment where the consolidated entity assumes all the risks and benefits of ownership are classified as finance leases. Other leases are classified as operating leases. Finance leases are capitalised. A lease asset and liability are established at the present value of minimum lease payments. Capitalised lease assets are amortised on a straight line basis over the term of the lease or, where it is likely that the consolidated entity will obtain ownership of the asset, the life of the asset. Leased assets are being amortised over five years. Other operating lease payments are charged to the statement of financial performance in the periods in which they are incurred, as this represents the pattern of benefits derived from the leased assets. notes to the financial statements for the year ended 30 June 2001 g) Income Tax l) Employee Entitlements Income tax is brought to account in respect of the Company, which has adopted the liability method of tax effect accounting. Income tax expense is calculated on the operating profit of the Company, adjusted for permanent differences between taxable and accounting income. The tax effect of timing differences which arise from items being brought to account in different periods for income tax and accounting purposes is carried forward in the balance sheet as a future income tax benefit or a deferred tax liability. However, the future tax benefit relating to timing differences and tax losses is not carried forward as an asset unless the benefit is virtually certain of realisation. h) Receivables Collectibility of trade debtors is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off. A provision for doubtful debts is raised when some doubt as to collection exists. i) Trade and other creditors These amounts represent liabilities for goods and services provided to the consolidated entity prior to the end of the financial year and which are unpaid. The amounts are unsecured and are usually paid within 45 days of recognition. j) Infrastructure Loan Facilities The Company has two Infrastructure Loan facilities. Under the terms of these facilities, the Company must provide cash collateral equal to the utilised amounts of the facilities. This cash collateral has been set-off against the outstanding infrastructure borrowing facilities so that no asset or liability in respect of those facilities has been recorded in the balance sheet of the consolidated entity. k) Non Interest Bearing Long Term Debt Non interest bearing long term debt represented by the Concession Notes has been included in the financial statements at the present value of expected future repayments. The present value of expected future repayments is determined using a discount rate applicable to the consolidated entity’s other borrowing arrangements. The present value of expected future repayments will be reassessed periodically. The Company contributes the statutory minimum to superannuation plans as nominated by the employee. The superannuation plans are all accumulation funds. Liabilities for current and deferred employee compensation and annual leave are recognised, and are measured as the amount unpaid at the reporting date at current pay rates in respect of employees’ services up to that date. The cost of current and deferred employee compensation and contributions to employee superannuation plans were charged to the statement of financial performance. m) Borrowing Costs Borrowing costs are recognised as expenses in the period in which they are incurred and include: • Interest on short-term and long-term borrowings • Costs incurred in connection with the arrangement of borrowings, and • Finance lease charges. n) Cash Flows For the purpose of the statement of cash flows, cash includes cash on hand, deposits held at call with banks, investments in money market instruments and amounts held on deposit as collateral for the Infrastructure Loan facilities. o) Conditional Receipts Where the consolidated entity has received payments that are provisional or subject to legal dispute, the total value of the receipts will be accounted for as a liability and will not be reclassified as revenue until the nature of the receipt is virtually certain and supports the classification as revenue. p) Earnings per Share (i) Basic Earnings per Share Basic earnings per share is determined by dividing the profit after income tax attributable to shareholders by the weighted average number of shares outstanding during the financial year. 39 notes to the financial statements for the year ended 30 June 2001 (ii) Diluted Earnings per Share q) Rounding of amounts Diluted earnings per share adjusts the figures used in the determination of basic earnings per share by taking into account the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential shares. The consolidated entity is of a kind referred to in Class Order 98/0100 issued by the Australian Securities and Investments Commission, relating to the ‘rounding off’ of amounts in the financial report. Amounts in the financial report are rounded off to the nearest thousand dollars in accordance with that Class Order. 