Transurban Group
Annual Report 2005

Plain-text annual report

www.transurban.com.au T r a n s u r b a n A n n u a l R e p o r t 2 0 0 5 m o v i n g utions distributions moving ...moving 54? per security moving 35? 50? per security per security 25.5? per security 2004 2005 2006* 2007* *forecast *forecast A n n u a l R e p o r t 2 0 0 5 distributions ...moving 54� per security 50� per security 35� per security 25.5� per security 2004 2005 2006* 2007* *forecast company ...moving $5.8 b* $1.8 b $594 m 1996 2000 2005 market capitalisation *excluding CARS all figures at June 30 of the relevant year  delivering     Annual Report 2005 for investors Transurban’ s appeal to investors is based on: A low risk diversified portfolio of toll road assets generating strong cash flows over the long term The growing, predictable, inflation protected nature of those cash flows The significant opportunities for sustainable growth as governments increasingly turn to the private sector to fund and manage new roads Transurban’s skills in actively managing the risks associated with those opportunities. Our track record Transurban listed on the Australian Stock Exchange in 1996 with a market capitalisation of $510 million. Today it is a Top 50 company and one of Australia’s largest infrastructure groups with a market cap of $5.8 billion. The company is committed to continually increasing distributions to investors – and we are delivering on that commitment with 25.5 cents per security in FY04, 35 cents in FY05, and forecasts of 50 cents per security in FY06 and 54 cents in FY07. CityLink 100% Ownership and Operations M2 100% Ownership WM7 40% Ownership 100% Customer Service and Tolling 65% 26% 9% Asset mix Our assets Transurban’s assets have been described by Sanjay Magotra of Citigroup as “all the bright jewels of the Australian toll road market”. Our future Transurban is a pioneer in a young, but rapidly growing global industry. In the next 10 years, McKinsey & Company estimates up to US$200 billion worth of new toll projects will be privately funded. With a healthy balance sheet and the core competencies developed in Sydney and Melbourne, Transurban is well placed to compete for carefully selected projects. Our key selection criteria are simple: We will only invest in projects that add value for investors We will only take on risks we believe we can manage. Transurban (TCL) ASX 200 220 200 180 160 140 120 100 80 60 s n r u t e r l r e d o h y t i r u c e s l a t o T 2 0 0 2 n a J 2 0 0 2 r a M 2 0 0 2 y a M 2 0 0 2 l u J 2 0 0 2 p e S 2 0 0 2 v o N 3 0 0 2 n a J 3 0 0 2 r a M 3 0 0 2 y a M 3 0 0 2 l u J 3 0 0 2 p e S 3 0 0 2 v o N 4 0 0 2 n a J 4 0 0 2 r a M 4 0 0 2 y a M 4 0 0 2 l u J 4 0 0 2 p e S 4 0 0 2 v o N 5 0 0 2 n a J 5 0 0 2 r a M 5 0 0 2 y a M 5 0 0 2 l u J Annual Report 2005  achieving     Annual Report 2005 in 2004/2005 Chairman and Managing Director’s Overview Active management is a feature of the key events over the year: The announcement of a new capital management strategy Transurban’s successful takeover of Hills Motorway, owner of the M2 in Sydney Continued progress in the development of Westlink M7, our 40 per cent owned new motorway in Sydney, which at the time of this report was scheduled to open in April next year Continued traffic growth and increased cost efficiencies on CityLink in Melbourne, still our cornerstone asset A ground breaking agreement with the State of Victoria to fund the upgrade of the Tullamarine/Calder interchange, a critical feeder on to CityLink Early success in pursuing new projects in the United States. 2004-05 was an excellent year for Transurban investors. Our company’s security price increased significantly. Distributions grew strongly, and growth is set to continue. On the last day of Financial Year 04, Transurban securities traded at $4.87. One year later, they were at $7.45. The company paid total distributions of 35 cents in FY2005, an increase of 37 per cent over FY2004. The forecast for FY2006 is 50 cents per security and for FY2007 it is 54 cents. That is a 54 per cent increase over the next two years. With road congestion escalating in much of the world, governments are increasingly turning to the private sector to meet the demand for new infrastructure. Our forecasts reflect more than the wealth of opportunities in a young, expanding industry. They are the result of careful, disciplined selection of the opportunities we pursue, a good understanding of the risks involved and active management of the assets we develop and manage. These are Transurban’s core skills and the basis for our success in 2004-05. Westlink M7’s Light Horse Interchange – the biggest interchange in the southern hemisphere Annual Report 2005  achieving in 2004/2005 Chairman and Managing Director’s Overview Financial results Capital management structure M2 Hills Motorway acquisition Transurban has always taken a conservative view of its capital structure. During the year, the Board conducted a review of the structure in the light of strong growth in both the value of our assets and the cash flows they generate. As a result of the review, we carried out a conservative regearing of the business, using our growing debt capacity to deliver a share of future expected revenue growth to investors earlier than originally planned. The new structure allowed us to announce higher distribution forecasts for investors. As part of the Hills acquisition, we announced an increase in our forecast distributions from the October 2004 regearing to 50 cents a stapled security in 2006 and 54 cents in 2007. These announcements were well received by the market and by the ratings agencies. Our security price increased and we maintained our A- credit rating on our senior debt. Transurban’s successful takeover bid for Hills Motorway, owner of the M2 in Sydney, was a company transforming event. The original offer was 1.47 Transurban securities for each Hills security. The offer was improved by adding a cash component of 25 cents for each Hills security. The increase amounted to just over 2 per cent and, as a result, the Hills Board of Directors supported the takeover. As a result of the takeover, there are some 4,000 new investors on the Transurban register. We take this opportunity to welcome you and look forward to meeting many of you at our Annual General Meeting, to be held in Sydney on 25 October. The merging of Hills and Transurban will extract substantial value for all investors. When we launched the takeover, we estimated the synergies and the cost savings they generate would be worth between $5 million and $6 million a year. We now believe these estimates are conservative. Transurban will move the M2 to high speed electronic tolling as quickly as possible, allowing us to extract maximum value for investors. Transurban is working with the Roads and Traffic Authority (RTA) of NSW to have electronic express lanes without boom gates in operation by the end of December 2005. The key figure in our financial results is the free cash flow before non-cash items - $182.8 million, up 35 per cent from $135.4 million in the previous year. This is the figure that underwrites our capacity to pay distributions to security holders. The accounting loss before tax was $87.8 million, compared to $61.5 million the year before. The higher loss reflects the additional depreciation of $15.5 million due to the acquisition of the M2 Hills Motorway in Sydney. Non-cash items do not impact our ability to pay distributions. Revenue was $511.7 million, up from $467.7 million the prior corresponding period. The $511.7 million is made up of $297.8 million from tolling and fees, $3.6 million from outdoor advertising, $185.7 million from interest and $24.6 million in other revenue. While tolls on existing assets generated the bulk of our revenue, the development teams delivered significant value for investors. In 2004-05, they were responsible for the takeover of Hills Motorway and the Tullamarine/ Calder interchange agreement. Operating costs were $92.4 million, compared to $77.1 million in the prior corresponding period.     Annual Report 2005 Distributions grew strongly this year, and growth is set to continue. Laurie Cox Chairman Higher forecast distributions The merger of Transurban and Hills has enabled a further increase in forecast distributions to investors. Both companies had under-geared balance sheets, allowing us to increase gearing and optimise the merged balance sheet. We again took a cautious approach, maintaining conservative debt covenants and an A-rating on senior debt. Westlink M7 In 2003 Transurban invested $400 million for a 40 per cent stake in Westlink M7, the new motorway currently under development in western Sydney. Successful management of the risks involved in the project should see the value of our investment significantly re-rated when the project is completed. As in all new toll roads, the major risks are construction, tolling and customer service, and traffic. Transurban is the tolling contractor for the M7, ensuring lessons learned on CityLink are applied to the new project. Both the Westlink Board and the RTA have accepted our tolling, customer management and marketing plans. Tolling gantries and the tolling system have been installed and are undergoing acceptance testing. The final risk is the traffic forecast. Since financial close, there has been enormous growth in the Westlink corridor. The project is attracting significant economic development, with major national companies moving to take advantage of the road. The NSW Government has announced that homes for 250,000 people will be built in growth areas near Westlink M7 within the next 30 years. We are confident that the road will prove to be a very successful investment for our security holders. CityLink CityLink continues to deliver for our investors. In 2004-05, traffic on the road grew by 4.6 per cent and revenue by 8 per cent. This takes into account an extra day for the leap year. CityLink’s ongoing focus on cost control and improvement initiatives resulted in a 14 per cent cost efficiency improvement in the customer service business. Tullamarine/Calder interchange agreement In January 2005, Transurban and the Victorian Government reached an agreement to fund the upgrade of the Tullamarine/Calder interchange, a badly congested traffic blackspot that feeds directly on to CityLink. Transurban is bringing forward the payment of Concession Fees payable to the State under the CityLink Concession Deed to pay for the upgrade. The upgrade is scheduled for completion in July 2007 and Transurban will benefit from increased traffic on CityLink. This upgrade will be done in cooperation with the State Government, which demonstrates the importance of active, ongoing management of toll road concessions. Transurban is committed to working with governments over the life of its concessions to ensure we continue to respond to changing community needs and expectations. Annual Report 2005  achieving in 2004/2005 Chairman and Managing Director’s Overview International opportunities People In the US, we are targeting projects that play to our strengths - the acquisition of existing roads and High Occupancy Toll (HOT) lanes. HOT lanes are electronically tolled lanes constructed adjacent to congested motorways so drivers have the choice to pay for travel time savings. There is an added incentive in that cars with three or more passengers travel free of charge. HOT lane projects on existing roads have relatively low traffic risk, as traffic patterns are already established. Such projects require skills in traffic forecasting and tolling - skills we have demonstrated in Australia. Transurban has established an office in New York and we are assessing three potential projects in the State of Virginia. Two of these are HOT lane projects and one is the acquisition of an existing road. We are in an exclusive negotiating position on two projects and are shortlisted for one. If successful in these projects, Transurban will be involved in tolling and operations and will have the opportunity of investing equity if the projects meet our investment criteria. In the United Kingdom, we have opened an office in London, where we are building relationships with potential partners and monitoring emerging project opportunities. In previous years, we have paid tribute to the ability of Transurban employees to respond to new challenges. In 2004-05, they once again demonstrated that they thrive in an environment of change and growth. At year’s end we had 490 employees, and this number is rising as we gear up for the opening of Westlink M7. Employees have played a crucial role in the development of the company’s Corporate Social Responsibility programs. They have been active in reviews to better understand our environmental and social impacts and the roll-out of programs to enhance our performance in these areas. Deputy Managing Director, Geoff Phillips, retired in 2005. For over nine years he played a major role in our success. Geoff will continue to represent Transurban on the Westlink Motorway Board and will undertake consultancy work for us from time to time. In anticipation of Geoff’s retirement we recruited Chris Brant as Chief Finance Officer during the year. Before joining us, Chris had a long and successful career at Deloitte Touche Tohmatsu, where he most recently headed up the Asia Pacific Energy & Resources Industry Group. During his time with Deloitte, he was involved in a number of public floats, capital raisings and domestic and international financing for major Australian corporations. Mitcham-Frankston Freeway One disappointing aspect of 2004-05 was our failure to win the concession to develop and manage the Mitcham- Frankston Freeway (since renamed Eastlink) in Melbourne. We submitted a competitive offer which reflected our determination to protect the interests of investors. We are not interested in winning projects if there is a risk that they may undermine security holder value. Transurban’s share of our consortium’s costs in bidding for Mitcham-Frankston was approximately $9.4 million, less a reimbursement due from the State. This amount has been expensed in 2004-05, and includes $7 million which had been deferred in prior periods. 0    Annual Report 2005 Our succesful takeover of M2 Hills Motorway was a company transforming event this year. Kim Edwards Managing Director We will continue to actively manage our existing assets. We are optimistic about the future. And our optimism is based on a sound understanding of the business we are in and the opportunities it provides. Recently, Christopher J S Renwick joined the Transurban Board. Chris has a wealth of experience in mining, operational business management and law. He is the Chairman of Coal and Allied Industries Limited and the Rio Tinto Aboriginal Foundation. From 1969 to 2004, he held senior positions in CRA Limited and then Rio Tinto Limited. Conclusion Transurban is now a Top 50 company on the ASX. We are one of Australia’s largest infrastructure groups with a market capitalisation of $5.8 billion. We have a low risk, diversified portfolio of three toll roads, widely recognised as the best in Australia and incorporating the main freight corridors in Sydney and Melbourne. Our roads generate strong cash flows and underpin substantial funding capacity. We are well placed to win new projects in the United States. In the coming years, many new toll road projects will come on to the market in Australia, the United States and Europe. We have a cautious approach to competing for those projects. We will only participate where we are confident we can add value for our investors. Laurence G Cox AO Chairman Kimberley Edwards Managing Director Full electronic tolling – allowing traffic to flow freely Annual Report 2005  shaping 2    Annual Report 2005 the Sydney road network This year Transurban successfully acquired M2 Hills Motorway, a 21 kilometre motorway in Sydney that will link to our Westlink M7 project when it opens in 2006. This will create 61 kilometres of Transurban-operated motorway in Australia’s highest growth transport corridor. As a 40 per cent owner of the M7, 100 per cent owner of the M2 and the tolling operator for both motorways, Transurban now has a major stake in around half of Sydney’s overall motorway network. Our priority over the coming year is to provide motorists with a seamless journey from Liverpool in the south to Lane Cove in the north. Transurban will introduce electronically tolled express lanes on the M2 by the end of 2005. By operating both the M7 and M2 we will create one free-fl owing corridor that will benefi t motorists and local industry, and deliver value for investors. of the M2 to investors, motorists and the community. We expect to deliver signifi cant synergies, savings and traffi c growth through active management of the road. Our forecasts indicate Transurban’s integration of the M2 Hills Motorway will generate synergies and costs savings of about $5-6 million per year. M2 Hills Motorway Transurban acquired the M2 in June 2005, just fi ve months after announcing an off er to take over the company. Transurban’s current priority is to deliver immediate benefi ts from the acquisition Sydney Metropolitan Road Network M2 Hills Motorway – Key Facts 21 kilometre roadway in Sydney, Australia Acquired by Transurban June 2005 Electronically tolled express lanes introduced by December 2005 Concession until 2042 Strong residential growth from the northwest Will link to the M7 and Lane Cove Tunnel Annual Report 2005 13 shaping the Sydney road network Towards free flowing traffic on M2 Subject to government approval, the M2 will move to 100 per cent electronic tolling by 2007. This will bring it in line with the Westlink M7 and Lane Cove Tunnel motorways, which link directly to the M2. Transurban plans to expand electronic tolling on the M2 by the end of 2005 by creating two new express lanes to reduce congestion at toll booths and reduce the need to slow down or stop to pay tolls. The M2 express lanes will allow motorists to travel 61 kilometres along the M2 and Westlink M7 from Liverpool to Lane Cove without stopping at a single traffic light or toll booth. Fully electronic express lanes on M2 will help create value for investors by increasing road capacity – and hence traffic revenuevv and decreasing the number of uncollected tolls. A manual toll booth can handle approximately 600 vehicles per hour while one fully electronic toll lane can process around 2,200 vehicles per hour. Transurban will introduce a new robust enforcement system on the M2 to stem revenue leakage from current operations. The development of a single customer service brand – soon to be operating across both M2 and Westlink M7 – will encourage even greater use of both roads as well as providing smooth connections to the surrounding road network. Westlink M7 Westlink M7 can be described as the missing link in Sydney’s orbital motorway network since it joins three motorways – M2, M4 and M5. It will be Sydney’s first distance-based fully electronic toll road when it opens to traffic next year. Distance-based tolling means motorists only pay for the distance travelled. This is a new and fairer concept in Sydney and will require a strong emphasis on community education about cost and travel time benefits. The M7 will significantly improve access to western Sydney and save motorists time and petrol by avoiding up to 48 sets of traffic lights. At the time of this report, the road was scheduled to open in April 2006.     Annual Report 2005 Transurban will operate tolling and customer service functions on the M7, and the company is on schedule to have verified and tested tolling systems in place to do this well ahead of the road’s opening date. This early delivery was only possible due to the technical expertise we gained on CityLink’s development. The 40-kilometre M7 includes 17 access points, which is a real benefit for local businesses and commuters. Westlink M7 - Key Facts 40 kilometre motorway in Sydney, Australia 100 per cent electronically tolled Concession until 2037 Toll increases in line with CPI Construction ahead of schedule Due for completion by April 2006 Consumer marketing and brand launch last quarter of 2005 Strong industrial and residential growth in corridor Links the M2, M4 and M5 motorways M2 Hills Motorway meets Westlink M7 in Baulkam Hills My job is to make sure Roam delivers an excellent customer experience...every time. Jan Lewis Head of Customer Operations - Roam Corridor of Growth Strong industrial growth continues to exceed early forecasts for western Sydney, and Westlink M7 is becoming a magnet for economic development and accelerated investment in the area. Over the next five years almost half of Sydney’s industrial construction will occur around the M7’s Light Horse Interchange at Eastern Creek. Major national companies including LG Electronics, Coles, Coca Cola, Woolworths, TNT and Bluescope Steel have already moved to take advantage of locations in the business and industrial parks in the M7 corridor. Residential development is also gathering momentum. In December the NSW Government announced an additional 160,000 new homes will be built in the region over the next 30 years to accommodate at least 250,000 people. These new areas will contain 80 new neighbourhoods and represent 30 per cent of Sydney’s growth over the next three decades. The M7 will provide these communities with access to the rapidly growing industrial and business parks in western Sydney and the major employment centres, including Liverpool, Parramatta, Blacktown, Fairfield and Castle Hill. Transurban plans to expand full electronic tolling on the M2 (designer’s impression) Introducing Roam A new tolling brand in NSW This year Transurban will introduce a new customer-focused tolling brand in the NSW market. – all backed by clear and effective product information. We know from CityLink that customer service is vital for high road use. Our NSW tolling brand offers a single contact point for Sydney’s multiple toll roads, an extensive range of easy-to-use products and 24-hour customer service The new brand – Roam – has been developed well before opening the M7 and will be launched before the end of 2005. Roam’s products are tailored to each market segment and include e-TAGs and a video- based tolling product called e-PASS. Roam will also provide specialised services for commercial customers to make managing large fleets easier, such as electronic billing and business account management. Annual Report 2005  moving     Annual Report 2005 Melbourne motorists CityLink showed strong growth in 2004-05, again demonstrating its value to Transurban investors. Average daily traffic was up 4.6 per cent and revenue increased by 8 per cent. The company had further success in reducing operational costs while continuing to focus on refining its approach to customer service. Over the year, CityLink reached several important milestones. The one millionth e-TAG® device was distributed, and there are now more than 700,000 customer accounts—a 7 per cent increase on last year. CityLink’s Gateway entrance to Melbourne Revenue up, costs down A number of programs across the business contributed to CityLink’s strong revenue growth and continued progress in lowering costs in 2004-05. The video tolling product for occasional CityLink users—ACCESS—continues to attract new customers. After just two years, there are more than 60,000 ACCESS accounts, double the number 12 months ago. ACCESS now makes up 35 per cent of all new CityLink accounts opened each month and has generated more than $4.7 million in toll and fee revenue for the year. In 2005-06 CityLink will further increase the efficiency of video tolling by introducing rear image cameras—a move that will also boost revenue and reduce costs. After five years, a new contract for CityLink’s e-TAG retrieval, storage and dispatch was signed and commenced operation in August 2005. This is expected to deliver significant annual savings. What a year - we reduced costs, improved our customer service and clocked over a million e-tags. Bruce Anderson Head of Operations - CityLink Annual Report 2005  moving Melbourne motorists CityLink customers continue to move to electronic channels such as the web and B-Pay for service, and this will help to further reduce costs. Overall, CityLink operating costs were 6 per cent lower than the previous year, driven by a 14 per cent improvement in customer service transaction