2. REVENUE Revenue from operating activities Toll revenue Fees revenue Advertising revenue Revenue from outside the operating activities Interest Other Total Revenue Consolidated Parent Entity 2001 $’000 2000 $’000 2001 $’000 2000 $’000 143,129 29,894 142,606 29,894 4,193 3,530 892 1,204 4,193 3,530 892 1,204 150,852 31,990 150,329 31,990 142,439 71,078 141,979 70,417 1,482 143,921 294,773 8 71,086 103,076 1,482 143,461 293,790 8 70,425 102,415 40 notes to the financial statements for the year ended 30 June 2001 Consolidated Parent Entity 2001 $’000 2000 $’000 2001 $’000 2000 $’000 3. OPERATING LOSS Expenses Losses from ordinary activities before income tax expense includes the following specific expenses: Operational expenses 62,474 40,073 62,474 40,073 Depreciation and amortisation CityLink and Exhibition Street Extension Other fixed assets 84,260 2,441 86,701 42,381 187 42,568 83,697 2,441 86,138 42,381 187 42,568 Amortisation of plant and equipment under finance lease 129 65 129 65 Total depreciation and amortisation 86,830 42,633 86,267 42,633 Bad and doubtful debts - trade debtors 525 19 525 19 Borrowing costs Interest and finance charges paid/payable 241,190 120,760 241,189 120,760 Provision for employee entitlements 1,322 176 1,322 Rental expenses relating to operating leases 816 182 816 176 182 41 notes to the financial statements for the year ended 30 June 2001 Consolidated Parent Entity 2001 $’000 2000 $’000 2001 $’000 2000 $’000 4. INCOME TAX a) The income tax loss for the financial year differs from the amount calculated on the loss. The differences are reconciled as follows: Loss from ordinary activities before income tax (221,382) (163,358) (221,801) (164,007) Income tax calculated at 34% (2000: 36%) (75,270) (58,809) (75,412) (59,043) Tax effect of permanent differences Infrastructure borrowing facility interest not deductible Benefit of tax losses not recognised Income tax expense b) Tax losses at beginning of year Tax Losses for the year Tax Losses at end of year 33,766 41,504 - 655,229 153,999 809,228 17,327 41,482 - 33,766 41,646 - 17,327 41,716 - 361,061 294,168 655,229 655,229 153,999 809,228 361,061 294,168 655,229 Potential future income tax benefits at 30 June 2001 for tax losses not brought to account for the consolidated entity are $242,768,000 (gross $809,228,000). These future income tax benefits are not being brought to account as an asset as they do not meet the requirements of note 1g. Legislation has been introduced to reduce the tax rate to 30% from the 2001-2002 income tax year and probable that tax losses not brought to account for the Company will be realised at 30%. These benefits of tax losses will only be realised if: (i) the consolidated entity derives future assessable income of a nature and of an amount sufficient to enable the benefit from the deductions for the losses to be realised; (ii) the consolidated entity continues to comply with the conditions for deductibility imposed by tax legislation; and (iii) no changes in tax legislation adversely affect the ability of the consolidated entity to realise the benefit from the deductions for the losses. The above tax position is based on tax ruling requests relating to borrowing costs and interentity transactions. However, the ATO has not given its opinion in relation to all of these requests. 42 notes to the financial statements for the year ended 30 June 2001 Transurban has advice from Senior Counsel that the concession fees should be immediately deductible expenditure. The Accounts have been prepared on this basis. Deductions in respect of concession fees account for $509,254,000 of the consolidated entity’s carried-forward loss of $809,228,000 at 30 June 2001. The Company and the ATO have been unable to agree on the treatment to be applied to concession fees and as a consequence the ATO issued an assessment in respect of the Company’s income tax return for the year ended 30 June 1998. Transurban lodged an objection to this assessment on 16 August 2000 and on 17 November 2000 the ATO disallowed the objection. On 21 December 2000, Transurban lodged an appeal in the Federal Court against the ATO decision to disallow the objection. The appeal is still progressing through directions and discovery processes and no date is set for hearing of the matter. If the ATO’s position on deductibility of the Concession Notes is confirmed, the after tax internal rate of return for an investor subject to the corporate tax rate will be reduced to approximately 85 per cent of the return which would have been achieved if the concession fees were immediately deductible. 