cost. CityLink - Key Facts Putting the customer first CityLink’s ‘Customer 1st’ policy is designed to help the business deliver superior service and give it a competitive edge in tolling customer service for the future. This should help CityLink retain existing customers and attract new ones. This year CityLink worked with the State Government to move toward invoicing motorists who use the road without first obtaining an e-TAG or pass or opening an ACCESS account. This is a significant improvement for customers, who previously received fines. A change in Victorian legislation was required to allow for the new approach, which was implemented in July 2005. Several other Customer 1st initiatives had a positive impact on CityLink’s operations. They include: 22 kilometre motorway in CityLink Customer Charter and Report Card – In most cases CityLink met or exceeded its performance targets in each of the two reports released in 2004-05. Melbourne, Australia Pioneer in full electronic tolling Concession until 2034 Toll increases at 4.5 per cent or inflation* Traffic up 4.6 per cent and revenue up 8 per cent in 2004-05 * Higher of 4.5 per cent or CPI until 2015 and CPI for balance of concession     Annual Report 2005 CityLink Customer Ombudsman – An independent Customer Ombudsman was appointed in 2004—a first for an Australian toll road. In his first six-monthly report, the Ombudsman had received 35 complaints. Thirty-four of these were resolved, and one had a determination issued. CityLink Plus – This is a value-add program developed exclusively for CityLink customers. CityLink has teamed with AGL, Australian Unity, Shell autoserv, St John Ambulance and the TAC to create exclusive discount offers and special deals for customers. SMS service – The second stage of CityLink’s SMS service—developed in partnership with Telstra— was launched in December 2004. Registered customers now have the option to top up their account via SMS. CityLink continues to explore ways to offer customers more value from their e-TAGs. In November 2004, the company conducted a world-first trial using the e-TAG and a separate device known as an i-TAG® as a convenient, cashless way to shop and pay. CityLink customers volunteered over the website for the trial, which took place at two McDonald’s sites in Melbourne. Transurban now has a patent pending for this system, which can be applied at other outlets such as car parks and service stations. I like the interaction with customers. I always try to look at things from the customer’s perspective and take on board what’s happening in their life and how they’re feeling. Mark Halyburton Customer Service Offi cer, Infringement Assist Team - CityLink Improvements to CityLink icons including the Gateway and Bolte Bridge and additional landscaping on the Western Link—part of CityLink’s eff ort to create a positive impression of Melbourne during the Commonwealth Games Safety improvements to the in-tunnel radio re-broadcast system and the Bolte Bridge on-ramp from the Westgate Freeway. Enchancing road operations In January 2005, Transurban and the Victorian Government signed an agreement that will fund a solution to congestion problems at the Tullamarine/ Calder Freeway interchange. The upgrade is aimed at improving conditions for drivers approaching CityLink from Melbourne’s northwest. Travel times are expected to fall by up to 10 minutes when the improvements are completed within three years. In addition, the work is expected to increase traffi c volume—and revenue. Under the deal, Transurban will provide $150 million to VicRoads to fund the upgrade. In return, CityLink Concession Fees payable to the State will be assigned to Transurban. In August 2005, CityLink extended its existing incident response services to the VicRoads sections of freeway between the CityLink tunnels and the Westgate Freeway / Western Link interchange, and on the Tullamarine/Calder interchange. This is expected to signifi cantly improve peak period performance. Other improvements introduced during 2004-2005 include: Enhancements to business continuity through the establishment of an alternative traffi c control room that can be activated within 24 hours Melbourne Metropolitan Road Network Freeways Arterial Roads Tunnels Transurban Projects Motorways Committed Motorways Planned Committed Freeways Annual Report 2005 19 expanding 20    Annual Report 2005 into new markets Australia The demand for infrastructure— including roads—is growing at a rapid rate throughout the world. Transurban is considering several emerging developments along Australia’s eastern seaboard. In the US, the funding shortfall for infrastructure has been estimated at US$30 billion a year. Many states are now looking to privatise existing road infrastructure and develop new projects using private finance. In the UK, the Government is looking at road user charging as a way of funding new projects over the next 10 years. In Europe, tolls are increasingly being introduced for trucks. Australia is grappling with similar issues. We estimate congestion could cost the country as much as $30 billion a year in lost productivity by 2015 unless infrastructure spending increases dramatically. Over the past year, Transurban has further positioned itself to pursue some of the projects arising from this demand. In Queensland, the Brisbane City Council has selected two consortiums to bid for a 4.7 kilometre North South Bypass Tunnel under the Brisbane River. Transurban elected not to take a sponsor role. This leaves us in a position to review equity investment opportunities. Transurban is also examining the proposed 7 kilometre Airport Link project connecting the Inner City Bypass and proposed North South Bypass Tunnel with the Gateway Motorway at Brisbane Airport. This is a joint State Government and Brisbane City Council project. An Environmental Impact Statement (EIS) and business case are due for completion in 2006. In New South Wales, the state government remains committed to the M4 East Motorway in Sydney, which will link the M4 at Strathfield and the Anzac Bridge. The state is expected to release an EIS for community consultation in 2006. The Federal Government has announced its preferred option for a link between the F3 and the M2 connecting the Central Coast Region and the Sydney Motorway network. Funding was allocated in this year’s federal budget and the proposal is expected to be subject to an EIS next year. Managing the Risk Transurban will continue to take a measured approach to any opportunities in Australia or overseas. The company is willing to forgo a project if acceptable returns cannot be obtained. With a healthy balance sheet and continuing growth, Transurban is in a strong position to select projects and consortia which add value for investors. Annual Report 2005 2 expanding into new markets Key Opportunities in Virginia, USA 22 Annual Report 2005 USA Less than three years after setting up its fi rst overseas offi ce in New York, Transurban is already a preferred bidder for key projects in the state of Virginia. In June 2005 Transurban signed a Memorandum of Understanding with the Pocahontas Parkway Association and the Virginia Department of Transportation (VDOT). The memorandum gives Transurban the exclusive right to consider acquiring the association’s rights and obligations to its nine mile (approximately 15 kilometre) toll road southeast of Richmond, Virginia’s capital. Transurban entered into an agreement in May 2005 with VDOT and Fluor Enterprises to exclusively study the feasibility of introducing High Occupancy Toll (HOT) lanes along a 14 mile (approximately 23 kilometre) section of the Capital Beltway (I-495) in northern Virginia. The Capital Beltway is the ring road around Washington, DC. If the project reaches fi nancial close, Transurban will act as toll operator and project investor. Transurban and Fluor have also submitted a detailed proposal to VDOT for a 56-mile (94-kilometre) Bus Rapid Transit / HOT Lane System on the I-95/395 in northern Virginia. One other consortium is bidding for the project. If successful, Transurban plans to deliver the tolling system design and handle operations. The I-95/395 crosses the Capital Beltway at the Springfi eld interchange, which creates signifi cant synergies through operating both projects. Transurban is increasingly looking to overseas markets for new business. The US and UK offer an exciting new direction for us, and I’m thrilled to be part of the journey. Ken Daley Vice President International Development UK Transurban has established a small office in the UK, where it is building relationships with clients and with potential consortium partners. The company will closely monitor potential project opportunities there and throughout western Europe. Transurban is also shortlisted on two projects in Dallas-Fort Worth, Texas. The SH-183 HOT Lane Project involves building managed lanes on a direct connection freeway between Dallas and Fort Worth that passes the major airport in the region. The SH-121 project involves completing a partially built freeway and converting it into a toll route to service the rapidly expanding area north of Dallas. Transurban is in partnership with Fluor Enterprises on both these Texas projects. View of the James River crossing on Virginia’s Pocahontas Parkway Annual Report 2005 23 caring 2    Annual Report 2005 for communities Transurban believes working to protect the environment and developing strong relationships with stakeholders will help it further build its business. Transurban continued to build on its commitment to corporate social responsibility in 2004-05, focusing on four key areas: Environment – minimising the impacts of our operations on the surrounding environment Community – contributing positively to the communities surrounding Transurban roads Customers – delivering on the promises set out in our ‘Customer 1st’ policy Employees – providing a ‘workplace of choice’ that ensures safety, equity and opportunity. Our approach was recognised by four major corporate social responsibility ratings agencies this year: Environment A comprehensive environmental review completed in late 2004 showed that Transurban has successfully addressed the most significant environmental issues for CityLink – tunnel vent stack emissions and groundwater recharge.. Over the past year, Transurban: Achieved 100 per cent compliance with EPA environmental requirements on CityLink Operated the CityLink water recycling and water treatment plant at more than 90 per cent efficiency Signed the company’s fleet of vehicles to Greenfleet to help offset carbon emissions Became a founding member of E-Tree, an initiative that offers security holders the opportunity to receive all communications electronically Extended noise walls on sections of the CityLink Southern Link to far exceed compliance requirements FTSE 4 Good Global Index – Launched a company-wide ‘green includes companies that meet Ethical Investment Research Service (EIRIS) corporate social responsibility standards Reputex SRI Index – lists Transurban as an A-rated company based on social, environmental, governance and workplace initiatives AuSSI Index – includes the leading 40 per cent of ASX-listed companies in terms of sustainability Corporate Monitor’s List of Ethical Funds – includes ASX200 companies that have been assessed against environmental, social engagement and corporate governance criteria. office’ program Ensured the protection of local fauna during the construction of Westlink M7 by providing relocation and refuge for species such as the Eastern Long-Necked Turtle. Transurban’s recent environment review highlighted the company’s positive environmental track record and found that its management of environmental issues could be improved by developing a company-wide environment strategy and management system. Sustainability is not just about doing good - it’s about doing good business. We’ve spent the past year better understanding our social and environmental impacts and developing CSR programs that will make a difference. Carley Freeman Corporate Social Responsibility Advisor Annual Report 2005 2 caring for communities The first Transurban Environment Strategy was developed this year. The strategy articulates the environmental values that guide the company’s decisions on asset acquisition, development and operation. It also identifies practical initiatives to improve environmental performance and impacts. Eastern Long-Necked Turtle Community Review During the first half of 2005, Transurban conducted a comprehensive community review to identify and measure company impacts on the community. The outcomes of the community review will assist in the development of company-wide community relations policies and practices and help direct the focus of Transurban’s community partnership program. 04/05 Partnerships Transurban invests in projects that deliver real benefits to the communities in which it operates and help it to respond to local issues. Over the past year, examples of community partnerships include: CityLink Schools for the Environment – delivering an environmental education program in partnership with Greening Australia Planned 05/06 initiatives Develop an organisation-wide environmental management system Adopt environmental purchasing procedures Undertake a study of the greenhouse gas risks and opportunities associated with our business Develop a model for measuring storm water run-off from road assets. 2    Annual Report 2005  CityLink School Support Program Transurban Excellence in – funding student support programs at 10 schools along the CityLink corridor Community art projects – involving local schools, councils, artists and community groups Community sponsorships – supporting local cultural festivals and community initiatives Red Cross support – Transurban donated $50,000 to the Red Cross as part of the Tsunami Disaster Appeal Engineering Awards – awarding prizes to recognise outstanding students at Melbourne, Monash and RMIT universities Western Chances – funding a program that provides scholarships for talented young people in Melbourne’s western suburbs who may not have the support to achieve their goals Western Sydney Industry Awards – supporting business and industry in the Westlink M7 and M2 corridor. Strategy As Transurban moves from operating a single asset to being the long term owner and manager of multiple assets, there is a growing need to formalise our corporate-wide approach to stakeholder management. Over the coming year, Transurban will focus on developing a Community Management Framework to co-ordinate community relations policies, procedures and initiatives and manage community issues from a company-wide perspective across all Transurban assets. CityLink joined with the City of Moonee Valley on a unique strategy to tackle graffiti on walls along CityLink Annual Report 2005 2 caring for communities Customers Our commitment Our performance Transurban is committed to providing a consistently high standard of service and safety on our roads and ensuring fairness in all our dealings with customers. Since CityLink began measuring its performance against targets set out in the Customer Charter, the business has consistently exceeded its goals. To increase accountability and transparency, Transurban has introduced a Customer Charter on CityLink and will introduce a similar charter for Westlink M7 customers once the road has opened. CityLink appointed an independent ombudsman in September 2004, making it the first Australian toll road with this position. A similar independent complaints resolution framework will be introduced for WestLink M7 and M2 customers. Initiatives Transurban introduced a safety net for customers who travel on CityLink without valid arrangements to pay from 1 July 2005. Instead of an infringement, customers who use the road without being registered with CityLink will now receive an invoice. This system will be in place from Westlink M7’s road opening and from the first day that electronic tolling is introduced on the M2 (before the end of 2005). Transurban has consistently exceeded its Customer Service Charter goals 2    Annual Report 2005 Employees Overview Transurban continues to focus on attracting and retaining high calibre employees and being an employer of choice. The company provides learning and development opportunities for individual career growth and offers a reward and recognition program that rewards successful individuals in line with business performance. The company delivered several key programs this year covering employee safety, health and wellbeing, workplace equity, privacy and security. We also focused on improving employee communication to create a shared knowledge environment through regular newsletters, updated online information and more detailed employee information forums. Highlights Transurban won the Australian Human Resources Institute’s state award for excellence in people management for a private enterprise with 200-1000 employees The ASX200 Blue Ribbon list (October 04) acknowledged Transurban as a leading organisation following the results of a census of women in leadership positions conducted by the Equal Opportunity for Women in the Workplace Agency (EOWA) The company offered 77 different internal and external learning and development programs for employees, with 75 per cent participating throughout the year The staff Good Company Group helps employees contribute to the community and environment. The amazing response to our workplace giving program is proof of the compassionate, generous staff we have. Stuart Webb Systems Architect and Good Company Group member Many employees participated in the company’s Health & Wellbeing programs, including the Corporate Games (115 participants), Healthy Eating, Quit Smoking, Employee Assistance, and the Walking and Exercise Club The company’s employee share ownership scheme continued to be very popular, with 98 per cent of eligible employees holding Transurban securities. Over the year, Transurban employees have contributed to: Tsunami volunteering – 30 CityLink customer service officers volunteered at the Oxfam call centre in the days following the Asian tsunami Workplace giving – developing a regular charitable giving program through the payroll system Green office – establishing an ongoing campaign to reduce office waste and support initiatives such as sustainable transport to work and green purchasing. Staff initiatives Transurban employees have played an active role in the company’s corporate social responsibility initiatives through the staff ‘Good Company Group’. The group is made up of employees from across the company who help communicate corporate social responsibility to the business and engage their colleagues in related projects. The company works together with the local community on environmental programs Many Transurban employees participate in workplace giving Seventy-five per cent of employees took part in learning and development programs this year Annual Report 2005 2 steering 30    Annual Report 2005 for success Corporate Governance Transurban is committed to high standards of corporate governance. The Group’s corporate governance framework was developed in the light of the ‘Principles and Best Practice Recommendations’ published by the Corporate Governance Council of the Australian Stock Exchange in March 2003. (See page 41 for a list of the 10 core principles.) The relationship between the Board and management is critical to the achievement of the Group’s objectives. The directors are responsible to the security holders for the performance of the Group and their key tasks are to enhance the interests of the security holders and other key stakeholders and to ensure the Group is properly managed. Continuous Disclosure Policy Shareholder Communication Strategy Risk Management Framework Corporate Social Responsibility Program. The Board and management continue to monitor developments in this important area to ensure best practice standards are maintained. This corporate governance statement is formulated on a collective basis and applies to all entities comprising the Transurban Group as described in the Directors’ Report. The “Board” is a reference to the Board of each relevant entity unless otherwise stated. Day to day management of the Group’s affairs and the implementation of strategic and policy decisions made by the Board are delegated to the Managing Director and senior executives. The Group’s main corporate governance practices are described in the following paragraphs. Unless otherwise stated, these practices were in operation for the entire year. Material relating to the corporate governance practices of the Group is published on the corporate governance section of the Group’s website at www.transurban.com.au. The material now available comprises summaries of the following: Board Charter Nomination and Remuneration Committee Charter Audit Committee Charter Remuneration Policy Code of Conduct Dealing in Securities Policy Annual Report 2005 3 Laurence G Cox Kim Edwards Geoff R Phillips Jeremy G A Davis Peter C Byers Susan M Oliver Geoff O Cosgriff David Ryan Chris Renwick (retired 26 July 2005) (appointed 26 July 2005) Board Composition The maximum and minimum number of directors is currently set by the Board at eight and three, respectively. The entity’s constitution allows a maximum of 12. The Board seeks to ensure that its membership provides the mix of qualifications, skills and experience to effectively fulfill its responsibilities and that its size facilitates effective discussion and efficient decision making. Board Members Details of the members of the Board, their experience, expertise, qualifications, term of office and independence are set out in the Directors’ Report under the heading “Information on Directors” (refer to page 51). steering for success corporate governance Board of Directors The Board operates in accordance with the broad principles set out in its charter which is available in summary form on the Group’s website. The charter covers the following matters: Board Responsibilities (Principal 1, Recommendation 1.1) To ensure the efficient undertaking of its overall responsibilities, the Board has delegated certain aspects of them (in particular, those relating to day-to-day operations of the entity) to the executive management of the entity. The following responsibilities have been retained by the Board: Reviewing and ratifying the entity’s business strategies and monitoring their implementation Appointing and removing the Managing Director, regularly evaluating his/her performance and determining his/her remuneration Appointing and removing the Company Secretary and regularly evaluating his/her performance Reviewing the entity’s financial reports and certifying that they comply with Australian Accounting Standards and present a true and fair view of the affairs of the entity Ensuring the financial integrity of the entity through Overseeing the entity’s systems of internal control and financial reporting Establishing and reviewing financial performance objectives Approving operating and capital budgets. Approving distribution payments Approving capital management activities, including the issue and redemption of equity and the increase or reduction in borrowings Approving significant changes to the Group’s organisation structure Reviewing and ratifying systems of risk management and legal compliance Ensuring that the entity complies with all disclosure requirements Approving changes to the authorities delegated to management Ratifying the appointment of Assessing the performance of each executives reporting to the Managing Director, reviewing the Managing Director’s assessment of the performance of such executives and determining their remuneration based on the Managing Director’s recommendations Developing and approving succession plans for the Managing Director and reviewing and approving succession plans for those executives reporting to him 32    Annual Report 2005 individual director and of the Board collectively Selecting nominees for election as directors Providing strong leadership of the entity on a continuing basis Fostering a culture of compliance with the highest legal, ethical and environmental standards and business practices. Laurence G Cox Kim Edwards Geoff R Phillips (retired 26 July 2005) Jeremy G A Davis Peter C Byers Susan M Oliver Geoff O Cosgriff David Ryan Chris Renwick (appointed 26 July 2005) In addition Transurban Limited is entitled to receive management fees of $6.5 million from MBL in relation to the extension of the term of the Infrastructure Borrowing Facilities provided by Macquarie Bank. Directors’ Independence (Principal 2, Recommendation 2.1) It is the Board’s policy that a majority of directors should be independent directors and the Chairman should be an independent director. The Board regularly determines which directors are considered to be independent directors in the light of their interests as disclosed to the Board. In making this determination, the Board considers whether a director’s security holding in the entity, his or her relationship with security holders, suppliers and competitors and tenure as a director would materially affect the director’s ability to exercise unfettered and independent judgment in the interests of the entity’s security holders. In considering whether a director’s business or other relationships give rise to any conflict, the Board believes it is inappropriate to solely apply arbitrary dollar, profit or turnover percentage tests to define the material impact of those business or other interests. Instead, the Board seeks to determine whether the director is generally free of any interest and any business or other relationship which could materially interfere with the director’s ability to act in the best interests of the Group. With regard to these factors, the Board has determined that all non–executive directors are independent directors. Mr L G Cox is an executive director of Macquarie Bank Limited (‘MBL’). It is considered Mr Cox’s relationship with MBL does not have a material effect on his ability to exercise unfettered and independent judgement in the interests of the Group’s security holders. Over the past three years, the Group has paid MBL the amounts shown in the table below. MBL has advised that each of these amounts are not material in the context of the total receipts of MBL in the relevant category in each period. As a result, the Board considers that these payments would not materially affect Mr Cox’s ability to exercise unfettered and independent judgment in the interests of the Group’s security holders. Advisory fees Underwriting fees Interest 2002 - 03 $mill. 0.37 7.21 3.85 2003 - 04 $mill. Nil Nil Nil 2004 - 05 $mill. 12.65 Nil Nil Annual Report 2005 33 steering for success corporate governance This fee was recognised during the year ended 30 June 2004. During this year $1.4 million was received with the remainder due to be received quarterly over the next two years. The Transurban Group also contributes to the costs of Mr Cox’s personal assistant and office facilities. Roles of the Chairman and the Managing Director (Principle 2, Recommendation 2.2 and 2.3) The Chairman is responsible for leading the Board, ensuring all directors are properly briefed in all matters relevant to their role and responsibilities, facilitating effective discussion of matters considered by the Board and managing the Board’s relationship with the entity’s executive management. The Managing Director is the Chief Executive Officer of the entity and is responsible to the Board for implementation of strategies and policies determined by the Board. The roles of Chairman and Managing Director are undertaken by separate people. Commitment (Principle 2, Recommendation 2.5) The Boards of the entities comprising the Group held 57 meetings during the year. Most of these meetings were held concurrently. The number of meetings held by the Boards of each individual entity and by Board committees is disclosed in the Directors’ 3    Annual Report 2005 Report (refer to pages 54-55). In addition, a corporate strategy workshop was held. The commitments of non-executive directors are reviewed by the Nomination and Remuneration Committee prior to their appointment and annually thereafter to ensure that non-executive directors are able to meet the Board’s expectations concerning time commitment. Directors are required to consult with the Chairman prior to accepting appointment as a director of a non-Group entity. Conflicts of Interest (Principle 2, Recommendation 2.1) The Group entities have developed protocols, consistent with the Corporations Act and ASX listing rules, to require each director to disclose contracts, offices held, interests in transactions and other directorships to signal any potential conflict. Procedures have been adopted to ensure that, where the possibility of a material conflict arises, information is not provided to the director, and the director does not participate in, or vote at, the meeting where the matter is considered. Further information on this matter is set out in the Board Charter summary. Entities connected with Mr L G Cox and Mr P C Byers had business dealings with Group entities during the year (as described in note 25 to the Group financial statements). The Group entered into contractual arrangements with entities connected with Mr Cox in relation to the provision of corporate advisory services on the takeover of the Hills Motorway Group. In addition, the entities connected with Mr Cox were party to a pre-bid agreement with a Transurban Group entity regarding acceptance of the Transurban Group’s offer for the Hills Motorway Group. In accordance with the Board Charter, Mr Cox declared his interest in these dealings and took no part in the decisions made or in the discussions preceding the decisions. Mr Byers was excluded from the Hills Motorway Review Committee overseeing the takeover of the Hills Motorway Group due to a perceived conflict of interest arising from his position as a director of Hills. No information was provided to Mr Byers in relation to the Hills acquisition and he did not attend Board meetings dealing with this issue. Independent External Advice (Principle 2, Recommendation 2.5) Independent external professional advice in relation to their roles and responsibilities is available to directors at the relevant entity’s expense. Prior to seeking such advice, directors are required to consult with, and obtain the approval of, the Chairman. The director must consult a suitably qualified adviser in the relevant field and inform the Chairman of the fee payable for the advice. A copy of the advice obtained must be provided to the relevant Board. Our acquisition of the M2 Hills Motorway this year created a challenge for us: we had to integrate the new entities’ compliance obligations with Transurban’s own governance requirements. Mark Licciardo Company Secretary Performance Assessment (Principle 8, Recommendation 8.1) Each year, the following reviews of performance are undertaken: Certification of Financial Reports and Risk Management Systems (Principle 4, Recommendation 4.1) (Principle 7, Recommendation 7.2) A review of the performance of the Board against the requirements of the Board Charter and any other objectives arising from previous reviews of performance A review of the performance of each Committee against the requirements of its Charter and of the continuing need for the Committee The Managing Director and the Chief Finance Officer have provided the following certifications to the Board in connection with the approval by the Board of the financial reports for the Group and the individual entities comprising the Group for the year ended 30 June 2005: The financial reports are complete and present a true and fair view, in all material respects, of the financial condition and operational results of the entity and the Group and are in accordance with relevant accounting standards The above statement is founded on sound systems of risk management and internal compliance and control which implement the policies of the Board The systems of risk management and internal compliance and control are operating efficiently and effectively in all material respects. A review by the Chairman with each director of the individual performance of the director A review of the performance of the Chairman by a non-executive director nominated by the Board An external evaluation of the performance and effectiveness of the Board was undertaken during July and August 2005. The results of this review will be discussed by the Board in September 2005. Induction and Training (Principle 1, Recommendation 1.1) New directors are provided with an induction program to familiarise them with all aspects of the business and each Group entity’s operations, and they are kept informed of other programs available to them. The Board has given the Nomination and Remuneration Committee responsibility for recommending training and further education it considers necessary to enable the Board to meet its responsibilities. Annual Report 2005 3 steering for success corporate governance Board Committees (Principle 4, Recommendation 4.4) The Board has presently established the following committees of directors to assist it in carrying out its responsibilities and to allow detailed consideration of complex issues: Audit Committee Risk Management and Compliance Committee Nomination and Remuneration Committee Special purpose Committees are established where deemed necessary to deal with specific projects such as the Mitcham–Frankston Freeway Project and the takeover of the Hills Motorway Group. The Board has also established a committee consisting of directors and external representatives to advise it on matters relating to Corporate Social Responsibility. Each Committee operates under a Committee Charter, approved by the Board, which sets out the authority, membership and responsibilities of the committee, together with any relevant administrative arrangements and any other matters considered appropriate by the Board. The Audit Committee Charter and summaries of the Charters of the Risk Management and Compliance Committee and of the Nomination and Remuneration Committee are available on the Group’s website. 3    Annual Report 2005 At least once each year the Board reviews the appropriateness of the existing committee structure. For those committees considered necessary, it also reviews the membership and the Committee Charter. Minutes of committee meetings are recorded by the Company Secretary and circulated with the papers for the next Board meeting. At the Board meeting, the Chairman of the committee highlights key issues under consideration by the committee. Audit Committee (Principle 4, Recommendation 4.2, 4.3 and 4.5) The Audit Committee consists of the following non-executive directors: P C Byers (Chairman) L G Cox J G A Davis D J Ryan Details of the qualifications of these directors and of their attendance at meetings of the Committee are set out in the Directors’ Report (refer to page 51). All members of the Audit Committee have appropriate financial expertise and an appropriate understanding of the industry in which the Group operates. The Managing Director, other members of the management team and representatives of the external and internal auditor attend meetings of the Committee by invitation. The external auditor meets with the Committee without management present on a regular basis. The duties and responsibilities of the Audit Committee are set out in its Charter, which is available on the Group’s website. The primary responsibility of the Committee is to oversee the entity’s financial reporting process on behalf of the Board and to recommend to the Board appropriate actions to ensure high quality financial reporting, sound practices to manage risks and ethical behaviour. In discharging this responsibility, the Committee: Assesses the accounting, financial and internal control systems used by the entity and recommends to the Board changes considered appropriate on the basis of such assessments Reviews the statutory financial reports of the entity and management’s representations in relation to them and provides advice for consideration by the Board in connection with adoption of the statutory financial reports Makes recommendations to the Board for the appointment, remuneration and removal of the external auditor and agrees the terms of the auditor’s engagement Ratifies all non-audit services provided by the external auditor Reviews the objectives, competence and resourcing of the internal audit function (including determining whether the internal audit function is to be provided by an internal or external party) Nomination and Remuneration Committee Monitors the program of internal audit activity each financial year. Risk Management and Compliance Committee (Principle 7, Recommendation 7.1) The Risk Management and Compliance Committee consists of the following directors: S M Oliver (Chairman) G O Cosgriff D J Ryan G R Phillips (Executive Director, until his retirement on 26 July 2005) Details of the qualifications of these directors and of their attendance at meetings of the Committee are set out in the Directors’ Report (refer to page 51). The duties and responsibilities of the Risk Management and Compliance Committee are set out in its Charter, a summary of which is available on the Group’s website. The primary responsibility of the Committee is to assist the Board to: Understand the nature of the risks to which the entity is exposed Prioritise those risks for management Mitigate those risks to an acceptable level Communicate its performance in managing risk to interested stakeholders. (Principle 2, Recommendation 2.4) (Principle 9, Recommendation 9.1, 9.2, 9.3, 9.4 and 9.5) The Nomination and Remuneration Committee consists of the following non-executive directors: L G Cox (Chairman) G O Cosgriff J G A Davis Details of the qualifications of these directors and of their attendance at meetings of the Committee are set out in the Directors’ Report (refer to page 51). The duties and responsibilities of the Nomination and Remuneration Committee are set out in its Charter, a summary of which is available on the Group’s website. The primary responsibilities of the Committee are to provide advice to the Board in connection with the appointment of new directors, the measurement of Board performance and the remuneration of directors and senior executives. In discharging this responsibility, the Committee: Makes recommendations on the size and composition of the Board and on procedures for identifying and screening candidates for appointment to the Board Annual Report 2005 3 steering for success corporate governance Implements these identification and screening procedures when required Reviews at least annually the time commitments of non-executive directors to provide a basis for assessing whether candidates for appointment as directors can (having regard to other commitments) meet these commitments Develops and oversees an orientation and education program for new directors Makes recommendations regarding succession plans for the Board Recommends processes for the review of the performance of individual directors and the Board as a whole Makes recommendations on the remuneration polices and practices to be introduced and maintained by the entity for the benefit of directors and employees. To assist in making these recommendations, the Committee consults as necessary with external remuneration consultants. The remuneration of non-executive directors consists entirely of directors’ fees, committee fees and (subject to eligibility) retirement benefits. Directors appointed after 25 March 2003 are not eligible for retirement benefits, but receive an additional director’s fee. A summary of the Group’s remuneration policies is available on the Group’s website. Further information on directors’ and executives’ remuneration is set out in the Remuneration Report, as part 3    Annual Report 2005 of the Directors’ Report (refer to page 56) and in note 25 to the Group financial statements (refer to page 98). Mitcham–Frankston Freeway Project Committee The Mitcham–Frankston Freeway Project Committee consisted of all directors except Mr L G Cox. Details of the attendance of these directors at meetings of the Committee are set out in the Directors’ Report (refer to page 55). An entity connected with Mr L G Cox was a member of the ConnectEast consortium. That consortium was a respondent during the year to a Request for Proposals (“RFP”) issued by the Southern and Eastern Integrated Transport Authority (“SEITA”)—an authority of the State of Victoria— for the Mitcham–Frankston Freeway project. Under information protocols agreed with SEITA, the Group was required to: Establish a committee of the Board, of which Mr Cox was not a member, to consider all matters relating to the response to the RFP Ensure that no information relating to the response to the RFP was provided to Mr Cox. Compliance with these requirements was subject to audit by a probity auditor appointed by SEITA. Hills Motorway Project Review Committee The Hills Motorway Project Review Committee consisted of all directors except Mr P C Byers. Details of the attendance of these directors at committee meetings are set out in the Directors’ Report (refer to page 55). Mr Byers was a director of the Hills Motorway Group during the takeover bid by the Transurban Group. The Board established a committee, of which Mr Byers was not a member. No information relating to the takeover was provided to Mr Byers. External Auditors (Principle 6, Recommendation 6.2) The policy of the Group is to appoint external auditors who are suitably qualified and whose independence is unequivocal. The performance of the external auditors is reviewed annually by the Audit Committee, which is responsible for making recommendations to the Board in relation to the appointment, remuneration and removal of the external auditors. PricewaterhouseCoopers was initially appointed as the Group’s external auditor in 1996 and was subsequently re-appointed in December 2001. Good corporate governance is about looking after stakeholders’ interests and ensuring decisions are sound and enhance business performance. I think Transurban clearly demonstrates its commitment to those ideals. Susan Oliver Board member The appointment of the external auditors has been approved by security holders as required by the Corporations Act. PricewaterhouseCoopers is required to rotate audit engagement partners on listed entities at least every five years. In accordance with that policy, a new audit engagement partner was introduced for the year ended 30 June 2003. Details of the fees paid to the external auditors, including a break down of fees paid for non-audit services, are set out in note 26 to the Group financial statements (refer to page 112). All non-audit services provided by the external auditors are reported to the Audit Committee. It is the policy of the external auditors to provide an annual declaration of their independence to the Audit Committee. The Board has considered the non-audit services provided by the external auditors and is satisfied they are compatible with the general standard of independence of auditors. The external auditors attend the Annual General Meeting and are available to answer questions raised by security holders in relation to the conduct of the audit and the preparation and content of the audit report. Risk Assessment and Management (Principle 7, Recommendation 7.1 and 7.3) The Board—assisted by the Risk Management and Compliance Committee—is responsible for ensuring that the Group has an effective framework for managing the risks to which the Group is exposed and that the elements of the framework are operating efficiently. A summary of the Group’s Risk Management Framework is available on the Group’s website. The framework is consistent with the Australian/New Zealand Standard for Risk Management AS/NZS 4360:2004 and is subject to regular review by the internal and external auditor. Oversight of the Group’s risk management and compliance systems is handled by the Risk Management Group, which consists of senior executives and is chaired by the Group’s General Counsel. Key responsibilities of the Risk Management Group are: Ensuring that the Group’s risk management and compliance systems are operating in a comprehensive and efficient manner Monitoring the activities of specialised risk management and compliance working groups Promoting a culture of risk awareness across the Group. The Working Group provides quarterly reports to the Risk Management and Compliance Committee. All major proposals submitted to the Board for decision include a comprehensive risk assessment and a description of the strategies proposed to mitigate the identified risks. Annual Report 2005 3 steering for success corporate governance Transactions proposed to be undertaken in Transurban stapled securities, CARS and in the securities of other entities specified from time to time under the policy must be notified to the Company Secretary in advance. A summary of the securities trading policy is available on the Group’s website. The Code requires employees who become aware of unethical behaviour or breaches of the securities trading policy to report these to senior management. The Code provides protection for employees who report such occurrences. The directors are satisfied that during the year ended 30 June 2005 the Group has complied with the requirements of the Code, including the securities trading policy. Continuous Disclosure and Shareholder Communication (Principle 5, Recommendation 5.1 and 5.2) (Principle 6, Recommendation 6.1) The Board’s policy on information disclosure covers: Continuous disclosure of any information concerning the Group that a reasonable person would expect to have a material effect on the price of Transurban stapled securities or CARS Arrangements to promote communication with security holders. A summary of this policy is available on the Group’s website. The Company Secretary is the person with primary responsibility for operation of the Continuous Disclosure Policy and for all communication with the ASX in relation to the continuous disclosure obligations of Group entities. The Group publishes information on its website as soon as it is disclosed to the ASX. All material used in briefing analysts on the Group’s operations is released to the ASX and placed on the Group’s website. The Group’s notices of security holder meetings provide all relevant information consistent with best practice. Security holders are encouraged to participate at these meetings. Information on the Group’s compliance with the environmental regulation to which it is subject is set out in the Directors’ Report (refer to page 50). Code of Conduct (Principle 3, Recommendation 3.1, 3.2 and 3.3) (Principle 10, Recommendation 10.1) The purpose of the Code is to nurture the values underpinning the corporate culture which has played an important role in the success achieved by the Group to date and in the establishment of its reputation. The Code is discussed with each new employee as part of his or her induction training and “refresher” training is provided on a regular basis. In summary, the Code requires that all employees act with integrity, fairness and respect for others and in compliance with the letter and spirit of all relevant laws and Group policies. The Code is available on the Group’s website. The Code specifies the procedures for dealing by directors and employees in securities issued by the Group and securities of entities with whom the Group has an existing or potential business relationship. Dealing in Transurban stapled securities and CARS is only permitted during the thirty day periods following the release of the annual and half year results to the ASX and following the Annual General Meeting. 