5. CASH ASSETS – CURRENT ASSETS Cash at bank The above figures are reconciled to cash at the end of the financial year as shown in the statement of cash flows as follows: Cash at bank - as above Cash collateral (see note 1j) The amount shown in Cash at Bank includes $36.6 million which is held in Reserve Accounts related to borrowing facilities and is not available for general use. (2000: $14.6 million) 6. RECEIVABLES – CURRENT ASSETS Trade Debtors Less: Provision for Doubtful Debts Other Debtors Consolidated Parent Entity 2001 $’000 2000 $’000 2001 $’000 2000 $’000 42,819 42,819 25,032 25,032 42,819 42,819 24,532 24,532 42,819 25,032 42,819 24,532 1,249,000 1,249,000 1,249,000 1,249,000 1,291,819 1,274,032 1,291,819 1,273,532 7,593 (342) 7,251 13,528 20,779 3,859 (19) 3,840 8,999 12,839 7,593 (342) 7,251 13,528 20,779 3,859 (19) 3,840 8,999 12,839 43 notes to the financial statements for the year ended 30 June 2001 7. OTHER – CURRENT ASSETS Prepayments Advance to Clepco Consolidated Parent Entity 2001 $’000 693 - 693 2000 $’000 1,160 - 1,160 2001 $’000 2000 $’000 693 35,844 36,537 1,160 36,420 37,580 8. PROPERTY, PLANT AND EQUIPMENT – NON CURRENT ASSETS a) CityLink Fixed Assets CityLink and Exhibition Street Extension 2,936,979 2,925,343 2,899,480 2,888,343 Less: Accumulated depreciation (126,641) (42,382) (126,078) (42,382) 2,810,338 2,882,961 2,773,402 2,845,961 Equipment and Fittings Equipment and fittings at cost Less: Accumulated depreciation Equipment and fittings under finance lease Less: Accumulated amortisation 14,455 (2,902) 11,553 979 (592) 387 3,498 (480) 3,018 979 (463) 516 14,455 (2,902) 11,553 979 (592) 387 3,498 (480) 3,018 979 (463) 516 Total Property, plant and equipment 2,822,278 2,886,495 2,785,342 2,849,495 Non-current assets pledged as security Refer to note 13 for information on non-current assets pledged as security by the parent entity or its controlled entities. 44 notes to the financial statements for the year ended 30 June 2001 b) Reconciliations Reconciliations of the carrying amounts of each class of property, plant and equipment at the beginning and end of the current and previous financial year are set out below. CityLink and Equipment Equipment Total ESE and Fittings and Fittings - leased $’000 - at cost $’000 $’000 $’000 Consolidated - 2001 Carrying amount at the start of the year Additions Disposals Depreciation/amortisation expense charged to statement of financial performance Carrying amount at year end Consolidated - 2000 Carrying amount at the start of the year Additions Disposals Depreciation/amortisation expense charged to statement of financial performance Depreciation/amortisation expense capitalised Carrying amount at year end Parent Entity - 2001 Carrying amount at the start of the year Additions Disposals Depreciation/amortisation expense charged to statement of financial performance Carrying amount at year end Parent Entity - 2000 Carrying amount at the start of the year Additions Disposals Depreciation/amortisation expense charged to statement of financial performance Depreciation/amortisation expense capitalised Carrying amount at year end 2,882,961 11,637 - (84,260) 2,810,338 2,688,336 237,007 - (42,382) - 2,882,961 2,845,961 11,138 - (83,697) 2,773,402 2,688,336 200,007 - (42,382) - 2,845,961 3,018 11,031 (55) (2,441) 11,553 402 3,096 - (187) (293) 3,018 3,018 11,031 (55) (2,441) 11,553 402 3,096 - (187) (293) 3,018 516 2,886,495 - - 22,668 (55) (129) (86,830) 387 2,822,278 645 2,689,383 - - 240,103 - (65) (64) 516 (42,634) (357) 2,886,495 516 2,849,495 - - 22,169 (55) (129) (86,267) 387 2,785,342 645 2,689,383 - - 203,103 - (65) (64) 516 (42,634) (357) 2,849,495 45 notes to the financial statements for the year ended 30 June 2001 9. PAYABLES – CURRENT LIABILITIES Trade creditors Other creditors Final EIB distribution 10. INTEREST BEARING LIABILITIES – CURRENT LIABILITIES Secured Lease liability (note 22) Consolidated Parent Entity 2001 $’000 2000 $’000 2001 $’000 2000 $’000 18,371 10,656 8,477 37,504 6,440 9,952 8,477 24,869 18,371 10,632 8,477 37,480 6,440 9,521 8,477 24,438 434 434 137 137 434 434 137 137 11. NON-INTEREST BEARING LIABILITIES – CURRENT