0    Annual Report 2005 International Financial Reporting Standards (“IFRS”) The Australian Accounting Standards Board (“AASB”) is adopting International Financial Reporting Standards (“IFRS”) for application to reporting periods beginning on or after 1 January 2005. The adoption of the Australian equivalents to IFRS will be first reflected in the consolidated entities’ financial statements for the half year ending 31 December 2005 and the year ending 30 June 2006. The known or predictable impacts on the financial report for the year ending 30 June 2005 had it been prepared using the Australian equivalents to IFRS are set out in note 36 to the Group financial statements (refer to page 124). ASX Principles of Good Corporate Governance Principle 1 Lay solid foundations for management and oversight Principle 2 Structure the board to add value Principle 3 Promote ethical and responsible decision-making Principle 4 Safeguard integrity in financial reporting Principle 5 Make timely and balanced disclosure Principle 6 Respect the rights of shareholders Principle 7 Recognise and manage risk Principle 8 Encourage enhanced performance Principle 9 Remunerate fairly and responsibly Principle 10 Recognise the legitimate interests of stakeholders Annual Report 2005  financials 2    Annual Report 2005 The Transurban Group The Transurban Group Financial Report consisting of the aggregate Financial Statements of Transurban Holdings Limited and Controlled Entities (ABN 86 098 143 429) and Transurban Holding Trust and Controlled Entities (ABN 30 169 362 255) and Transurban Limited (formerly Transurban Infrastructure Developments Limited) and Controlled Entities (ABN 96 098 143 410) For the Year Ended 30 June 2005 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 to the members Security Holder Information 44 67 68 69 70 127 128 130 This financial report covers the Transurban Group which consists of Transurban Holdings Limited, Transurban Holding Trust and Transurban Limited and their controlled entities as described in Note 1 to the Financial Statements. The equity securities of the parent entities are stapled and cannot be traded separately. All entities within the group are domiciled in Australia. Its registered office and principal place of business is: Level 43 Rialto South Tower 525 Collins Street Melbourne VIC 3000 Through the use of the internet, we have ensured that our corporate reporting is timely, complete, and available globally. All releases to the ASX and the media, financial reports and other information are available on our website: www.transurban.com.au Annual Report 2005 43 financials Directors’ Report The directors of Transurban Limited (formerly Transurban Infrastructure Developments Limited), Transurban Infrastructure Management Limited as Responsible Entity for Transurban Holding Trust and Transurban Holdings Limited present their report on the Transurban Group Accounts for the year ended 30 June 2005. Group Accounts These Group Accounts have been prepared as an aggregation of the financial statements of Transurban Holdings Limited and controlled Non-executive Directors Laurence G Cox Peter C Byers Geoffrey O Cosgriff Jeremy G A Davis Susan M Oliver David J Ryan Christopher J S Renwick (1) Executive Directors Kimberley Edwards (2) Geoffrey R Phillips (3) Directors With the exception of the changes noted below, the following persons were directors of Transurban Limited, Transurban Holdings Limited and Transurban Infrastructure Management Limited during the whole of the financial year and up to the date of this report: entities (“THL”), Transurban Holding Trust and controlled entities (“THT”), and Transurban Limited and controlled entities (“TL”) as if all entities operate together. They are therefore treated as a combined entity (“the combined entity” or “Group”), notwithstanding that none of the entities controls any of the others. The financial statements have been aggregated in recognition of the fact that the securities issued by THL, THT and TL are stapled into parcels (“Stapled Securities”), comprising one share in THL, one share in TL and one unit in THT. None of the components of the Stapled Security can be traded separately. Transurban Limited Transurban Holdings Limited Transurban Infrastructure Management Limited √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ (1) (2) (3) Christopher J S Renwick was appointed a non-executive director of TL, THL and TIML on 26 July 2005 and continues in office at the date of this report. Kimberley Edwards was appointed an executive director of Transurban Infrastructure Management Limited on 26 July 2005 and continues in office at the date of this report. Geoffrey R Phillips was an executive director of TL, THL and TIML from the beginning of the financial year until his resignation on 26 July 2005. 44    Annual Report 2005 The Transurban Group Directors’ Report Principal Activities (d) Tendering for participation in and/ Results or acquisition of other toll roads; During the year the principal continuing activities of the group were: (a) Operation of the Melbourne CityLink (“CityLink”) and the M2 Hills Motorway (“M2”) following its successful acquisition; (b) Participation in the direction of the activities responsible for the development of the Westlink M7 Motorway project; (c) Provision of the tolling and customer management system for the Westlink M7 Motorway project; (e) Development of electronic tolling and other intelligent transport systems for implementation in both the domestic and international markets; and (f ) Identification and development of infrastructure projects in accordance with the investment strategies of Transurban Holdings Limited and Transurban Holding Trust. The result of operations for the financial year ended 30 June 2005 was an operating loss of $87.8 million (2004: $61.5 million). Distributions Distributions paid to members during the financial year were as follows: Distributions proposed Final distribution payable and recognised as a liability: 18.0 cents per fully paid stapled security payable 2 September 2005 Distributions paid during the year Final distribution for 2004 financial year of 13.5 cents (2003 – 10.0 cents) per fully paid Stapled Security paid 8 October 2004 Interim distribution for 2005 financial year of 17.0 cents cents (2004 – 12.0 cents) per fully paid Stapled Security paid 25 March 2005 Total distributions paid Distributions paid in cash or satisfied by the issue of Stapled Securities under the distribution reinvestment plan during the years ended 30 June 2005 and 30 June 2004 Paid in cash Satisfied by issue of Stapled Securities 2005 $’000 2004 $’000 142,455 - 71,983 51,847 91,745 62,823 163,728 114,670 131,686 32,042 54,145 60,525 163,728 114,670 Annual Report 2005 45 financials Directors’ Report Review of Operations a) CityLink Melbourne Traffic Transaction volume for the year ended 30 June 2005 was 227.6 million transactions, representing a 4.6 per cent increase on the prior year. Traffic growth was marginally stronger in the second six months with 4.7 per cent being achieved, compared to 4.5 per cent in the first six months. Growth in usage by heavy and light commercial vehicle classes was above the average at 5.4 per cent and 5.1 per cent respectively. The growth in transaction volumes combined with the toll escalation as provided for in the Concession Deed resulted in toll and fee revenue (net of GST) of $274.8 million, an increase of 8.0 per cent over the previous year. Customer Service CityLink’s continued focus on cost control and continuous improvement initiatives which included the call centre contract renegotiation, transition of transaction banking arrangements and process improvement have resulted in customer service expenditure decreasing by 5.0 per cent ($1.4 million) on the prior year to $26.4 million. Cost reductions were achieved in an environment of increased transaction volume and continued growth in customer accounts and e-TAG’s on issue. At 30 June 2005, there were 719,190 46    Annual Report 2005 accounts (including 59,822 Access accounts), with 1,014,348 e-TAGs linked to e-TAG accounts. This represents increases of 7.0 per cent and 8.0 per cent respectively, over the previous year. As in the prior year Customer Services will continue the focus on operational improvements while enhancing service standards. Infrastructure Group Operations CityLink successfully completed the Alternate Traffic Control Room (“ATCR”) project during the year at a capital cost of $2.4 million. The ATCR enables the tunnels to remain open in the event the primary control centre becomes unavailable. CityLink entered into an agreement with VicRoads as part of the Tullamarine/ Calder Freeway Interchange Upgrade to administer extended incident response from July 2005 on the Westgate Freeway between the tunnels and the Bolte Bridge, as well as the Tullamarine Freeway and Calder Freeway interchange. The additional cost associated with the extended incident response will be offset by a compensatory payment from VicRoads. The Infrastructure group continues to review the operations and maintenance of the road and has renegotiated this contract achieving ongoing savings of up to $1.0 million per annum, along with improvements in service level. Recycling of water drained from the tunnels continues to meet the 95 per cent reuse targets. b) Hills Motorway Group Transurban achieved effective control of the Hills Motorway Group (“Hills”) on 12 April 2005. The net contribution of Hills to the result was a loss of $10.7 million. The loss represents Hills operational contribution from the date of deemed control (12 April 2005) to 30 June 2005. Included in this result is additional depreciation of $15.5 million as a result of the reflection of the revaluation of the Hills asset on acquisition of the Hills Motorway Group recorded in the financial statements of Transurban Holdings Limited and Transurban Holding Trust. Excluding the effect of the additional depreciation, Hills net contribution for the period was a profit of $4.8 million. c) Westlink M7 The Westlink M7 Project, in which the Transurban Group has a 40 per cent interest, is now expected to be fully operational no later than April 2006. Assisted by prevailing dry weather conditions, concrete paving and bridge construction is progressing well ahead of schedule. All gantries have been installed and landscaping, noise walls and safety barriers are nearing completion along most of the roadway. Transurban contracts for the development and implementation of the GATe electronic tolling system and the tolling and customer management (“TCM”) system for the Westlink project continue to be on target for completion in line with the expected April 2006 completion date. TCM have finalised Directors’ Report development of the product suite and approvals for the marketing and implementation plans have been received from the NSW RTA. d) ROAM During the year ROAM was selected as the retail brand for the Westlink M7 Motorway. e) Business Development During the year Transurban Limited has continued to pursue new business development opportunities on both the domestic and international markets. Opportunities pursued during the period include: (i) I95 Virginia USA Proposal Transurban is a part of a consortium headed by Fluor Corporation that has been selected as one of two consortiums by The Virginian Department of Transportation (“VDOT”) for the provision of Bus Rapid Transit (“BRT”)/High Occupancy Toll (“HOT”) lanes for the I95 Motorway in Virginia. The two selected consortiums are currently in the process of preparing required submissions to VDOT and if successful Transurban would undertake the design and operation of the tolling system. The Transurban Group (ii) Tullamarine / Calder Freeway (iii) Transurban Takeover of the Hills Interchange Upgrade Motorway Group On 27 January 2005, the Transurban Group reached agreement with the State of Victoria and VicRoads to use CityLink Concession Notes to fund an upgrade of the Tullamarine/ Calder Freeway interchange. Under the agreement, Transurban will provide $151.0 million to VicRoads which will be used to fund the upgrade. The agreement provides the amount be payable to Vic Roads in two installments on 1 July 2005 ($100.8 million) and 1 July 2006 ($50.2 million). In exchange, the State will assign to Transurban $305.3 million ($328.0 million pending the outcome of the appeal to the High Court of Australia on deductibility of concession fees) of the Concession Notes issued by CityLink to the State under the provisions of the Melbourne CityLink Concession Deed. The State also received on 1 July 2005 an upfront benefit of $11.0 million dollars representing the estimated net present value of the State’s share of the expected increase in net tolling revenue following completion. The quantum of the benefit to the State will be reviewed 30 months after completion with any additional revenue realised to be paid to the State. The Transurban Group announced a takeover offer for all the stapled securities in Hills Motorway Group (“Hills”) on 31 January 2005. A Bidders Statement was subsequently issued to the holders of ordinary stapled securities in the Hills Motorway Group in February 2005. Transurban’s offer to Hills holders of 1.47 Transurban securities for each Hills security together with a cash component of 25 cents per Hills security was unanimously recommended by the independent directors of Hills on 12 April 2005. The final offer closed on 20 May 2005 and from 10 June 2005, Hills Motorway became a 100 per cent owned subsidiary of the Transurban Group. (iv) Participation in Capital Beltway project – Virginia USA Transurban, through its wholly owned subsidiary Transurban USA Inc, has joined a consortium lead by Fluor Corporation for the provision of High Occupancy Toll (“HOT”) lanes along a 22.4 kilometre segment of the Capital Beltway (I 495) in Northern Virginia, USA. The Virginia Department of Transportation (“VDOT”) estimates the project will cost approximately US $900 million (A$1,200 million). It is expected that Transurban’s contribution to the project will approximate A$200 million. Annual Report 2005 47 financials Directors’ Report Currently an environmental impact study is being undertaken prior to commencement of a full financial feasibility evaluation of the project. In the event that a Financial Close is achieved in late 2006 Transurban will provide support for the design and operation of the tolling system. Transurban and DEPFA. Transurban has commenced due diligence on the project as it is contemplated that any such agreement would be expected to be completed before the end of 2005. (vi) Mitcham Frankston Freeway (“MFF”) Project (v) Pocahontas Parkway- Memorandum of Understanding-Virginia USA On 17 June 2005 Transurban (USA), Inc. and DEPFA Bank, Plc. announced they had entered into a confidential Memorandum of Understanding (“MOU”) with the Pocahontas Parkway Association (“PPA”) and VDOT. PPA was created in August 1997 for the financing and operation of the Pocahontas Parkway (route 895) which was fully opened to traffic in September 2002. The Parkway is a nine mile (approximately 15 kilometre), four lane toll road located southeast of the city of Richmond in Virginia which provides a crossing of the James River and facilities access to the Richmond International Airport. The MOU provides for the exclusive investigation of the feasibility of acquiring PPA’s rights and obligations in relation to the Parkway and in the event of a favorable outcome of such investigation, the negotiation of an agreement to transfer the PPA’s rights and obligations to 48    Annual Report 2005 On 14 October 2004, the State of Victoria advised the Mitcham Frankston Motorway (“MFM”) Consortium of which Transurban was a sponsor, that the consortium’s proposal for the Mitcham Frankston Freeway project had not been accepted. In accordance with the Group’s accounting policies, $9.4 million, representing costs incurred in preparation of the proposal less a reimbursement due from SEITA, has been charged to expense in the period. This amount includes $7.0 million which had been capitalised in the prior year. f) Income Tax Transurban has advice from Senior Counsel that the concession fees paid to the State of Victoria by Transurban under the CityLink Concession Deed are immediately deductible expenditure for taxation purposes. The Group Accounts have been prepared on this basis for the year ended 30 June 2005 and all prior years. 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 CityLink Melbourne’s income tax return for the year ended 30 June 1998. Transurban’s appeal against the ATO’s decision to disallow its objection to the assessment was heard before Mr Justice Merkel in the Federal Court on 3 October 2002. On 2 February 2004, Mr Justice Merkel dismissed Transurban’s appeal. Transurban lodged a Notice of Appeal against the dismissal which was heard before a Full Court of the Federal Court on 12 October 2004. The Full Court of the Federal Court unanimously ruled in favor of Transurban confirming that concession fees are deductible. The Australian Taxation Office subsequently sought special leave to appeal to the High Court of Australia against the Full Court’s decision. This was granted in April 2005. Determination of the appeal is unlikely to occur before early 2006. Until a definitive resolution of this matter has been achieved, Transurban intends to continue preparing the Group financial statements on the basis that the concession fees are deductible. If the High Court of Australia over turns the decision and finds in favour of the Australian Taxation Office, certain items in the Group financial statements will require amendment. These amendments are quantified in the following table, assuming that the amendments were applicable for the year ended 30 June 2005: Directors’ Report Item Statement of Financial Performance The Transurban Group Current Amended $000 $000 Concession Note Valuation Adjustment (Expense)/Benefit (41,121) 6,476 Statement of Financial Position Non-interest bearing non-current liabilities Accumulated losses Carried forward tax loss at 30 June 2005 Significant Changes in the State of Affairs a) Refinancing During the year Transurban entered into refinancing arrangements to replace existing medium and short term debt facilities. The Group completed the following debt issues: A US private placement of USD $247.5 million and AUD $72.0 million to US institutional investors. The placement consisted of four tranches with maturities ranging from December 2014 to December 2019, providing a weighted average maturity of 12.9 years An issue of AUD $150 .0 million of medium term notes maturing in December 2009 to domestic institutional investors $600.0 million working capital facility, comprising $150.0 million for a three year term from March 2005, $255.0 million for a three year term from June 2005 and $195.0 million for a five year term from June 2005. $252.5 million was drawn down as at 30 June 2005 In addition, Transurban announced plans in May 2005 to issue USD $380.0 million (AUD $500.0 million) of senior debt into the US private placement market. The proceeds of the issue have been used to repay bonds issued in the debt capital markets which matured on 8 August 2005. b) Enhanced Distribution Profile The Bidders Statement issued to Hills security holders as part of the acquisition of the Hills Motorway Group outlined an enhanced distribution profile for the Transurban Group. The distribution forecast for the financial year ended 30 June 2006 is 50.0 cents per stapled security. This represents an 11.0 cent 127,277 79,830 (747,975) (668,595) 891,883 229 increase on the previous estimate of 39.0 cents per stapled security outlined in an Australian Stock Exchange release on 29 October 2004. c) Mitcham Frankston Freeway (“MFF”) Project Refer to Item (e)(vi) of Review of Operations. d) Tullamarine / Calder Freeway Interchange Upgrade Refer to Item (e)(ii) of Review of Operations. e) Transurban Takeover of Hills Motorway Group Refer to Item (e)(iii) of Review of Operations f) Participation in Capital Beltway project (Virginia USA) Refer to item (e) (iv) of Review of Operations. Annual Report 2005 49 financials Directors’ Report g) Pocahontas Parkway – Memorandum of Understanding (Virginia USA) Refer to item (e) (v) of Review of Operations. Matters Subsequent to the End of the Financial Year Capital markets debt totaling $590.0 million matured on 8 August 2005. The debt was replaced by an issue of USD $380.0 million (AUD $500.0 million) of senior debt in the US private placement market and $90.0 million from existing facilities. The refinanced debt matures between 2015 and 2020. With exception of the refinancing, the directors are not aware of any circumstances that have arisen since 30 June 2005 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 2005. Likely Developments and Expected Results of Operations Information on likely developments in the operations of the Group and the expected results of operations have not been included in this report because the directors believe it would be likely to result in unreasonable prejudice to the Group. 50    Annual Report 2005 Environmental Regulation CityLink Melbourne Limited is subject to regulation by the Victorian Environmental Protection Authority (“EPA”) in respect of: discharges from the tunnel ventilation system discharges from the tunnel drainage systems, and groundwater quality in the aquifers surrounding the tunnels. The main regulation relates to the Waste Discharge Licence (EA41502) that regulates the operation of the tunnel ventilation system and imposes requirements to monitor the emissions of carbon monoxide, oxides of nitrogen and particulate matter. This monitoring is undertaken by several specialist organisations under the supervision of the CityLink operator, Translink Operations Pty Ltd. The monitoring organisations are certified by the National Association of Testing Authorities. Monitoring verifies that emission levels are well below the maximum levels specified in the Waste Discharge Licence and that there has been an improvement in ambient air quality since the tunnels opened. Following discussions with the Environmental Management Committee which includes representatives from CityLink, Translink Operations, EPA Victoria, local councils and community representatives, Translink Operations sought an amendment to the Waste Discharge Licence. Accordingly, on 7 June 2005, EPA Victoria issued an amended Waste Discharge Licence (Licence EA41502) which materially altered the licence conditions. Under the amended licence, CityLink is no longer required to monitor ambient air quality in the vicinity of the tunnel ventilation stacks. Monitoring of emissions within the tunnels and from the ventilation stacks will continue unchanged. Monitoring of groundwater quality verifies that the requirements of the EPA are being met. Monitoring of tunnel drainage water quality verifies that the requirements of the EPA are being met. The operator of the M2 Motorway has implemented a comprehensive environmental management plan to monitor the performance of the motorway and takes remedial steps where necessary. There have not been any reported breaches for the year ended 30 June 2005. The Transurban Group Directors’ Report Information on Directors Laurence G Cox AO, B. Con, FCPA, FSIA. Chairman – non-executive. Kimberley Edwards BE, MAdmin (Bus), FIE (Aust), MAICD. Managing Director Peter C Byers B Com (Hons). Independent non-executive director Experience and expertise Experience and expertise Experience and expertise A former business manager and deputy principal of the University of Tasmania. Other current directorships Non–executive director of Airport Motorway Management Limited and Foundation Capital Limited. Former directorships in last 3 years Alternate non-executive director of Hancock Victorian Plantations Holdings Limited (1995 to 2005). Non-executive director of The Hills Motorway Group (1995 to 2005). Date of initial appointment 2 January 1996 Special responsibilities Chairman of Audit Committee Over 40 years’ experience in Australian and International financial markets, including Chairman of the Australian Stock Exchange Limited from 1989 to 1994 and executive Chairman of the Potter Warburg Group from 1989 to 1995. Other current directorships Non-executive Chairman of The Murdoch Children’s Research Institute and SMS Management and Technology Limited, executive director of Macquarie Bank Limited and non-executive director of Smorgon Steel Group. Former directorships in last 3 years Non-Executive Director of Hills Motorway Limited and Hills Motorway Management Limited from 18 April 2005 to 12 August 2005. Date of initial appointment Held senior management positions on major commercial and infrastructure projects in Australia, the United Kingdom and the Middle East. Joined Transurban when it was originally bidding for the CityLink project and recently led the development of the Transurban Group into other toll road opportunities and the deployment of its electronic tolling technology in Australia and overseas. Other current directorships None Former directorships in last 3 years WestLink Motorway Limited (2002 to 2005). WSO Co Pty Limited (2002 to 2005). WSO Finance Pty Limited (2002 to 2005). Executive Director of Hills Motorway Limited and Hills Motorway Management Limited from 18 April 2005 to 12 August 2005. 13 February 1996 Date of initial appointment Special responsibilities Chairman of Board, Chairman of Nomination and Remuneration Committee and Member of Audit Committee. 29 October 1996 Special responsibilities Managing Director Annual Report 2005 51 financials Directors’ Report Geoffrey O Cosgriff BAppSc, Company Director Diploma, FIE(Aust), FAICD. Independent non-executive director Jeremy G A Davis BEc, MBA, Ma, FAICD. Independent non-executive director Susan M Oliver Build. Prop. & Const, FAICD. Independent non-executive director Experience and expertise Experience and expertise Experience and expertise Formerly held executive management roles with Melbourne and Metropolitan Board of Works and has had extensive experience in the information technology industry, including the founding Managing Director of MITS Limited. MITS grew to 600 staff and nearly $100 million in sales of information technology solutions from its formation until December 2000 when it was acquired by Logica Pty Limited. Other current directorships Non-executive director of UXC Limited. Executive director of LogicaCMG Pty Limited. Holds the AMP Chair of Management in the Australian Graduate School of Management at the University of New South Wales and the University of Sydney. Academic interests in the fields of corporate strategy and negotiation and a fellow of the Australian Institute of Company Directors. Other current directorships Non-executive Chairman of XRT Limited. Non-executive director of SP Australia Networks (Transmission) Pty Ltd, SP Australia Networks (Distribution) Pty Ltd, CHAMP Ventures Pty Ltd, and AMWIN Management Pty Ltd. Former directorships in last 3 years Former directorships in last 3 years None Date of initial appointment 19 December 2000 Special responsibilities Member of Risk Management and Compliance Committee, Member of Nomination and Remuneration Committee. Non-executive director of SPI Australia Group Pty Ltd (2004 to 2005). Non-executive director of Gradipore Limited (2002 to 2003). Date of initial appointment 16 December 1997 Special responsibilities Member of Audit Committee, Member of Nomination and Remuneration Committee. Former Senior Manager of Andersen Consulting and former Managing Director of the Australian Commission for the Future Limited. Other current directorships Non-executive director of MBF Australia Ltd, non-executive director of Programmed Maintenance Services Limited, non-executive director of Methodist Ladies College Limited, non-executive director of The Australian Business Foundation Limited, executive director wwITe Pty Limited and Governor of The Smith Family Ltd. Former directorships in last 3 years Non-executive director of The Smith Family Ltd (2002 to 2005). Non-executive Chairman of ScreenSound Australia (The National Screen and Sound Archive) (1998 to 2003). Date of initial appointment 25 June 1996 Special responsibilities Chairperson of Risk Management and Compliance Committee, Chairperson of Corporate Social Responsibility Committee. 52    Annual Report 2005 The Transurban Group Directors’ Report Geoffrey R Phillips BE (Chem), MBA, MAICD. Executive director Christopher J S Renwick BA, LLB, FAIM, FAIE, FTSE. Independent non-executive director David J Ryan AO, BBus, FCPA, FAICD. Independent non-executive director Experience and expertise Experience and expertise Experience and expertise Joined Transurban in 1996 as Executive General Manager, Finance and was subsequently appointed Finance Director. Prior to joining Transurban, worked for the Potter Warburg Group (now UBS Australia) for 6 years as director in both the Corporate Finance and Fixed Interest Divisions. Other current directorships Non-executive director and Deputy Chairman of Yarra Valley Water Limited. Former directorships in last 3 years None Date of initial appointment 28 August 1998 Special responsibilities Deputy Managing Director, Member of Risk Management and Compliance Committee. Date of retirement 26 July 2005 Over 35 year’s experience covering mining, operational business management and law. Experience covers commercial banking, investment banking and operational business management in a range of sectors. Other current directorships Non-executive Chairman of Coal and Allied Industries Limited and Rio Tinto Aboriginal Foundation, non-executive director of Downer – EDI Limited and Governor of the Ian Clunies Ross Foundation. Vice President of the Australia Japan Business Co-operation Committee. Former directorships in last 3 years Multiple executive directorships within Rio Tinto Group (1986 to 2004). Date of initial appointment 26 July 2005 Special responsibilities None Other current directorships Non-executive Chairman of Residual Assco Limited, DJL Limited, Tooth & Co Limited and Industrial Equity Limited. Non-executive director of ABC Learning Centres Limited, Lend Lease Corporation Limited, Caliburn Partnership and Virgin Management Asia-Pacific Pty Ltd Advisory Board. Former directorships in last 3 years Non-executive director of Virgin Blue Holdings Limited (2003 to 2005) and Managing Director of Adsteam Marine Limited (1997 to 2002). Date of initial appointment 23 April 2003 Special responsibilities Member of the Audit Committee and the Risk Management and Compliance Committee. Annual Report 2005 53 financials Directors’ Report Company Secretary Paul O’Shea B.Ec, LLB, FCIS. Meetings of directors Mark Licciardo B.Bus (Acc), GradDip CSP, ASA, ACIS. Mr Licciardo was appointed to the position of Company Secretary with effect from 17 January 2005. Before joining Transurban he held the position of company secretary with a group of listed investment companies, the major one being Australian Foundation Investment Company Limited, for just over 7 years. Prior to that he held various finance roles with investment companies and major banks. Mr O’Shea is a Company Secretary and General Counsel, Transurban Legal. He has been General Counsel since March 1996 and a Company Secretary since March 1998. Before joining Transurban he held a senior legal role at Transfield for 18 months and prior to that worked as a solicitor with two major legal firms. The number of meetings of the board of directors of Transurban Limited, Transurban Holdings Limited and Transurban Infrastructure Management Limited held during the year ended 30 June 2005, and the numbers of meetings attended by each director were: Geoffrey R Phillips BE (Chem), MBA, MAICD. Geoffrey R Phillips was a company secretary from the beginning of the financial year until his resignation on 26 July 2005. Name Board of Directors Transurban Limited Board of Directors Transurban Holdings Limited Board of Directors Transurban Infrastructure Management Limited L G Cox P C Byers (1) G O Cosgriff J G A Davis S M Oliver D J Ryan K Edwards G R Phillips A 18 14 19 18 19 18 18 19 B 19 19 19 19 19 19 19 19 A 16 13 18 18 17 17 17 18 B 18 18 18 18 18 18 18 18 A 18 15 20 19 19 19 x 20 B 20 20 20 20 20 20 x 20 A = Number of meetings attended B = Number of meetings held during the time the director held office x = Not a director of the relevant company (1) Mr Byers did not participate in 5 board meetings dealing with the takeover of the Hills Motorway Group due to a conflict of interest arising from his position as a Hills director. 54    Annual Report 2005 The Transurban Group Directors’ Report The number of meetings of each board committee of Transurban Limited, Transurban Holdings Limited and Transurban Infrastructure Management Limited held during the year ended 30 June 2005, and the numbers of meetings attended by each director are set out in the following table. All meetings were held jointly. Name Audit Committee Mitcham Frankston Freeway Committee Nomination & Remuneration Committee Risk Management & Compliance Committee Hills Motorway Review Committee A B A B A B A B A B L G Cox (5) P C Byers (1) G O Cosgriff J G A Davis S M Oliver (2) D J Ryan (3) K Edwards (4) G R Phillips (4) 4 5 x 5 x 2 x x 5 5 x 5 x 2 x x x 4 4 4 3 4 4 4 x 4 4 4 4 4 4 4 3 x 3 3 x x x x 3 x 3 3 x x x x x x 3 x 3 2 x 3 x x 3 x 3 3 x 3 4 x 4 4 4 4 4 4 4 x 4 4 4 4 4 4 A = Number of meetings attended B = Number of meetings held during the time the director held office x = Not a member of the relevant committee (1) (2) (3) (4) (5) Mr Byers did not participate in the Hills Review Committee due to a conflict of interest arising from his position as a Hills director. Ms Oliver chaired 3 meetings of the Corporate Social Responsibility Committee held during the year ended 30 June 2005. This committee is not a committee of the board. Ms Oliver is not a member of the Audit Committee but attended 3 of these meetings in her capacity as Chair of the Risk Management and Compliance Committee. Mr Ryan was appointed to the Audit Committee on 22 February 2005. He attended all meetings held during the year, including 3 prior to his appointment. Messrs Edwards and Phillips are not members of the Audit and Nomination and Remuneration Committee but attend these meetings. Mr Cox did not participate in the Mitcham-Frankston freeway Committee due to a conflict of interest arising from his position as a director of Macquarie Bank Limited. Annual Report 2005 55 financials Directors’ Report Directors’ Interests The directors of the Group have disclosed relevant interests in Stapled Securities, options over Stapled Securities and Convertible Adjusting Rate Securities (“CARS”) as follows: Number of Stapled Securities Options over Stapled Securities Number of CARS 1,142,500 70,580 24,910 50,000 62,540 - 21,577 61,000 508,820 - - - - - - - 1,500,000 - - - 121 - - - - - - limit, remuneration structure and amounts for non-executive directors are recommended to the Board by the Nomination & Remuneration Committee with assistance from external remuneration consultants. Liability for the Superannuation Guarantee Contribution is met from gross remuneration. The current fee arrangements were last reviewed with effect from 1 January 2005. In 1997, the Board implemented a policy to provide retirement allowances to non-executive directors. The policy provides for an entitlement to a lump sum payment (not exceeding the maximum allowable under the Corporations Act 2001) if the non-executive director has completed a minimum of three years service. The lump sum is equivalent to the total emoluments received during the Relevant Period. The Relevant Period is one-third of the director’s total period of service or three years (both calculated to the day of retirement), whichever is the lesser. This policy was reviewed in April 2003 and it was resolved to continue the policy for directors appointed prior to 29 April 2003, but not to extend the policy to appointments made after that date. Non–executive directors not entitled to retirement benefits receive an additional director’s fee. Executive Directors and Executives The key objectives of the Group’s policy for executive remuneration are: To secure employees with the skills and experience necessary to meet business objectives Name L G Cox P C Byers G O Cosgriff J G A Davis S M Oliver C J S Renwick D J Ryan K Edwards G R Phillips Remuneration Report Principles used to determine the nature and amount of remuneration Non-Executive Directors The remuneration of non-executive directors consists of director’s fees, committee fees and (subject to eligibility) retirement benefits. Non-executive directors are not provided with any form of equity-based compensation. The constitutions of the entities comprising the Transurban Group (“the Group”) provides that the total remuneration paid in a year to non- executive directors may not exceed $950,000 per entity. Subject to this 56    Annual Report 2005 Directors’ Report To motivate employees to the highest levels of performance To align employee incentives with increased shareholder value. The policy seeks to support the Group’s objective to be perceived as “an employer of choice” by: Offering remuneration levels which are attractive relative to those offered by comparable employers Providing strong, transparent linkages between individual and group performance and rewards. In consultation with external remuneration consultants, the Group has structured its executive remuneration to reward both longer term growth and the achievement of short term performance targets. Executives are remunerated through a combination of base salary and benefits, short-term incentives (“STI”) in the form of cash bonuses and long-term incentives (“LTI”). Until 30 June 2005, LTIs were provided via either the Executive Option Plan or the Executive Long Term Incentive Plan. Revised LTI arrangements have been introduced for the period beyond 30 June 2005. The proportion of each component of an executive’s total remuneration is established by reference to remuneration survey data for comparable companies. As executives progress in seniority, the proportion of remuneration which is dependent on the performance of the entity increases. The incentive component of executive remuneration is primarily determined by financial performance relative to short- term profitability targets and by Total Shareholder Return (“TSR”) relative to the companies comprising the ASX200 index over the longer term. Over the past five years Total Shareholder Return (“TSR”) for the Transurban Group was 149.4 per cent compared with the Standard and Poors / ASX 200 accumulation index of 57.0 per cent for the same period. Distributions paid from commencement of operations have risen consistently, evidenced in the final result for the financial year ended 30 June 2005 of 35.0 cents per security (“cps”) representing a 25.0 per cent increase over that recorded for the prior corresponding period (28.0 cps). Transurban’s ability to grow distributions arises from a combination of strong cash generation and increased debt capacity. Since commencement of operations, Transurban’s annual cash contribution from operations has increased from a surplus in 2001 of $0.02 million to $146.7 million for the current period. Further evidence of strong performance was provided during the year with the acquisition of the Hills Motorway Group which contributed to an increase in market capitalisation between 2004 and 2005 of $2,594 million and $5,896 million respectively. Transurban is currently ranked in the top 40 public companies listed on the ASX. The remuneration of the Managing Director is established by the Board, based on the recommendation of the Nomination & Remuneration Committee. The remuneration of senior executives The Transurban Group reporting to the Managing Director is established by the Nomination and Remuneration Committee, based on the recommendation of the Managing Director. The components of executive remuneration are described below: Base Pay Base pay represents the fixed component of executive remuneration and is structured as a Total Employment Cost (“TEC”). TEC consists of a mix of cash, superannuation and prescribed benefits. An executive’s TEC is reviewed annually against market rates for comparable roles. There are no guaranteed base pay increases fixed in any executive’s contract of employment. Benefits Executives receive benefits including death and disability insurance, salary continuance insurance and car parking. Short-term Incentives On an annual basis, the Group makes available Short-term Incentive (“STI”) payments to executives for the achievement of Group and individual performance (Key Performance Indicators). A target STI amount, expressed as a percentage of the executive’s TEC, is specified for each executive, but this amount is subject to further adjustment for: Annual Report 2005 57 financials Directors’ Report The extent to which a profit-related Financial Performance Measure (“FPM”) is achieved The extent to which the executive has achieved his/her Key Performance Indicators (“KPIs”). Such adjustments can result in the actual STI payment received by the executive being above or below the target. STI payments are made annually in September following the annual performance reviews. The adjustment ensures that STI payments are only made when value has been created for security holders and profit is consistent with the business plan. Each year, the FPM and the KPIs for senior executives are established by the Nomination & Remuneration Committee, based on recommendations made by the Managing Director. The KPIs for the Managing Director are established by the Board based on recommendations made by the Nomination & Remuneration Committee. The Nomination & Remuneration Committee is also responsible for assessing the extent to which the FPM and the KPIs set for senior executives have been achieved. To assist in making these assessments, the Committee receives reports from the Chief Finance Officer and the Managing Director. 58    Annual Report 2005 Long Term Incentives Business Generation Incentive Plan Two forms of Long-term Incentives (“LTI”) are currently in operation. The Executive Option Plan (“EOP”) provides equity rewards, while the Executive Long Term Incentive Plan (“ELTIP”) provides cash rewards linked to equity performance. Both plans utilise Total Shareholder Return as the basis for determining payment. The EOP was introduced with a five year term in 2001. Following a review in 2003, it was decided to make no further issues of options under the EOP and to introduce the ELTIP to provide long-term incentives beyond the period when all options issued under the EOP had vested. No options were granted under the EOP during this financial year. Details of the EOP and ELTIP are set out below under the heading “Share-based Options” (Note 25). A further review of LTIs was undertaken in the current year and as a result a revised Plan will be introduced later in the year. The objective of the revised Plan is to implement a more cost effective Plan to the Group for a given amount of incentive. In addition, the revised Plan will take into consideration those Plans which have been introduced by a number of other companies whose equity securities are stapled. The Group also operates a Business Generation Incentive Plan (“BGIP”) in which executives may participate, depending upon their level of involvement in generating new business activities. The BGIP provides for cash bonuses to be paid from a bonus pool determined by the risk adjusted net present value of a project or business venture. The BGIP is intended to reward executives for successful business generation activities, based on the increase in security holder value derived from new business. BGIP payments are determined and awarded by the Board, on the recommendation of the Managing Director to the Nomination & Remuneration Committee. Employee Security Ownership Plan Executives may elect to participate in the Employee Security Ownership Plan on the same basis as that offered to all permanent employees. Executive Directors do not participate in the Plan. Details of remuneration Details of the nature and amount of each element of the emoluments of each director of the Transurban Group and each of the 5 officers of the Group receiving the highest emoluments for the year ended 30 June 2005 are set out in the following tables. The Transurban Group Directors’ Report Directors of the Transurban Group Primary Post-employment Equity Name Cash salary and fees Cash Long Term Non- Bonus Incentive (1) monetary annuation Super- Retirement Options (2) benefits Total $ $ benefits $ $ $ $ $ $ Non-executive directors L G Cox Chairman P C Byers J G A Davis S M Oliver 265,718 100,935 77,013 97,918 G O Cosgriff 101,852 D J Ryan 117,566 Executive directors - - - - - - - - - - - - - - - - - - 20,331 168,992 9,085 78,822 80,000 79,311 8,812 82,340 9,167 47,078 10,581 - - - - - - - 455,041 188,842 236,324 189,070 158,097 128,147 K Edwards Managing Director G R Phillips Deputy Managing Director 1,154,259 1,000,000 2,545,620 7,300 95,940 - 183,999 4,987,118 538,509 262,500 - 7,300 11,585 - 61,333 881,227 Total 2,453,770 1,262,500 2,545,620 14,600 245,501 456,543 245,332 7,223,866 Annual Report 2005 59 financials Directors’ Report Other executives of the Transurban Group Primary Post-employment Equity Name Cash salary and fees Cash Long Term Non- Super- Options (2) Total bonus Incentive (1) monetary annuation $ $ benefits $ $ $ $ $ B Bourke CEO CityLink Melbourne Limited K Daley Vice President, International Development V Howard General Manager, Corporate Finance P O’Shea General Counsel L Hunt General Manager NSW 385,342 230,000 485,490 7,300 46,660 35,791 1,190,583 321,352 230,000 482,286 6,083 27,337 30,544 1,097,602 254,315 432,500 350,699 7,300 15,000 21,817 1,081,631 304,319 225,000 387,751 7,300 27,312 26,181 977,863 305,473 137,000 375,935 13,400 26,511 11,742 870,061 Total 1,570,801 1,254,500 2,082,161 41,383 142,820 126,075 5,217,740 (1) (2) The amount shown as Long Term Incentives is that part of the units issued under the ELTIP which is attributable to the current year portion of the vesting period for each current allocation. No options were granted during the year over Transurban Group Stapled Securities. Option remuneration relates to options granted to Executive Directors and Executives in prior financial years. The amounts disclosed as remuneration in the current year is that part of the value of the options which is attributable to the current year portion of the vesting period. To calculate remuneration from options, the options were valued as at grant date using a Black-Scholes derived option valuation model taking into consideration the exercise price, the term of the option, the market price of Transurban Group Stapled Securities on the date of granting the option, the expected price volatility of Transurban Group Stapled Securities, expected future distributions and the risk free rate of interest over the term of the options. Cash Bonuses and options Remuneration of the Group’s executives includes a short term incentive (“STI”) component and each executive has the potential to receive 100 per cent of his or her target STI payment. The actual STI payment received by each executive is determined by the extent to which the executive’s KPIs are met. Cash bonuses aggregating $3.8 million were incurred*- under the Business Generation Incentive Plan in relation to the takeover offer for the Hills Motorway Group and the project to upgrade the interchange between the Tullamarine and Calder Freeways. For each cash bonus paid to the directors and executives listed in the above tables, the percentage of the available bonus that was paid in the financial year and the percentage that was not paid because the person did not meet his or her performance criteria is set out below. No part of the cash bonuses are payable in future years. 