LIABILITIES Prepaid tolls Provisional payments - liquidated damages 14,412 106,811 121,223 16,466 80,084 96,550 14,412 106,811 121,223 16,466 80,084 96,550 12. PROVISIONS – CURRENT LIABILITIES Employee entitlements 2,568 2,568 580 580 2,568 2,568 580 580 13. INTEREST BEARING LIABILITIES – NON CURRENT LIABILITIES Secured Lease Liabilities (note 22) Land Transport Notes Infrastructure Loan facility Less: Cash collateral (note 1j) Infrastructure Note facility Less: Cash collateral (note 1j) Advance from the Trust - 434 - 434 94,549 94,549 94,549 94,549 795,000 795,000 795,000 795,000 (795,000) (795,000) (795,000) (795,000) 454,000 454,000 454,000 454,000 (454,000) (454,000) (454,000) (454,000) 1,296,713 1,174,670 1,296,713 1,174,670 1,391,262 1,269,653 1,391,262 1,269,653 Set-off of Assets and Liabilities A legal right of set-off exists in respect of the specific cash deposits of $795 million, representing collateralisation of liabilities under the Infrastructure Loan facility and $454 million, representing collateralisation of liabilities under the Infrastructure Note facility. 46 notes to the financial statements for the year ended 30 June 2001 Financing Arrangements and Credit Facilities Credit facilities are provided as part of the overall debt funding structure and comprise an Infrastructure Loan facility, an Infrastructure Note facility and a Land Transport Notes facility. Details of each facility are as follows:- a) Infrastructure Loan Facility $795 million facility certified by the Development Allowance Authority to qualify for concessional tax treatment under Division 16L of the Income Tax Legislation. The loan is secured by cash collateral equal to the amount of the loan which is set off against the loan liability. The principal of the Infrastructure Loan facility will be repaid from the cash collateral during the nine years from 4 March 1996. The facility was fully drawn as at 30 June 2001. b) Infrastructure Note Facility $454.09 million facility certified by the Development Allowance Authority to qualify for concessional tax treatment under the Income Tax Legislation. The loan is secured by cash collateral equal to the amount of the loan. The facility was fully drawn as at 30 June 2001. c) Land Transport Notes $94.5 million facility is subject to an Infrastructure Borrowing Taxation Offset Agreement with the Federal Department of transport and Regional Services. The Noteholders qualify for an income tax rebate on interest received. The facility was fully drawn as at 30 June 2001. Details of the utilisation of borrowing facilities are as follows: - 2001 Available facilities Amount utilised Amount unutilised 2000 Available facilities Amount utilised Amount unutilised Infrastructure Facilities $’000 1,343,549 (1,343,549) - $’000 1,343,549 (1,343,549) - 47 notes to the financial statements for the year ended 30 June 2001 Consolidated Parent Entity 2001 $’000 2000 $’000 2001 $’000 2000 $’000 14. NON INTEREST BEARING LIABILITIES – NON CURRENT LIABILITIES Advance from the Trust Concession Notes 1,576,600 1,576,600 1,576,600 1,576,600 135,682 114,253 135,682 114,253 1,712,282 1,690,853 1,712,282 1,690,853 15. PROVISIONS – NON CURRENT LIABILITIES Employee entitlements Directors’ retirement 16. EQUITY a) Paid up capital 510,000,000 shares - fully paid - 936 936 666 476 1,142 - 936 936 666 476 1,142 5,100 5,100 5,100 5,100 5,100 5,100 5,100 5,100 b) Options 2,350,000 options were granted under the Transurban Executive Options Plan to eight senior executives of Transurban City Link Ltd (see note 19). No stapled securities were issued at 30 June 2001. 17. RETAINED LOSSES Retained losses at the beginning of the period (163,358) - (164,007) - Net losses incurred during the period (221,382) (163,358) (221,801) (164,007) Retained losses at the end of the financial year (384,740) (163,358) (385,808) (164,007) 18. REMUNERATION OF DIRECTORS Income paid or payable, or otherwise made available, to directors by entities in the consolidated entity and related parties in connection with the management of affairs of the parent entity or its controlled entity 1,440 1,464 1,440 1,464 48 notes to the financial statements for the year ended 30 June 2001 The number of directors whose income was within the following specified bands: $20,000 $40,000 $50,000 $70,000 $110,000 $120,000 $140,000 $340,000 $360,000 $620,000 $670,000 2001 Number 2000 Number - - - - - - - - - - - $29,999 $49,999 $59,999 $79,999 $119,999 $129,999 $149,999 $349,999 $369,999 $629,999 $679,999 1 - 4 - - - 1 - 1 - 1 - 4 - 1 1 1 - 1 - 1 - Consolidated Parent Entity 2001 $’000 2000 $’000 2001 $’000 2000 $’000 