60    Annual Report 2005 Directors’ Report Name K Edward G R Phillips B Bourke K Daley V Howard P O’Shea L Hunt Options All options issued to the executives and directors listed in the above tables and which were due to vest during the current year have now vested. No options which were due to vest during the current year have been forfeited. For options issued under the EOP and vesting in the current year, the rank of Transurban’s TSR relative to the TSRs of the companies comprising the ASX 200 index over the relevant Exercise Condition Test Period was at the 69.6th percentile. As this rank was above the threshold required for 100 per cent vesting, all options which vested in the current year, together with options which had vested in prior periods but whose exercise had been precluded by operation of the Exercise Condition, became exercisable. Long Term Incentive Units No long term incentive units issued during this year or prior years were due to vest during this reporting year. The Transurban Group Cash Bonus Paid % Not Paid % 100 87 102 92 100 105 85 - 13 - 8 - - 15 Service agreements Remuneration for the Managing Director, the Deputy Managing Director and the executives specified above are formalised in service agreements. Each of these agreements provides for access to performance-related cash bonuses, other benefits including death and disability insurance, salary continuance insurance and car parking, and participation, when eligible, in the Employee Share Ownership Plan, the Executive Option Plan, the Executive Long Term Incentive Plan and the Business Generation Incentive Plan. Other major provisions of the agreements, relating to remuneration, are set out below: Executive Directors K Edwards, Managing Director Term of Agreement – permanent, subject to 3 months notice of termination by either party Fixed remuneration including base salary and superannuation, for the year ended 30 June 2005 of $1,250,000 to be reviewed annually by the remuneration committee and the Board On 25 July 2005, the terms of Mr Edwards’ service agreement was varied to provide for a payment of one year’s fixed remuneration upon termination. G R Phillips, Deputy Managing Director Term of Agreement – until 31 July 2005 Base salary, including superannuation, for the year ended 30 June 2005 of $550,000 On 25 July 2005, Mr Phillips’ service agreement was varied to provide for a termination benefit of $990,000 in recognition of his long service to the Group and his non- participation in the Executive Long Term Incentive Plan. Annual Report 2005 61 financials Directors’ Report Other Executives The major provisions contained in the service agreements of the other executives listed in the table in the section headed ‘Details of Remuneration” are the same for all executives except for the base salary component. These provisions are: Term of agreement – permanent, subject to termination on 3 months notice by either party Stapled Securities under option Unissued stapled securities of the Transurban Group, under option at the date of this report are as follows. No options were issued during the year. Eligible to participate in the Transurban Group’s Employee Share Ownership Plan and Executive Long Term Incentive Plan Total Employment Cost is reviewed annually by the Nomination and Remuneration Committee. Date options granted Expiry date 26 April 2001 23 October 2001 1 February 2002 9 April 2002 20 May 2002 30 April 2006 31 October 2006 30 April 2007 30 April 2007 30 April 2007 Issue price of stapled securities $3.817 $4.404 $4.280 $4.030 $4.220 Number under option 390,000 1,500,000 - 237,300 744,852 Options have no voting or distribution entitlements and have no rights to participate in any other issues of the Group. Issued Long Term Incentives The terms and conditions of each grant of ELTI units affecting remuneration in this or future reporting periods are as follows. Grant date Expiry date Grant price Units on issue 30 Sept 2003 30 Sept 2005 30 Sept 2004 30 Sept 2006 $4.23 $5.45 1,912,000 2,965,000 Value per unit at grant date $0.46 $0.54 Value per unit at reporting date Date Payable $2.98 $1.79 30 Nov 2005 30 Nov 2006 62    Annual Report 2005 The Transurban Group Directors’ Report Further details relating to options and long term incentives are set out below. Name K Edwards – options K Edwards – ELTI G R Phillips – options G R Phillips – ELTI B Bourke – options B Bourke – ELTI K Daley – options K Daley – ELTI V Howard – options V Howard – ELTI P O’Shea – options P O’Shea – ELTI L Hunt – options L Hunt – ELTI A Remuneration consisting of options/ELTI % - 35 - - - 20 - 20 - 20 - 20 - 20 B Value at grant date C Value at grant date D Value at lapse date $ - 437,500 $ - - - - - 1,483,000 - 1,069,550 84,000 - - 181,300 66,000 - - 716,706 55,000 - - 730,039 66,000 - 64,000 - - - $ - - - - - - - - - - - - - - E Total of columns B to D $ - 437,500 1,483,000 - 1,069,550 84,000 181,300 66,000 716,706 55,000 730,039 66,000 - 64,000 A = The percentage of the value of remuneration consisting of options/ELTIs, based on the value at grant date set out in column B. B = The value at grant date calculated in accordance with AASB 1046 Director and Executive Disclosures by Disclosing Entities of options/ETLIs granted during the year as part of remuneration. C = The value at exercise date of options/ELTIs that were granted as part of remuneration and were exercised/matured during the year. D = The value at lapse date of options/ELTIs that were granted as part of remuneration and that lapsed during the year. Shares issued on the exercise of options The following Transurban Stapled Securities were issued during the year ended 30 June 2005 on the exercise of options granted under the Transurban Group’s Employee Option Plan. No further securities have been issued since that date. No amounts are unpaid on any of the securities. Annual Report 2005 63 financials Directors’ Report Date options granted 26 April 2001 23 October 2001 1 February 2002 9 April 2002 20 May 2002 Indemnification and Insurance The officers of the Group are indemnified against liability incurred by the person in their capacity as an officer unless the liability arises out of conduct on the part of the officer which involves a lack of good faith. The Group also indemnifies each person who is or has been an officer against liability for costs or expenses incurred by the person in his or her capacity as an officer 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 Act 2001. Pursuant to this indemnification, the individual entities of the Group have paid premiums for an insurance policy for the benefit of directors, secretaries and executive officers and related bodies corporate of the Group, in the case of the Trusts within the Group the officers are indemnified out of the assets of the Trusts. In accordance with common practice, the insurance policies prohibit disclosure of the nature of the liability covered and the amount of the premium. 64    Annual Report 2005 Issue price of securities $3.817 $4.404 $4.280 $4.030 $4.220 Number of securities issued 1,493,231 500,000 89,867 62,700 715,598 Rounding off The Group 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. Amounts in the Directors’ Report have been rounded off in accordance with that Class Order to the nearest thousand dollars. Non-audit Services The combined entity may decide to employ the auditor on assignments additional to their statutory audit duties where the auditor’s expertise and experience with the combined entity are important. Details of the amounts paid or payable to the auditor (PricewaterhouseCoopers) for audit and non-audit services provided during the year are set out in note 26 of the financial report. The Board of Directors has considered the position and, in accordance with the advice received from the audit committee is satisfied that the provision of the non- audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are satisfied that the provision of non-audit services by the auditor, did not compromise the auditor independence requirements of the Corporations Act 2001 for the following reasons: All non-audit services have been reviewed by the audit committee to ensure they do not impact the impartiality and objectivity of the auditor None of the services undermine the general principles relating to auditor independence as set out in professional statement F1, including reviewing or auditing the auditor’s own work, acting in a management or a decision making capacity for the combined entity, acting as advocate for the combined entity or jointly sharing economic risk and rewards. A copy of the auditor’s independence declaration as required under section 307C of the Corporation Act 2001 is set out on page 66. Auditor PricewaterhouseCoopers continues in office in accordance with section 327 of the Corporations Act 2001. The Transurban Group Directors’ Report This report is made in accordance with a resolution of the directors. Laurence G Cox Chairman Kimberley Edwards Managing Director Melbourne 23 August 2005 Annual Report 2005 65 financials Directors’ Report Auditors’ Independence Declaration As lead auditor for the audit of the Transurban Group for the year ended 30 June 2005, I declare that, to the best of my knowledge and belief, there have been: a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of the Transurban Group and the entities it controlled during the year. Tim Goldsmith Partner Melbourne 23 August 2005 66    Annual Report 2005 The Transurban Group Statements of financial performance for the year ended 30 June 2005 Revenue from ordinary activities Expenses from ordinary activities: Operational costs Corporate costs Business Development Corporate and Community Relations Concession Fees Net valuation adjustment on Concession Notes Net valuation adjustment on Promissory Notes Depreciation and amortisation expenses Borrowing costs expense Loss from ordinary activities before income tax Income tax expense Loss from ordinary activities after income tax Basic earnings per Stapled Security Diluted earnings per Stapled Security Notes 3 4 4 5 35 35 2005 $’000 511,652 (74,222) (26,730) (18,158) (3,523) (95,600) 54,179 (541) (179,396) (255,054) (87,393) (444) (87,837) Cents (14.8) (6.4) 2004 $’000 467,666 (67,899) (18,504) (9,172) (2,454) (95,600) 58,615 - (152,400) (241,742) (61,490) - (61,490) Cents (11.7) (4.1) The above statements of financial performance should be read in conjunction with the accompanying notes. Annual Report 2005 67 financials Statements of financial position as at 30 June 2005 CURRENT ASSETS Cash assets Receivables Other Total Current Assets NON-CURRENT ASSETS Property, plant and equipment Intangible assets Financial assets Investments accounted for using the equity method Other Total Non-Current Assets TOTAL ASSETS CURRENT LIABILITIES Payables Current tax liabilities Interest bearing liabilities Non-Interest bearing liabilities Provisions Total Current Liabilities NON-CURRENT LIABILITIES Deferred tax liabilities Interest bearing liabilities Non-Interest bearing liabilities Provisions Total Non-Current Liabilities TOTAL LIABILITIES NET ASSETS EQUITY Contributed equity Accumulated losses TOTAL EQUITY Notes 6 7 8 9 10 11 12 13 14 5 15 16 17 5 18 19 20 21 22 The above statements of financial position should be read in conjunction with the accompanying notes. 68    Annual Report 2005 2005 $’000 395,561 25,394 9,178 430,133 5,943,389 8,252 392,000 6,236 35,061 6,384,938 6,815,071 104,301 5,429 8,000 129,578 157,601 404,909 5,024 2,865,976 206,796 3,999 3,081,795 3,486,704 3,328,367 4,127,228 (798,861) 3,328,367 2004 $’000 207,452 25,757 6,914 240,123 3,604,281 8,752 486,419 6,236 29,920 4,135,608 4,375,731 79,422 - 8,000 25,585 5,570 118,577 - 2,210,248 207,681 2,036 2,419,965 2,538,542 1,837,189 2,242,030 (404,841) 1,837,189 The Transurban Group Statements of cash flows for the year ended 30 June 2005 Notes Cash flows from operating activities Receipts from customers (inclusive of GST) Payments to suppliers (inclusive of GST) Interest received Other revenue Income taxes paid Borrowing costs Net cash inflows from operating activities 33 Cash flows from investing activities Net cash acquired from purchase of controlled entities Payments for property, plant and equipment Payments for project development Payments for deferred borrowing costs Payments for investments Payment for release from single purpose Distributions received Proceeds from sale of assets Loans to related parties Repayment of loans by related parties Net cash inflows/(outflows) from investing activities Cash flows from financing activities Proceeds from issue of stapled securities Security issue transaction costs Unclaimed compulsory acquisition funds Interest capitalised against cash collateral Proceeds from borrowings Repayment of borrowings Distributions paid Net cash inflows from financing activities Net increase in cash at bank and cash collateral Cash at bank and cash collateral at the beginning of the financial year Effects of exchange rate changes on cash Cash at bank and cash collateral at the end of the financial year Less cash collateral Cash at bank at the end of the financial year 6 6 The above statements of cash flows should be read in conjunction with the accompanying notes. 2005 $’000 379,532 (171,174) 223,554 15,258 (2,720) (297,478) 146,972 332,024 (29,361) (4,400) (10,394) - (3,150) 4,650 - (2,576) 3,778 290,571 11,559 (146) 556 35,007 810,321 (590,000) (131,686) 135,611 573,154 1,456,452 30 2,029,636 (1,634,075) 395,561 2004 $’000 309,806 (146,034) 173,553 15,687 - (214,768) 138,244 - (22,602) (5,334) - (96,347) (3,150) - 6 (2,801) 909 (129,319) 365 - - - 80,000 - (54,145) 26,220 35,145 1,421,277 30 1,456,452 (1,249,000) 207,452 Annual Report 2005 69 financials Notes to the financial statements for the year ended 30 June 2005 1 Summary of Significant Accounting Policies in Transurban Limited and one unit in Transurban Holding Trust. None of the components of the Stapled Security are able to be traded separately. This general purpose financial report has been 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. Unless otherwise stated, the accounting policies adopted are consistent with those of the previous year. a) Principles of aggregation The Group Financial Report consists of the aggregated financial statements of the combined entity comprising Transurban Holdings Limited and controlled entities, Transurban Holding Trust and controlled entities and Transurban Limited and controlled entities, notwithstanding that none of the entities controls the others. The aggregated accounts incorporate an elimination of inter-entity transactions and balances and other adjustments necessary to present the financial statements on a combined basis. The accounting policies adopted in preparing the financial statements have been consistently applied by the individual entities comprising the Group Accounts except as otherwise indicated. The financial statements have been aggregated in recognition of the fact that the securities issued by the parent entities were stapled into parcels during the year ended 30 June 2005. A Stapled Security comprises one share in Transurban Holdings Limited, one share 70    Annual Report 2005 Where control of an entity is obtained during a financial year, its results are included in the combined statement of financial performance from the date on which control commences. Where control of an entity ceases during a financial year its results are included for that part of the year during which control existed. Investments in associates are accounted for in the combined financial statements using the equity method. Under this method, the combined entity’s share of post acquisition profits or losses of associates is recognised in the combined statement of financial performance, and its share of post acquisition movements in reserves is recognised in combined reserves. The cumulative post acquisition movements are adjusted against the cost of the investment. Associates are those entities over which the combined entity exercises significant influence, but not control. 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 Group. The Group has not adopted a policy of revaluing its non-current assets on a regular basis. c) Income Tax Income tax is brought to account in respect of the Group, which has adopted the liability method of tax effect accounting. Income tax expense is calculated on the operating profit of the Group, 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. The tax losses are shown in aggregate for the Group. However, the losses remain with the legal entities and cannot be transferred between entities comprising the Stapled Security. Tax consolidation legislation The Transurban Group has completed an analysis of the tax consolidation legislation and its applicability to the Group. In reaching a decision on the extent to which it would adopt the provisions of the legislation, the Group considered the following: The Transurban Group Notes to the financial statements for the year ended 30 June 2005 the ability of entities comprising the stapled security to consolidate are recognised in determining the profit or loss for the year. the effect of the legislation on each entity’s carry-forward loss position, and transitional concessions available to entities electing to consolidate at 1 July 2004. Based on its analysis, the Group has elected to implement tax consolidation legislation for Transurban Limited and its wholly owned entities with effect from 1 July 2003. As a consequence, Transurban Limited, as the head entity in the tax consolidated group recognises events and transactions of its wholly owned entities as if those transactions were its own. Transurban Holdings Limited has elected not to participate in the tax consolidation legislation. The impact on the income tax expense for the year is disclosed in note 5. d) Foreign currency translation Transactions Foreign currency transactions are initially translated into Australian currency at the rate of exchange at the date of the transaction. At balance date amounts payable and receivable in foreign currencies are translated to Australian currency at rates of exchange current at the date. Resulting exchange differences e) Acquisition of assets The purchase method of accounting is used for all acquisitions of assets. Cost is measured as the fair value of the assets given up, shares issued or liabilities undertaken at the date of acquisition plus incidental costs directly attributable to the acquisition. f) Revenue recognition Toll charges and related fees are recognised when the charge is incurred by the user. Interest income is recognised on a time proportionate basis that takes into account the effective yield on the financial assets. Rental income is recognised as it accrues. g) 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 reasonable doubt as to collection exists. h) Recoverable Amount of Non-Current Assets The recoverable amount of an asset is the net amount expected to be recovered through the cash inflows and outflows arising from its continued use and subsequent disposal. Where the carrying amount of a non-current asset is greater than its recoverable amount, the asset is written down to its recoverable amount. The decrement in the carrying amount is recognised as an expense in net profit or loss in the reporting period in which the recoverable amount write-down occurs. In assessing recoverable amounts of non-current assets, the relevant cash flows have been discounted to their present value. i) 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 (32 years), or the estimated useful lives of the assets, whichever is less. Amortisation by the combined entity commenced on 18 December 2001 and is calculated on a straight line basis. The period of amortisation will be assessed annually. M2 Motorway Fixed Assets Amounts classified as M2 Motorway fixed assets are amortised over 28 years, being the estimated term of the right to operate the M2 Motorway or the estimated useful lives of the assets, whichever is less. Amortisation by the combined entity commenced on 12 April 2005 and is calculated on a straight line basis. The period of amortisation is assessed annually. Annual Report 2005 71 financials Notes to the financial statements for the year ended 30 June 2005 Other Plant and Equipment l) Intangible Assets The excess of the cost over the identifiable net assets acquired is brought to account as goodwill and amortised on a straight line basis over the period during which the benefits are expected to arise. This period is presently estimated to be 20 years. m) Trade and other creditors Trade and other creditors 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. n) Interest bearing liabilities Loans are carried at their principal amounts which represent the present value of future cash flows associated with servicing the debt. Interest is accrued over the period it becomes due and is recorded as part of other creditors. o) Deferred Expenditure Deferred expenditure relates to The Hills Motorway Trust’s annual lease liability to the Roads and Traffic Authority of New South Wales (“RTA”). Payments under these leases can be made at the discretion of the Responsible Entity, by means of the issue of non-interest bearing promissory notes to the RTA. These promissory notes are classified as a prepayment on their issue which is then charged as an expense over the relevant 12 month period. Depreciation is calculated on a straight line basis so as to write off the net cost of items of plant and equipment over their expected useful lives. Estimates of remaining useful lives will be made on a regular basis for all assets. The expected useful lives are as follows: Plant and Equipment 2.5 – 20 years j) 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. 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. k) Non-current assets constructed by the consolidated entity The cost of non-current assets constructed by the consolidated entity includes the cost of all materials used in construction, direct labour on the project and an appropriate proportion of directly attributable variable and fixed overheads. 72    Annual Report 2005 p) Infrastructure Loan Facilities The consolidated entity has three Infrastructure Loan facilities. Under the terms of these facilities, the consolidated entity 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. (refer note 18). q) Concession and RTA Promissory Notes Non-interest bearing long term debt represented by the Concession and RTA Promissory Notes has been included in the financial statements at the present value of the expected future repayments. As the timing and profile of these repayments is largely determined by the available equity cash flows of the underlying assets (CityLink and the Hills M2 Motorway), the present value of the expected future repayments is determined using a discount rate which recognises their subordinated nature. r) Employee Entitlements (i) Wages, salaries and annual leave Liabilities for wages and salaries, including non-monetary benefits and annual leave expected to be settled within 12 months of the reporting date are recognized in other creditors in respect of employees’ services up to the reporting date and are measured at The Transurban Group Notes to the financial statements for the year ended 30 June 2005 the amounts expected to be paid when the liabilities are settled. An expense for non-accumulating sick leave is recognised when the leave is taken and measured at the rates paid or payable. (ii) Long service leave The liability for long service leave expected to be settled within 12 months of the reporting date is recognized in the provision for employee benefits and is measured in accordance with (i) above. The liability for long service leave expected to be settled more than 12 months from the reporting date is recognized in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date. Consideration is given to expected future wages and salary levels and periods of service. Expected future payments are discounted using market yields at the reporting date on national government bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. (iii) Equity-based compensation benefits Equity based compensation benefits are provided to employees via the Transurban Group Executive Option Plan. Information relating to this scheme is set out in note 29. No accounting entries are made in relation to the Option Plan until options are exercised, at which time the amounts receivable from employees are recognised in the statement of financial position as share capital. The amounts disclosed for remuneration of directors and executives in note 25 include the assessed fair value of options at the date they were granted. (iv) Share-based compensation benefits Share based compensation benefits are provided to employees via the Transurban Group Long Term Incentive Plan. Information relating to this plan is set out in note 29. Units are allocated to reporting periods on a pro-rata basis from the grant date to the maturity date. Units allocated to a particular reporting period are valued on the reporting date and an employee benefit expense and an employee benefit liability are recognised at the amount of the valuation for each unit allocated. On each reporting date, the units allocated to prior periods are revalued and the liability is adjusted to the new valuation. The movement in the liability is recognised as an employee benefits expense. This revaluation occurs until all the units are exercised or lapse. On the exercise date where a cash bonus is paid, any difference between the cash payment and the liability in relation to those units is recognised as an adjustment to employee benefits expense in that period. (v) Superannuation Superannuation is contributed to plans as nominated by the employee. The contribution is not less than the statutory minimum. The superannuation plans are all accumulation funds. The cost of current and deferred employee compensation and contributions to employee superannuation plans were charged to the statements of financial performance. s) Distributions Provision is made for the amount of any distribution declared, determined or publicly recommended by the directors on or before the end of the financial year but not distributed at balance date. t) Joint venture entity The interest in a joint venture partnership is accounted for using the equity method. Under this method, the share of the profits or losses of the partnership is recognised in the statement of financial performance, and the share of movements in reserves is recognised in reserves in the statement of financial position. Details relating to the partnership are set out in note 32. Annual Report 2005 73 financials Notes to the financial statements for the year ended 30 June 2005 u) Maintenance and Repairs x) Project Development Costs incurred in developing proposals for specific projects are charged to the Statement of Financial Performance in the period in which they are incurred except where: (i) (ii) the outcome of the proposal has been determined and the outcome will result in the acquisition of an asset; or the outcome of the proposal has not been determined but it is considered reasonably probable that the outcome, when determined, will result in the acquisition of an asset. Unrealised gains and losses on interest rate swaps and foreign exchange swaps not effectively hedging an underlying exposure are recognised in the statement of financial performance. z) 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 period. Costs meeting these criteria are deferred. (ii) Diluted Earnings per Share 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. y) Financial Instruments Financial instruments, in the form of interest rate swap contracts and foreign exchange rate swaps, are used to manage financial risk. Gains and losses on interest rate and foreign exchange swaps used as hedges are accounted for on the same basis as the interest and foreign exchange 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. The cost of maintenance is charged as expenses as incurred, except where they relate to the replacement of a component of an asset, in which case the costs are capitalised and depreciated in accordance with note 1i. Other routine operating maintenance, repair and minor renewal costs are also charged as expenses as incurred. v) Borrowing Costs Borrowing costs are recognised as expenses in the period in which they are incurred, except to the extent to which they relate to the construction of qualifying assets in which case borrowing costs are capitalised into the cost of the asset. Borrowing costs include interest on short term, long term borrowings and amortisation of deferred borrowing costs. Costs incurred in connection with the arrangement of borrowings are deferred and amortised over the effective period of the funding. w) Cash For the purposes of the statement of cash flows, cash includes cash deposits held at call with financial institutions and other highly liquid investments with short periods to maturity which are readily convertible to cash on hand and are subject to an insignificant risk of changes in value, net of outstanding bank overdrafts. 74    Annual Report 2005 The Transurban Group Notes to the financial statements for the year ended 30 June 2005 aa) Rounding of amounts ab) Trust Formation 2 Segment Information The combined 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. The Transurban Holding Trust was established on 15 November 2001. The Trust was due to terminate on 20 December 2081 unless terminated earlier. However amendments made to the Trust Deed have extended the Trust to perpetuity. The Trust was registered as a managed investment scheme by the Australian Securities and Investments Commission on 28 November 2001. The Combined Entity’s primary business segment for the year ending 30 June 2005 was the operation of the toll roads being Melbourne City Link and the Hills Motorway M2 in Sydney following the acquisition of Hills Motorway Group and a 40 per cent interest in the Westlink M7 project. Geographical segment information is provided in the table below and reflects the Transurban Group’s activities in relation to geographically unique locations. Segment Revenues Segment Assets Segment Liabilities 2005 $’000 2004 $’000 2005 $’000 2004 $’000 2005 $’000 2004 $’000 Victoria 436,749 431,033 3,843,061 3,960,431 2,482,680 2,091,096 New South Wales 74,903 36,633 2,970,082 415,300 1,004,024 447,446 Other - - 1,928 - - - 511,652 467,666 6,815,071 4,375,731 3,486,704 2,538,542 Annual Report 2005 75 financials Notes to the financial statements for the year ended 30 June 2005 2005 $’000 2004 $’000 291,138 248,097 6,672 3,594 12,206 943 6,361 3,451 9,245 - 314,553 267,154 185,704 180,480 - 6 2,025 1,044 714 59 8,656 18,923 197,099 200,512 511,652 467,666 3 Revenue Revenue from operating activities Toll revenue Fee revenue Advertising revenue IT development fees Other Revenue from outside operating activities Interest Proceeds from sale of non-current assets Equity investment distributions Foreign exchange gains (net) (note 4) Other Revenue from ordinary activities 76    Annual Report 2005 The Transurban Group Notes to the financial statements for the year ended 30 June 2005 4 Operating Loss from Ordinary Activities Net gains and expenses Loss from ordinary activities before income tax expense includes the following specific net gains and expense: Net gains Net gain on disposal of property, plant and equipment Net foreign exchange gains recognised in the profit from ordinary activities for the year (as either revenue or expense) Expenses Losses from ordinary activities before income tax expense includes the following specific expenses: Depreciation and amortisation CityLink M2 Motorway Other fixed assets Amortisation Goodwill Total depreciation/amortisation Bad and doubtful debts – trade debtors Mitcham Frankston Freeway bid costs Borrowing costs Interest and finance charges paid/payable Interest rate hedging charges paid/payable Total borrowing costs Rental expenses relating to operating leases 2005 $’000 2004 $’000 - 714 6 59 140,871 141,200 23,161 - 14,864 10,700 500 500 179,396 152,400 1,287 9,423 635 - 245,828 230,650 9,226 11,092 255,054 241,742 2,555 2,284 Annual Report 2005 77 financials Notes to the financial statements for the year ended 30 June 2005 5 Income Tax Tax consolidation legislation The Transurban Group has elected to implement tax consolidation legislation for Transurban Limited and its wholly owned entities with effect from 1 July 2003. The accounting policy on implementation of the legislation is set out in note 1(c). The impact on the income tax expense for the year is disclosed in the tax reconciliation below. Transurban Holdings Limited has elected not to adopt the tax consolidation legislation. a) The income tax expense 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 expense Income tax calculated at 30% (2004-30%) Tax effect of permanent differences: Infrastructure borrowing facility interest not deductible Non-deductible depreciation and amortisation Other Income tax adjusted for permanent differences Benefit of (tax losses of prior year recouped)/tax losses not recognised Income tax expense 2005 $’000 2004 $’000 (87,393) (61,490) (26,218) (18,447) 27,561 26,439 150 732 150 170 2,225 8,312 (1,781) (8,312) 444 - 78    Annual Report 2005 The Transurban Group Notes to the financial statements for the year ended 30 June 2005 b) Transurban Holding Trust Tax losses at beginning of year Tax (income) for the year Tax losses at end of year Transurban Holdings Limited Tax losses at beginning of year Tax (income)/losses for the year Tax losses at end of year Transurban Limited Tax losses at beginning of year Tax (income) for the year Tax losses at end of year Income tax liabilities Current tax payable Current tax liabilities Future income tax benefit – non-current Provision for deferred income tax non-current Deferred tax liabilities 2005 $’000 2004 $’000 152,903 197,957 (50,554) (45,054) 102,349 152,903 824,236 830,722 (34,855) (6,486) 789,381 824,236 17,267 12,178 (17,114) 5,089 153 17,267 5,429 5,429 (2,022) 7,046 5,024 - - - - - Potential future income tax benefits at 30 June 2005 for tax losses not brought to account for the combined entity are $267.6 million (2004: $298.3 million). These future income tax benefits are not being brought to account as an asset as they do not meet the requirements described in note 1c. The gross tax losses in relation to the Trust are $102.3 million as at 30 June 2005 (2004: $152.9 million). These losses can not be used directly by the Trust for the reason outlined in note 1c, but may be available for the benefit of unit holders in the future. (ii) the entity continues to comply with the conditions for deductibility imposed by tax legislation; and, The benefit of tax losses will only be realised by each individual entity 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; and (iii) no changes in tax legislation adversely affect the entity in realising the benefit from the deductions for the losses. Annual Report 2005 79 financials Notes to the financial statements for the year ended 30 June 2005 The above tax position is based on the tax treatment proposed in tax ruling requests relating to borrowing costs and interentity transactions. However, the Australian Taxation Office (“ATO”) has not given its opinion in relation to all of these requests. 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 CityLink Melbourne’s income tax return for the year ended 30 June 1998. Transurban has advice from Senior Counsel that the concession fees are immediately deductible expenditure. The Group Accounts have been prepared on this basis for the year ended 30 June 2005 and all prior years. Deductions in respect of concession fees account for $891.7 million of the combined entity’s carried forward loss of $891.9 million at 30 June 2005. Transurban’s appeal against the ATO’s decision to disallow its objection to the assessment was heard before Mr Justice Merkel in the Federal Court on 3 October 2002. On 2 February 2004, Mr Justice Merkel dismissed Transurban’s appeal. Transurban lodged a Notice of Appeal against the dismissal which was heard before a Full Court of the Federal Court on 12 October 2004. The Full Court of the Federal Court unanimously ruled in favor of Transurban confirming that concession fees are deductible. The Australian Taxation Office subsequently sought special leave to appeal to the High Court of Australia against the Full Court’s decision. This was granted in April 2005. Determination of the appeal is unlikely to occur before early 2006. Until a definitive resolution of this matter has been achieved, Transurban intends to continue preparing the Group financial statements on the basis that the concession fees are deductible. If the finding of Mr Justice Merkel is finally confirmed, certain items in the Group financial statements will require amendment. 6 Current Assets – Cash Assets Cash at bank The above figures are reconciled to cash at the end of the financial period as shown in the statement of cash flows as follows: Cash at bank – as above Cash collateral, Infrastructure Loan Facility (note 1p) Cash collateral, Infrastructure Note Facility (note 1p) Cash collateral, Refinancing Infrastructure Bonds (note 1p) 2005 $’000 2004 $’000 395,561 207,452 395,561 207,452 395,561 207,452 795,000 795,000 454,000 454,000 385,075 - 2,029,636 1,456,452 The amount shown in Cash at Bank includes $28.1 million comprising the amount required under the CityLink Concession Deed to be held in the maintenance reserve account and the amount held in the CARS funding reserve. These amounts were not available for general use at 30 June 2005 (2004: $36.2 million). 80    Annual Report 2005 The Transurban Group Notes to the financial statements for the year ended 30 June 2005 7 Current Assets – Receivables Trade Debtors Less: Provision for Doubtful Debts Other Debtors 8 Current Assets – Other Prepayments Deferred expenditure Debtors from related parties 9 Non-current Assets – Property, Plant and Equipment a) CityLink Fixed Assets CityLink at cost Less: Accumulated depreciation M2 Motorway Fixed Assets M2 at cost Less: Accumulated depreciation Equipment and Fittings Equipment and fittings at cost Less: Accumulated depreciation Total Property, plant and equipment 2005 $’000 2004 $’000 12,509 11,508 (1,429) 11,080 14,314 25,394 3,792 1,898 3,488 9,178 (755) 10,753 15,004 25,757 3,627 - 3,287 6,914 3,937,269 3,910,616 (500,031) (359,160) 3,437,238 3,551,456 2,446,819 (23,161) 2,423,658 - - - 124,625 80,116 (42,132) (27,291) 82,493 52,825 5,943,389 3,604,281 Annual Report 2005 81 financials Notes to the financial statements for the year ended 30 June 2005 Non-current assets pledged as security Refer to note 18 for information on non-current assets pledged as security by the Group. b) Reconciliations Reconciliations of the carrying amounts of each class of property, plant and equipment at the beginning and end of the current financial period is set out below: CityLink Equipment & Fittings $’000 $’000 M2 Total $’000 $’000 2005 Carrying amount at 1 July 2004 3,551,456 52,825 - 3,604,281 Additions 26,653 44,532 2,446,819 2,518,004 Depreciation/amortisation expense charged to statement of financial performance (140,871) (14,864) (23,161) (178,896) Carrying amount at 30 June 2005 3,437,238 82,493 2,423,658 5,943,389 2004 Carrying amount at 1 July 2003 Additions Depreciation/amortisation expense charged to statement of financial performance Carrying amount at 30 June 2004 3,692,648 35,603 8 27,922 (141,200) (10,700) 3,551,456 52,825 - - - - 3,728,251 27,930 (151,900) 3,604,281 10 Non-current Assets – Intangible Assets Goodwill Less: Accumulated amortisation 2005 $’000 2004 $’000 10,000 10,000 (1,748) (1,248) 8,252 8,752 82    Annual Report 2005 The Transurban Group Notes to the financial statements for the year ended 30 June 2005 11 Non-current Assets – Other Financial Assets Investments traded on organised markets Shares in other corporations Other financial assets Investment in Construction Phase Loan Notes 2005 $’000 2004 $’000 - 94,419 392,000 392,000 392,000 486,419 During the year, the Transurban Group acquired the remaining 91.9 per cent interest in the Hills Motorway Group, creating a wholly owned Group subsidiary. The 2004 comparison is the investment in the Hills Motorway Group held by Transurban Holding Trust prior to the takeover (refer note 30). Investment in Construction Phase Loan Notes (“CPLN”) The CPLN represent Transurban’s funding contribution to the Westlink Motorway Partnership. The CPLN earn interest at the fixed rate of 6.27 per cent for the period from the financial close of the Westlink M7 project (“the Project”) to the date of completion of the Project, or 3.5 years which, ever is the lesser, at which time they convert to Term Loan Notes. 12 Investments Accounted for Using the Equity Method Interest in joint venture partnership (note 32) Shares in associates (note 31) 13 Non-current Assets – Other Debtor from related party Prepayments Project development Deferred borrowing costs 2005 $’000 6,236 - 2004 $’000 6,236 - 6,236 6,236 2,114 1,973 8,163 22,811 35,061 5,128 2,913 9,139 12,740 29,920 Annual Report 2005 83 financials Notes to the financial statements for the year ended 30 June 2005 14 Current Liabilities – Payables Trade creditors CARS coupon payment Other creditors 2005 $’000 2004 $’000 29,434 14,926 59,941 104,301 7,355 15,009 57,058 79,422 CARS coupon payment represents the interest payment due to holders of Convertible Adjusting Rate Securities (“CARS”). The distribution on these securities of 7.0 per cent for the period 1 January 2005 to 30 June 2005 totalling $14.9 million has been charged to the statement of financial performance as a borrowing cost due to the CARS being classified as a liability. This coupon was paid to CARS holders on 31 July 2005. Other Creditors Other creditors represents accruals for operating expenses and interest on the Group’s borrowings. 15 Current Liabilities – Interest Bearing Liabilities Secured Bank loan This loan facility was fully utilised at 30 June 2005. 16 Current Liabilities – Non-interest Bearing Liabilities Prepaid tolls Unearned income Release from Single Purpose Tullamarine/Calder freeway upgrade 84    Annual Report 2005 2005 $’000 2004 $’000 8,000 8,000 8,000 8,000 21,083 20,121 7,677 - 100,818 2,314 3,150 - 129,578 25,585 The Transurban Group Notes to the financial statements for the year ended 30 June 2005 17 Current Liabilities – Provisions Employee entitlements Distribution to security holders 18 Non-current Liabilities – Interest Bearing Liabilities Secured Infrastructure Loan facility Less: Cash collateral (note 1p) Infrastructure Note facility Less: Cash collateral (note 1p) Refinancing Infrastructure Bonds Less: Cash collateral (note 1p) Term Debt U.S. Private Placement Working Capital Facilities Land Transport Notes Project Debt - Tranche B Capital Markets Debt Convertible Adjusting Rate Securities Subordinated Debt Facility 2005 $’000 2004 $’000 15,146 5,570 142,455 - 157,601 5,570 795,000 795,000 (795,000) (795,000) 454,000 454,000 (454,000) (454,000) 385,075 (385,075) 440,000 396,080 259,500 - - - - - 396 248 - 510,000 1,340,000 1,190,000 430,000 430,000 - 80,000 2,865,976 2,210,248 Annual Report 2005 85 financials Notes to the financial statements for the year ended 30 June 2005 Set-off of Assets and Liabilities A legal right of set-off exists in respect of the specific cash deposits of $795.0 million, representing collateralisation of liabilities under the Infrastructure Loan facility, $454.0 million, representing collateralisation of liabilities under the Infrastructure Note facility and $385.0 million representing collateralisation of the Refinancing Infrastructure Bonds. Financing Arrangements and Credit Facilities Credit facilities are provided as part of the overall debt funding structure of the Transurban Group. Details of each facility are as follows: 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 on 15 April 2007. The facility was fully drawn as at 30 June 2005. bonds are secured by cash collateral equal to the amount of the loan which is set off against the loan facility, the principal of the refinancing bonds will be repaid from the cash collateral on 31 December 2009. The facility was fully drawn down as at 30 June 2005. b) Infrastructure Note Facility d) Term Debt $454 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 which is set-off against the loan liability. The principal of the infrastructure note facility will be repaid from the cash collateral on 15 April 2007. The facility was fully drawn as at 30 June 2005. $440 million bank facility, maturing in June 2009. The facility was fully utilised at 30 June 2005. This facility is fully secured against the respective rights of Hills Motorway Ltd and Hills Motorway Trust in the M2 Motorway and their assets. e) U.S. Private Placement The Tranche B bank debt facility was repaid utilising Capital Markets Debt and a US Private Placement consisting of medium and long term debt facilities on 7 December 2004. The placement consists of four tranches with maturities ranging from December 2014 to December 2019. c) Refinancing Infrastructure a) Infrastructure Loan Facility Bonds $795.0 million facility certified by the Development Allowance Authority to qualify for concessional tax treatment under Division 16L of the Income Tax $385.0 million facility certified by the Development Allowance Authority to qualify for concessional tax treatment under the Income Tax Legislation. The 86    Annual Report 2005 The Transurban Group Notes to the financial statements for the year ended 30 June 2005 The composition of the US Private Placement is outlined below: Fixed Interest Rate Tranche A Tranche B Tranche C Total Floating Interest Rate Tranche D Total Total US Private Placement USD $’000 100,000 38,900 108,600 247,500 - - 247,500 These facilities are secured by a first ranking charge over the cash flows of the Group. f) Working Capital Facilities During the year, the following facilities were entered into: $30.0 million facility which is available for use until June 2009. At 30 June 2005, $7.0 million of this facility was drawn-down. $150.0 million facility which is for a term of 3 years from 18 March 2005. At 30 June 2005, $82.5 million of this facility was drawn-down $450.0 million facility which is composed of two Tranches from 27 June 2005. Tranche A ($255.0 million) which is for a term of 3 years and Tranche B ($195.0 million) which is for a term of 5 years. At 30 June 2005, $170.0 million of the Tranche A facility was drawn-down. The Tranche B facility remained unused The $150.0 million and $450.0 million facilities are secured by a first ranking charge over the cash flows of the Group. g) Land Transport Notes The class A land Transport Notes were repaid on 30 June 2004. The class B Land Transport Notes are carried at a present value of $0.4 million and will be repaid no later than 30 days prior to the last day of the concession period. Maturity December 2014 December 2016 December 2019 December 2019 AUD $’000 130,942 50,936 142,202 324,080 72,000 72,000 396,080 h) Capital Markets Debt Comprises bonds issued by Transurban Finance Company with terms of 3, 5, and 7 years from 8 August 2002. An additional $150.0 million was raised in December 2004 through the issuance of non-credit wrapped fixed rate Medium Term Notes. These facilities are secured by a first ranking charge over the cash flows of the Group. Annual Report 2005 87 financials Notes to the financial statements for the year ended 30 June 2005 Maturing Maturing Maturing 2009 $‘000 2007 $‘000 2005 $‘000 Total $‘000 Fixed interest rate Credit wrapped Non-credit wrapped Floating interest rate Credit wrapped (1) Non-credit wrapped 175,000 260,000 435,000 - - - - 175,000 150,000 410,000 150,000 585,000 65,000 240,000 360,000 665,000 90,000 - - 90,000 155,000 240,000 360,000 755,000 Total Capital Markets Debt 590,000 240,000 510,000 1,340,000 (1) The Group has the option to redeem the 5 year and 7 year facilities after 3 years. The debt due for repayment on the 8 August 2005 was refinanced on 10 August 2005 by US $380.0 million (AU $500.0 million) and AU $90.0 million from existing facilities. This replacement debt matures between 2015-2020. i) Convertible Adjusting Rate Securities $430.0 million raised via the issue of 4.3 million securities. Semi annual interest is paid at a fixed rate of 7.0 per cent per annum until the first re-set date on 14 April 2007. These securities are generally convertible into Transurban Securities at a discount of 2.5 per cent and rank ahead of Transurban Stapled Securities on a winding up of Transurban in conjunction with a winding up of Transurban CARS Trust. Transurban Holding Trust acts as guarantor for Transurban CARS Trust in relation to the interest payments to holders of CARS. The term of this guarantee is until the first reset date, 14 April 2007, at which time the guarantee may or may not be extended. Loans Total facilities Used at balance date Unused at balance date 88    Annual Report 2005 2005 $’000 2004 $’000 4,448,155 3,087,000 4,077,655 3,037,000 370,500 50,000 The Transurban Group Notes to the financial statements for the year ended 30 June 2005 19 Non-currrent Liabilities – Non-interest Bearing Liabilities Forward exchange contract Concession notes Promissory notes Tullamarine/Calder freeway upgrade 2005 $’000 2004 $’000 11,741 - 127,277 207,681 22,116 45,662 - - 206,796 207,681 The face value of Concession Notes on issue at 30 June 2005 is $586.4 million (2004: $796.1 million). The Net Present Value at 30 June 2005 of the redemption payments relating to these Concession Notes is $127.3 million (2004: $207.7 million). The indicative timing of these redemption payments is set out in the following table. Concession Notes CityLink Melbourne Limited issues Concession Notes annually in satisfaction of its obligations to pay Concession Fees to the State of Victoria (“the State”) equal to $95.6 million. The notes are due for redemption at the end of the Concession Period, but may be presented earlier where a Notional Initial Equity Investor has achieved a real after tax internal rate of return on its equity investment in the Project equal to 10 per cent per annum. Once the threshold rate of return is achieved, subsequent Concession Note redemption payments are limited to not more than 30 per cent of the distributable cash flow for the previous year. Based on forecast cash flows which assume that concession fees are deductible as incurred, the first Concession Note payment is presently expected to occur in the 2012 financial year. Concession Notes have been included in the Financial Report as non interest