19. REMUNERATION OF EXECUTIVES Remuneration received, or due and receivable, from entities in the consolidated entity and related parties by executive officers (including directors) whose remuneration was at least $100,000 2,651 2,432 2,651 2,432 Remuneration above does not include option value Executive Option Plan The establishment of the Executive Option Plan was approved by the Board in March 2001. The first issue pursuant to the Plan was made on 26 April 2001 when 2,350,000 options were offered to eight executives, excluding the Managing Director and the Executive Finance Director. Each option is convertible into one Stapled Security. Each option is issued at no cost to the Optionholder. The exercise price of $3.817, has been determined by Transurban City Link Limited, as the weighted average market price over the week preceding the issue. Options vest in three equal tranches on the second, third and fourth anniversaries of their issue. The Exercise is subject to an Exercise Condition. The Exercise Condition involves a comparison between Total Shareholder Return (TSR) of Transurban’s Stapled Securities over the two years prior to a vesting date of options and the TSR of each of the other companies in the S&P/ASX 200 Industrials as at the end of the relevant Exercise Condition Test Period which have been in the S&P/ASX 200 Industrials for the full term of the Exercise Condition Test Period (Test Companies) measured over the same period. TSR measures the total return on investment of a security. It takes into account both capital appreciation and distribution income. Transurban and each of the Test Companies will be ranked according to their respective TSRs over the Exercise Condition Test Period. The ranking determines the extent to which vested options may be exercised. If Transurban’s TSR exceeds the 65th percentile of the ranking, 100% of the vested options may be exercised. If Transurban’s TSR is below the 25th percentile of the 49 notes to the financial statements for the year ended 30 June 2001 ranking, none of the vested options may be exercised. If the TSR falls between these percentiles, the percentage of vested options that may be exercised will be calculated according to a formula. Transurban City Link Limited has determined the market value of the Stapled Securities at their issue date to be $8,969,950. No Stapled Securities were issued during the year ended 30 June 2001 pursuant to the exercise of options. The market price per Stapled Security at 30 June 2001 was $4.50. The number of executive officers whose remuneration was within the following specified bands: $110,000 $140,000 $170,000 $190,000 $200,000 $210,000 $220,000 $240,000 $270,000 $290,000 $340,000 $360,000 $620,000 $670,000 - - - - - - - - - - - - - - 2001 Number 2000 Number $119,999 $149,999 $179,999 $199,999 $209,999 $219,999 $229,999 $249,999 $279,999 $299,999 $349,999 $369,999 $629,999 $679,999 - - 1 1 1 1 - 1 1 1 - 1 - 1 1 1 - - 1 1 1 - 1 1 1 - 1 - Total executive remuneration and the remuneration banding does not include amounts in relation to the grant of options under the Transurban Executive Option Plan. The options are not included as they were issued at no cost to the entity. The value of options exercised is included in executive remuneration in the year the options are exercised. 20. REMUNERATION OF AUDITORS Remuneration for the audit or review of the financial reports of the parent or any entity in the consolidated entity Remuneration for other services Consolidated Parent Entity 2001 $’000 2000 $’000 2001 $’000 2000 $’000 122 27 176 194 122 27 176 194 50 notes to the financial statements for the year ended 30 June 2001 21. CONTINGENT LIABILITIES Challenge to Infrastructure Bond Certificates – Allan v Transurban City Link Ltd Several persons applied to the Commonwealth Administrative Appeals Tribunal (AAT) for a review of the Development Allowance Authority (DAA) decision to issue infrastructure borrowing certificates in respect of the Infrastructure Loan facilities of the Company. All applications for review were denied. On 7 August 1997, the Federal Court dismissed an appeal by Mr. Peter Allan against the DAA. Mr Allan then appealed to the Full Federal Court and on 27 February 1998 the Court allowed his appeal and remitted the matter to the AAT for determination of certain factual issues. The Company applied to be joined as second respondent and became a party to the proceedings. On 9 September 1998 the AAT handed down its decision in favour of the DAA and Transurban. Mr Allan again appealed and the Federal Court (Justice Merkel) ordered that the matter again be remitted to the AAT for a further hearing. Transurban appealed this decision to the Full Court of the Federal Court. Transurban’s appeal of the decision of Justice Merkel to the Full Court of the Federal Court was heard on 30 August 1999 before Chief Justice Black and Justices Hill, Kenny, Marshall and Sundberg. Their decision was handed down on 10 December 1999. The court unanimously rejected Mr Allan’s arguments in a single judgement. They found that he did not have standing to challenge the certificates isued by the Development Allowance Authority. Mr Allan obtained special leave to appeal to the High Court. The appeal was heard by six judges of the Court on 23 May 2001. There is no indication as to when the court will hand down its decision. No material losses are anticipated in respect of this contingent liability. 22. CAPITAL COMMITMENTS Commitments for the acquisition of plant and equipment contracted for at the reporting date but not recognised as liabilities, payable: Within one year Later than one year but not later than 5 years Consolidated Parent Entity 2001 $’000 2000 $’000 2001 $’000 2000 $’000 - - - 5,115 - 5,115 - - - 5,115 - 5,115 The Company has entered into a Design and Construct Contract with the Transfield-Obayashi Joint Venture to design and construct CityLink for a fixed price of $1,020 million, and is subject to cross guarantees between the Trustee and the Company in relation to their respective obligations. 51 notes to the financial statements for the year ended 30 June 2001 Payments under the Design and Construct Contract make up the majority of the prior year capital commitments in the above table. Lease Commitments Commitments in relation to non-cancellable operating leases contracted for at the reporting date but not recognised as liabilities, payable: Within one year Later than one year but not later than five years Later than five years Commitments in relation to finance leases are payable as follows: Within one year Later than one year but not later than five years Later than five years Less: Future finance charges Total finance lease liabilities Representing lease liabilities Current (note 10) Non-current (note 13) Consolidated Parent Entity 2001 $’000 2000 $’000 2001 $’000 2000 $’000 1,146 1,856 - 3,002 450 - - 450 16 434 434 - 434 227 392 - 619 176 450 - 626 55 571 137 434 571 1,146 1,856 - 3,002 450 - - 450 16 434 434 - 434 227 392 - 619 176 450 - 626 55 571 137 434 571 Concession Fees The Concession Deed between the Company and the Melbourne City Link Authority provides for annual concession fees of $95.6 million for the first 25 years after the completion date of CityLink, $45.2 million for years 26 to 34 and $1 million thereafter if the concession continues beyond year 34. Until a certain threshold return is achieved, payments of concession fees due under the Concession Deed will be satisfied by means of the issue of non-interest bearing Concession Notes to the State. The Concession Notes have been accounted for in accordance with note 1k. 52 notes to the financial statements for the year ended 30 June 2001 Due to uncertainty in determining when the Concession Note liability will be paid, it has not been included in the aged analysis of amounts payable detailed above. Consolidated Parent Entity 2001 $’000 2000 $’000 2001 $’000 2000 $’000 2,568 - 580 666 2,568 - 580 666 2,568 1,246 2,568 1,246 Number Number 244 244 142 142 244 244 142 142 23. EMPLOYEE ENTITLEMENTS Provision for employee entitlements: Current (note 12) Non current (note 15) Employee numbers Average number of employees during the financial year 24. RELATED PARTY INFORMATION Controlling Entities The Company is an ultimate chief entity. Directors The name of each person who was a director of the Company at any time during the financial year is as follows: Laurence G Cox, Kimberley Edwards, WH John Barr, Peter C Byers, Geoffrey O Cosgriff, Jeremy GA Davis, Susan M Oliver, Geoffrey R Phillips. Remuneration and Service Agreements Remuneration received or receivable by the directors of the Company is disclosed in the Directors’ Report and note 18 to the financial statements. Transactions of Company Directors and their Director-Related Entities Concerning Stapled Securities The aggregate numbers of Stapled Securities acquired or disposed of and held at 30 June 2001 by directors or their director- related entities were as follows: Balance at 1 July 2000 Acquired Disposed Balance at 30 June 2001 Beneficial Non Beneficial 930,000 20,745 - 950,745 11,228,494 2,636,021 (32,794) 13,831,721 Total 12,158,494 2,656,766 (32,794) 14,782,466 53 notes to the financial statements for the year ended 30 June 2001 Company directors and their director-related entities will receive normal distributions on these Stapled Securities. All transactions relating to Stapled Securities were on the same basis as similar transactions with other Stapled Security holders. Other Transactions with Company Directors and Director Related Entities Laurence Cox is a director of Macquarie Corporate Finance Limited (a wholly owned subsidiary of Macquarie Bank Ltd), which is contracted to provide general advice on debt and equity finance. Laurence is a director of Macquarie Bank Ltd which was involved in the financial arrangements concerning the Land Transport Notes. During the year he acquired a further 245,895 Land Transport Notes issued at $1.00 bringing his total holding to 2 million LTNs. He is Chairman of SMS Management Group and Technology Ltd which is contracted to provide information technology consulting. The aggregate amounts that were brought to account in relation to transactions with Company directors and their director-related entities for each of the above type of transactions were as follows: Consolidated Parent Entity 2001 $’000 2000 $’000 2001 $’000 2000 $’000 636 24 - - 660 38 15 11,602 14,494 26,149 636 24 - - 38 15 11,602 14,149 660 25,804 Consulting fees Reimbursement of out of pocket expenses Design and construct payments Operator payments All of the above amounts represent payments on normal commercial terms made in relation to the provision of goods and services. Aggregate amounts payable to directors and their director related entities at balance date: Current liabilities 55 1,149 55 1,149 Aggregate amounts receivable from directors and their director related entities at balance date: Current assets - 44 - 44 54 notes to the financial statements for the year ended 30 June 2001 Other Related Parties Aggregate amounts that were either capitalised as part of leasehold improvements or charged to the statement of financial performance that resulted from transactions with other related parties were as follows: Trustee fees Aggregate amounts payable to and receivable from other related parties at balance date: Current liabilities Wholly-Owned Group Consolidated Parent Entity 2001 $’000 2000 $’000 2001 $’000 2000 $’000 - - 32 - - - 32 - The wholly-owned group consists of Transurban City Link Limited and its wholly-owned controlled entity, City Link Extension Pty Ltd. Ownership interest in this controlled entity is set out in note 25. Transactions between Transurban City Link Limited and its controlled entity during the years ended 30 June 2001 and 2000 consisted of: (a) loans advanced by Transurban City Link Limited; and (b) loans repaid to Transurban City Link Limited. Aggregate amounts receivable from entities in the wholly-owned group at balance date: Non-current receivables (loans) Parent Entity 2001 $’000 2000 $’000 35,844 36,420 25. INVESTMENT IN CONTROLLED ENTITY Transurban City Link Ltd owns 100 percent of City Link Extension Pty Ltd. The book value of this investment is $12. 55 notes to the financial statements for the year ended 30 June 2001 26. FINANCIAL INSTRUMENTS DISCLOSURE Interest Rate Risk The consolidated entity’s exposure to interest rate risk and the effective rates on financial assets and liabilities at 30 June 2001 were: Floating interest rate $’000 Notes Fixed Interest Rate Maturity 1 year between 1 or less and 5 years $’000 $’000 more than 5 years $’000 Non interest bearing $’000 Total $’000 Financial Assets Cash Sundry debtors Cash collateral 5 6 5 42,819 - - Total Financial Assets 42,819 Weighted average interest rate 3.17% Financial Liabilities Trade creditors Prepaid tolls Provisional payments 9 11 11 - - - Advance from Trust 13,14 1,296,713 - - - - - - - - - Lease liabilities Land Transport Notes Concession Notes Infrastructure Loan facility 10 13 14 13 - 434 94,549 - - - - - Total Financial Liabilities 1,391,262 434 Weighted average interest rate 10.93% 7.70% Net Financial Assets/(Liabilities) (1,348,443) (434) - - - - - - - - - - - - - - - - - - - 20,779 42,819 20,779 1,249,000 - 1,249,000 1,249,000 20,779 1,312,598 11.20% - - - - - - - - - 37,504 14,412 37,504 14,412 106,811 106,811 1,576,600 2,873,313 - - 434 94,549 135,682 135,682 1,249,000 - 1,249,000 1,249,000 1,871,009 4,511,705 7.95% - - - (1,850,230) (3,199,107) 56 notes to the financial statements for the year ended 30 June 2001 The consolidated entity’s exposure to interest rate risk and the effective rates on financial assets and liabilities at 30 June 2000 were: Floating interest rate $’000 25,032 - - 25,032 Notes 5 6 5 Financial Assets Cash Sundry debtors Cash collateral Total Financial Assets Weighted average interest rate 5.75% Financial Liabilities Trade creditors Prepaid tolls Provisional payments Advance from Trust Lease liabilities Land Transport Notes Concession Notes 9 11 11 - - - 13,14 1,174,670 10,13 - 94,549 13 - 14 Infrastructure Loan facility 13 - Total Financial Liabilities 1,269,219 Fixed Interest Rate Maturity 1 year between 1 or less and 5 years $’000 $’000 more than 5 years $’000 Non interest bearing $’000 Total $’000 - - - - - - - - - 137 - - - 137 - - - - - - - - - 434 - - - 434 - - - 12,839 25,032 12,839 1,249,000 - 1,249,000 1,249,000 12,839 1,286,871 11.20% - - - - - - - - - 24,869 16,466 80,084 1,576,600 - - 114,253 24,869 16,466 80,084 2,751,270 571 94,549 114,253 1,249,000 - 1,249,000 1,249,000 1,812,272 4,331,062 Weighted average interest rate 11.92% 7.70% 7.70% 7.73% - - Net Financial Assets/(Liabilities) . (1,244,187) (137) (434) - (1,799,433) (3,044,191) Reconciliation of Net Financial Assets/(Liabilities) to Net Assets/(Liabilities) Net financial assets/(liabilities) as above Non-financial assets and liabilities Property, plant and equipment Other assets Other liabilities Net assets/(liabilities) per balance sheet Notes 2001 $’000 2000 $’000 (3,199,107) (3,044,191) 8 7 12,15 2,822,278 693 (3,504) (379,640) 2,886,495 1,160 (1,722) (158,258) Credit Risk Credit risk represents the loss that would be recognised if counterparties failed to perform as contracted. The credit risk on financial assets is the carrying amount net of any provisions for doubtful debts. Net Fair Values of Financial Assets and Liabilities The carrying amount and net market value of financial assets and liabilities brought to account at balance date are the same. 57 notes to the financial statements for the year ended 30 June 2001 27. SEGMENT INFORMATION The consolidated entity operates in one geographic segment in Victoria, Australia and one industry segment being the design, construction and operation of the Melbourne City Link. 28. RECONCILIATION OF OPERATING LOSS AFTER INCOME TAX TO NET CASH FLOW FROM OPERATING ACTIVITIES Operating loss after income tax Depreciation and amortisation (Increase)/Decrease in prepayments Increase in creditors (Increase) in debtors Revaluation of Concession Notes Increase in provisions Increase in Loans Consolidated Parent Entity 2001 $’000 2000 $’000 2001 $’000 2000 $’000 (221,382) (163,358) (221,801) (164,007) 86,830 (693) 11,955 (13,287) 21,429 1,763 217,724 42,633 920 7,959 (6,313) 11,665 660 - 86,267 (693) 12,387 (13,313) 21,429 1,763 217,724 42,633 920 7,529 (6,313) 11,665 660 - Net cash inflow/(outflow) from operating activities 104,339 (105,834) 103,763 (106,913) 29. EARNINGS PER SHARE Basic earnings per share Diluted earnings per share Weighted average number of Stapled Securities used as the denominator in calculating basic earnings per Stapled Security Weighted average number of Stapled Securities and potential Stapled Securities used as the denominator in calculating diluted earnings per Stapled Security Information concerning the classification of securities (a) Shares (43 cents) (34 cents) (43 cents) (34 cents) 510,000,000 486,191,781 510,476,438 486,191,781 All shares are fully paid. They carry the right to participate in distributions and have been included in the determination of basic and diluted earnings per share. (b) Options Options granted to executives under the Transurban Executive Option Plan are considered to be potential shares and have been included in the determination of diluted earnings per shares. The options have not been included in the determination of basic earnings per share. 30. ECONOMIC DEPENDENCY The consolidated entity is reliant on the Trust for the ongoing funding of operations. 58 directors’ declaration The directors declare that the financial statements and notes set out on pages 35 to 58 a) comply with Accounting Standards, the Corporations Regulations and other mandatory professional reporting requirements; and b) give a true and fair view of the company’s and consolidated entity’s financial position as at 30 June 2001 and of their performance, as represented by the results of their operations and its cash flows, for the financial year ended on that date. In the directors’ opinion a) b) the financial statements and notes are in accordance with the Corporations Act 2001; and there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable. This declaration is made in accordance with a resolution of the directors. Laurence G Cox AO Chairman Kimberley Edwards Managing Director Melbourne 28 August, 2001 59 independent audit report