bearing liabilities at the present value of the expected future repayments. As the timing and profile of these repayments is largely determined by the available equity cash flows of CityLink, the present value of the expected future repayments is determined using a discount rate of 12 per cent which recognises their subordinated nature. Annual Report 2005 89 financials Notes to the financial statements for the year ended 30 June 2005 Concession Note Redemption Estimated Concession Note payments Later than 5 years but not later than 10 years Payable to the State Receivable from the State Later than 10 years but not later than 15 years Payable to the State Receivable from the State Later than 15 years but not later than 20 years Payable to the State Receivable from the State 2005 $’000 2004 $’000 263,334 155,152 (263,334) - 628,320 525,903 (41,920) - - - 114,999 - 586,400 796,054 On 27 January 2005, the Transurban Group reached agreement with the State of Victoria and VicRoads to use CityLink Concession Notes to fund an upgrade of the Tullamarine/Calder Freeway interchange. Under the agreement, Transurban will provide $151.0 million to VicRoads which will be used to fund the upgrade. The agreement provides the amount be payable to VicRoads in two installments on I July 2005 ($100.8 million, as per note 16) and 1 July 2006 ($50.2 million being a present value of $45.7 million, as per note 19). In exchange, the State will assign to Transurban $305.3 million of the Concession Notes issued by CityLink to the State under the provisions of the Melbourne CityLink Concession Deed. Reconciliation Reconciliation of movement in the Concession Note liability. Concession Note liability at the start of the year Concession Notes issued during the year Valuation adjustments for the year: Charge/(credit) for Concession Notes on issue at beginning of period Credit for Concession Notes issued during the year Tullamarine/Calder freeway upgrade adjustment Concession Note liability at the end of the year 90    Annual Report 2005 2005 $’000 2004 $’000 207,681 170,696 95,600 95,600 24,851 20,483 (79,029) (79,098) (121,826) - 127,277 207,681 The Transurban Group Notes to the financial statements for the year ended 30 June 2005 Promissory Notes The Hills Motorway Trust has entered into leases with the Roads and Traffic Authority of New South Wales (“RTA”). Annual lease liabilities under these leases total $7.0 million, indexed annually to the Consumer Price Index over the estimated period that the M2 Motorway will be used. Until such time as a threshold return is achieved, payments under these leases can be made at any time at the discretion of the Responsible Entity of the Trust, by means of the issue of non- interest bearing promissory notes to the RTA. Promissory Notes to the value of $69.2 million have been issued by the Trust since the beginning of the M2 operations. Promissory Notes have been included in the Financial Report as non-interest bearing liabilities at the present value of expected future repayments. As the timing and profile of these repayments is largely determined by the available equity cash flows of the M2 Motorway, the present value of the expected future repayments is determined using a discount rate of 12 per cent which recognises their subordinated nature. The face value of promissory Notes on issue at 30 June 2005 is $69.2 million. The Net Present Value at 30 June 2005 of the redemption payments relating to these Concession Notes is $22.1 million. The indicative timing of these redemption payments is set out in the following table. Promissory Note Redemption Estimated Promissory Note payments Later than 5 years but not later than 10 years Later than 10 years but not later than 15 years Reconciliation Reconciliation of movement in the Promissory Note liability. Promissory Notes liability at the start of the year Promissory Notes acquired Promissory Notes issued during the year Discount of Promissory Notes issued during the year Promissory Note liability at the end of the year 20 Non-current Liabilities – Provisions Employee entitlements 2005 $’000 2004 $’000 37,332 31,900 69,232 - 20,001 8,583 (6,468) 22,116 - - - - - - - - 3,999 3,999 2,036 2,036 Annual Report 2005 91 financials Notes to the financial statements for the year ended 30 June 2005 21 Contributed Equity a) Stapled Securities fully paid 2005 Number 2004 Number 2005 2004 ‘000 ‘000 $’000 $’000 791,416 532,630 4,127,228 2,242,030 791,416 532,630 4,127,228 2,242,030 b) Date Details Notes Number of Securities Issue Price $’000 1 July 2004 Opening Balance 532,630 - 2,242,030 7 Sep 2004 Exercise of April 2001 Options 7 Sep 2004 Exercise of April 2002 Options 7 Sep 2004 Exercise of May 2002 Options 8 Oct 2004 Dividend Reivestment Plan Issue 26 Nov 2004 Exercise of April 2001 Options 26 Nov 2004 Exercise of May 2002 Options 24 Dec 2004 Exercise of February 2002 Options 21 Jan 2005 Exercise of April 2001 Options 16 Feb 2005 Exercise of April 2001 Options 16 Feb 2005 Exercise of May 2002 Options 12 Apr 2005 Hills Motorway Group Acquisition 1 June 2005 Exercise of May 2002 Options 2 June 2005 Exercise of April 2001 Options 2 June 2005 Exercise of May 2002 Options 7 June 2005 Exercise of May 2002 Options 8 June 2005 Exercise of October 2001 Options 8 June 2005 Exercise of May 2002 Options 8 June 2005 Exercise of April 2001 Options e e e d e e e e e e f e e e e e e e 449 63 63 $3.8170 1,714 $4.0300 $4.2200 253 265 6,024 $5.3194 32,042 60 30 90 129 132 10 $3.8170 $4.2200 $4.2800 $3.8170 $3.8170 $4.2200 229 128 385 492 505 44 249,901 $7.3699 1,841,743 46 150 46 142 500 99 121 $4.2200 $3.8170 $4.2200 $4.2200 193 573 193 600 $4.4042 2,202 $4.2200 $3.8170 419 462 92    Annual Report 2005 The Transurban Group Notes to the financial statements for the year ended 30 June 2005 Date Details Notes 9 June 2005 Exercise of April 2001 Options 9 June 2005 Exercise of May 2002 Options 15 June 2005 Exercise of April 2001 Options 15 June 2005 Exercise of May 2002 Options e e e e Number of Securities 250 46 202 233 Issue Price $3.8170 $4.2200 $3.8170 $4.2200 Less: Transaction costs arising on stapled security issues 30 June 2005 Closing Balance 791,416 $’000 954 193 770 985 146 4,127,228 c) Stapled Securities d) Distribution e) Options Reinvestment Plan The Transurban Group had established a distribution reinvestment plan under which holders of Stapled Securities elect to have all or part of their distribution entitlements satisfied by the issue of new Stapled Securities rather than by cash. Securities where issued under the plan at a 2.5 per cent discount to the market price. A decision to suspend the plan until further notice was made and reported to the ASX on 23 February 2005. Stapled Securities entitle the holder to participate in distributions and the winding up of the Transurban Group in proportion to the number of and amounts paid on the securities held. In the event that Transurban and Transurban CARS Trust are wound up simultaneously, then holders of Transurban CARS securities would rank ahead of Transurban Group Stapled Security holders. On a show of hands every holder of Stapled Securities present at a meeting in person or by proxy, is entitled to one vote. Information relating to the Transurban Group Executive Option Plan, including details of options issued, exercised, and lapsed during the financial year and options outstanding at the end of the financial year are set out in note 29. f) Hills Motorway Group Acquisition The consideration given to holders of Hills Motorway Group securities on acquisition by the Transurban Group consisted of 1.47 Transurban Group stapled securities and a cash component of 25 cents per Hills Motorway Group security. Annual Report 2005 93 financials Notes to the financial statements for the year ended 30 June 2005 2005 $’000 2004 $’000 (404,841) (228,681) (87,837) (61,490) (306,183) (114,670) (798,861) (404,841) 142,455 - 71,983 51,847 91,745 62,823 163,728 114,670 131,686 32,042 54,145 60,525 163,728 114,670 22 Accumulated Losses Accumulated losses Accumulated losses at the beginning of the year Net losses incurred during the year Trust distributions to security holders Accumulated losses at the end of year 23 Distributions Distributions proposed Final distribution payable and recognised as a liability: 18.0 cents per fully paid stapled security payable 2 September 2005 Distributions paid during the year Final distribution for 2004 financial year of 13.5 cents (2003 – 10.0 cents) per fully paid Stapled Security paid 8 October 2004 Interim distribution for 2005 financial year of 17.0 cents cents (2004 – 12.0 cents) per fully paid Stapled Security paid 25 March 2005 Total distributions paid Distributions paid in cash or satisfied by the issue of Stapled Securities under the distribution reinvestment plan during the years ended 30 June 2005 and 30 June 2004 Paid in cash Satisfied by issue of Stapled Securities 94    Annual Report 2005 The Transurban Group Notes to the financial statements for the year ended 30 June 2005 24 Financial Instruments Interest rate swap contracts The combined entity is party to financial instruments with off-balance sheet risks in the normal course of business in order to hedge exposure to interest rate and exchange rate fluctuations. These instruments are not included in assets or liabilities. It is Transurban Group policy to protect floating rate facilities from exposure to increasing interest rates. Accordingly, the consolidated entity has entered into interest rate swap contracts under which it is obliged to receive interest at variable rates and to pay interest at fixed rates. The contracts are settled on a net basis and the net amount receivable or payable at the reporting date is included in other debtors or other creditors. Swaps currently in place cover approximately 81 per cent (2004: 86 per cent) of the floating rate loan principal outstanding. At 30 June 2005, the notional principal amounts and periods of expiry of the interest rate swap contracts are as follows: 1 - 5 years Greater than 5 years 2005 $’000 132,000 2004 $’000 - 1,380,021 1,160,000 1,512,021 1,160,000 Cross-currency interest rate swap contracts fixed rates and to pay AUD interest at floating rates. The U.S. Private Placement in December 2004 involved raising fixed rate USD debt. It is company policy to protect foreign currency facilities from exposure to unfavourable exchange rate movements. Accordingly, the entity has entered into cross-currency interest rate swap contracts under which it is obliged to receive foreign currency interest at Swaps currently in place cover 100 per cent of the foreign currency facilities. These contracts are marked to market by comparing the contractual rate to the current market rate. As these contracts are hedging anticipated principal and interest payments, any unrealised gains and losses on the contracts, are deferred and will be recognised in the measurement of the underlying transaction provided the underlying transaction is still expected to occur as originally designated. The contracts are settled on a net basis and the net amount receivable or payable at the reporting date is included in other debtors or other creditors. The following gains, losses and costs have been deferred at 30 June 2005: Notional Amount Unrealised loss (note 19) 2005 $’000 335,821 (11,741) 324,080 2004 $’000 - - - Annual Report 2005 95 financials Notes to the financial statements for the year ended 30 June 2005 Interest Rate Risk The combined entity’s exposure to interest rate risk and the effective weighted average interest rate by maturity periods is set out in the following tables. 2005 Floating Fixed Interest Maturity in: interest rate 1 year or less between 1 and 5 years $’000 more than 5 years $’000 Financial Assets Cash Debtors Debtors from related party Construction Phase Loan Notes Note $’000 $’000 6 7 8, 13 11 395,561 - - - - - - 392,000 Total Financial Assets 395,561 392,000 Weighted average interest rate 4.60% 6.27% - - - - - - - - - - - - - - - Non interest bearing Total $’000 $’000 - 395,561 25,394 5,602 25,394 5,602 - 392,000 30,996 818,557 104,301 104,301 21,083 21,083 146,480 146,480 127,277 127,277 22,116 - - - - - - - - - - - 22,116 8,000 440,000 259,500 1,340,000 396,080 - 11,741 1,634,075 (1,634,075) 430,000 - 396 - 396 - - - - - - - - - - - - - - - - - - - - - - - - 435,000 150,000 - - - - - - - - - - 324,080 (335,821) 11,741 1,634,075 (1,634,075) 430,000 - - - 132,000 1,380,021 Financial Liabilities Creditors Prepaid tolls 14 16 Tullamarine/Calder freeway upgrade 16,19 Land Transport Notes Concession Notes Promissory Notes Bank loan Term Debt Working Capital Facilities Capital Markets Debt US Private Placement Cross-currency interest rate swaps Forward Exchange Contract Infrastructure loan facility Cash collateral CARS Interest rate swaps 18 19 19 15 18 18 18 18 24 19 18 18 18 24 - - - - - - 8,000 440,000 259,500 755,000 72,000 335,821 - - - - (1,512,021) Total Financial Liabilities 358,300 435,000 712,000 1,380,417 421,257 3,306,974 Weighted average interest rate 6.23% 6.25% 7.40% 6.08% Net Financial Assets / (Liabilities) 37,261 (43,000) (712,000) (1,380,417) (390,261) (2,488,417) 96    Annual Report 2005 The Transurban Group Notes to the financial statements for the year ended 30 June 2005 Floating Fixed Interest Maturity in: interest rate 1 year or less between 1 and 5 years $’000 more than 5 years $’000 2004 Financial Assets Cash Debtors Other Debtors from related party Construction Phase Loan Notes Total Financial Assets Weighted average interest rate Financial Liabilities Creditors Prepaid tolls Release from single purpose Land Transport Notes Concession Notes Bank loan Tranche B Debt Capital Markets Debt Subordinated Debt Facility Infrastructure loan facility Cash collateral CARS Interest rate swaps Total Financial Liabilities Weighted average interest rate Net Financial Assets / (Liabilities) Note $’000 $’000 6 207,452 7, 13 8, 13 8 11 14 16 16 18 19 15 18 18 18 18 18 18 24 - - - - 207,452 5.05% - - - - - 8,000 510,000 755,000 80,000 - - - (1,160,000) 193,000 5.97% 14,452 - - - - - - - - - - - - - - - - - - - - - - - - - - - 392,000 392,000 6.27% - - - - - - - 435,000 - 1,249,000 (1,249,000) 430,000 1,160,000 - - - - - - - - - - Non interest bearing Total $’000 $’000 - 207,452 30,885 30,885 6,540 3,287 6,540 3,287 - 392,000 40,712 640,164 79,722 20,121 3,150 79,722 20,121 3,150 248 248 - - - - - - - - - - 207,681 207,681 - - - - - - - - 8,000 510,000 1,190,000 80,000 1,249,000 (1,249,000) 430,000 - 2,025,000 248 310,674 2,528,922 3.76% 6.50% (1,633,000) (248) (269,962) (1,888,758) Annual Report 2005 97 financials Notes to the financial statements for the year ended 30 June 2005 Reconciliation of Net Financial Liabilities to Net Assets Notes 24 9 8, 10, 12, 13 5, 16, 17, 19 As these contracts are hedging anticipated future interest payments and foreign exchange movements, 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 entity expects to pay or receive to terminate the contracts or replace the contracts at their current market rates as at 30 June 2005. 2005 $’000 2004 $’000 (2,488,417) (1,888,458) 5,943,389 53,125 (179,730) 3,328,367 3,604,281 131,286 (9,920) 1,837,189 Chairman – non-executive Laurence G Cox Non-executive directors Peter C Byers, Geoffrey O Cosgriff, Jeremy GA Davis, Susan M Oliver, David J Ryan, Christopher C J Renwick (1) Executive directors Kimberley Edwards (2), Geoffrey R Phillips (3) 25 Director and Executive Disclosures Directors The following persons were directors of entities within the Transurban Group during the financial year: (1) (2) (3) Christopher J S Renwick was appointed a non-executive director of TL, THL and TIML on 26 July 2005 and continues in office at the date of this report. Kimberley Edwards was appointed an executive director of Transurban Infrastructure Management Limited on 26 July 2005 and continues in office at the date of this report. Geoffrey R Phillips was an executive director of TL, THL and TIML from the beginning of the financial year until his resignation on 26 July 2005. Net financial liabilities as above Non-financial assets and liabilities – Property, plant and equipment – Other assets – Other liabilities Net assets per balance sheet 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. The aggregate net fair value of interest rate swaps not recognised in the balance sheet (refer note 1y) held at 30 June 2005 is a liability of $49.8 million (2004: $0.3 million). 98    Annual Report 2005 The Transurban Group Notes to the financial statements for the year ended 30 June 2005 Specified Executives The following persons were the 6 executives with the greatest authority for the strategic direction and management of the Group (“specified executives”) during the financial year. Name Chris Brant Position Chief Finance Officer Brendan Bourke CEO CityLink Melbourne Limited Ken Daley Paul O’Shea Lisa Hunt Vic Delosa All of the above persons were also specified executives of the Transurban Group during the year ended 30 June 2004, except for Chris Brant who commenced employment on 22 November 2004. The specified executives identified above, differ from those disclosed in the Financial Report for the year ended 30 June 2004 due to changes in responsibility for the strategic and operational direction of the Group. Management considers the changes to be appropriate due to the extent of growth and maturity of the group in the past 12 months. Vice President International Development General Counsel General Manager, New South Wales General Manager, Victoria/New Zealand Remuneration of directors and executives Principles used to determine the nature and amount of remuneration Non-Executive Directors The remuneration of non-executive directors consists of director’s fees, committee fees and (subject to eligibility) retirement benefits. Non- executive directors are not provided with any form of equity-based compensation. The constitutions of the entities comprising the Transurban Group (“the Group”) provides that the total remuneration paid in a year to non- executive directors may not exceed $950,000 per entity. Subject to this limit, remuneration structure and amounts for non-executive directors are recommended by the Nomination & Remuneration Committee of the Board with assistance from external remuneration consultants. Liability for the Superannuation Guarantee Contribution is met from gross remuneration. The current fee arrangements were last reviewed with effect from 1 January 2005. In 1997, the Board implemented a policy to provide retirement allowances to non-executive directors. The policy provides for an entitlement to a lump sum payment (not exceeding the maximum allowable under the Corporations Act 2001) if the non- executive director has completed a minimum of three years service. The lump sum is equivalent to the total emoluments received during the Relevant Period. The Relevant Period is one-third of the director’s total period of service or three years (both calculated to the day of retirement), whichever is the lesser. This policy was reviewed in April 2003 and it was resolved to continue the policy for directors appointed prior to 29 April 2003, but not to extend the policy to Annual Report 2005 99 financials Notes to the financial statements for the year ended 30 June 2005 appointments made after that date. Non–executive directors not entitled to retirement benefits receive an additional director’s fee. Executive Directors and Executives The key objectives of the Group’s policy for executive remuneration are: To secure employees with the skills and experience necessary to meet business objectives To motivate employees to the highest levels of performance To align employee incentives with increased shareholder value. The policy seeks to support the Group’s objective to be perceived as “an employer of choice” by: Offering remuneration levels which are attractive relative to those offered by comparable employers Providing strong, transparent linkages between individual and group performance and rewards. In consultation with external remuneration consultants, the Group has structured its executive remuneration to reward both longer term growth and the achievement of short term performance targets. Executives are remunerated through a combination of base salary and benefits, short-term incentives (“STI”) in the form of cash bonuses and long- term incentives (“LTI”). Until 30 June 2005, LTIs were provided via either the Executive Option Plan or the Executive Long Term Incentive Plan. Revised LTI arrangements have been introduced for the period beyond 30 June 2005. The proportion of each component of an executive’s total remuneration is established by reference to remuneration survey data for comparable companies. As executives progress in seniority, the proportion of remuneration which is dependent on the performance of the entity increases. The incentive component of executive remuneration is primarily determined by financial performance relative to short-term profitability targets and by Total Shareholder Return relative to the companies comprising the ASX200 index over the longer term. The remuneration of the Managing Director is established by the Board, based on the recommendation of the Nomination & Remuneration Committee. The remuneration of senior executives reporting to the Managing Director is established by the Nomination and Remuneration Committee, based on the recommendation of the Managing Director. The components of executive remuneration are described below: Base Pay Base pay represents the fixed component of executive remuneration and is structured as a Total Employment Cost (“TEC”). TEC consists of a mix of cash, superannuation and prescribed benefits. An executive’s TEC is reviewed annually against market rates for comparable roles. There are no guaranteed base pay increases fixed in any executive’s contract of employment. Benefits Executives receive benefits including death and disability insurance, salary continuance insurance and car parking. Short-term Incentives On an annual basis, the Company makes available Short-term Incentive (“STI”) payments to executives for the achievement of Company and individual performance (Key Performance Indicators). A target STI amount, expressed as a percentage of the executive’s TEC, is specified for each executive, but this amount is subject to further adjustment for: The extent to which a profit-related Financial Performance Measure (“FPM”) is achieved The extent to which the executive has achieved his/her Key Performance Indicators (“KPIs”). 100   Annual Report 2005 The Transurban Group Notes to the financial statements for the year ended 30 June 2005 Such adjustments can result in the actual STI payment received by the executive being above or below the target. STI payments are made annually in September following the annual performance reviews. The intent of the adjustment for the extent to which the FPM is achieved is to ensure that STI payments are only made when value has been created for securityholders and profit is consistent with the business plan. Each year, the FPM and the KPIs for senior executives are established by the Nomination & Remuneration Committee, based on recommendations made by the Managing Director. The KPIs for the Managing Director are established by the Board based on recommendations made by the Nomination & Remuneration Committee. The Nomination & Remuneration Committee is also responsible for assessing the extent to which the FPM and the KPIs set for senior executives have been achieved. To assist in making these assessments, the Committee receives reports from the Chief Finance Officer and the Managing Director respectively. Business Generation Incentive Plan The Group also operates a Business Generation Incentive Plan (“BGIP”) in which executives may participate, depending upon their level of involvement in generating new business. The BGIP provides for cash bonuses to be paid from a bonus pool determined by the risk adjusted net present value of a project or business venture. The BGIP is intended to reward executives for successful business generation activities, based on the increase in security holder value derived from new business. BGIP payments are determined and awarded by the Board, on the recommendation of the Managing Director. Long Term Incentives Two forms of Long-term Incentives (“LTI”) are currently in operation. The Executive Option Plan (“EOP”) provides equity rewards, while the Executive Long Term Incentive Plan (“ELTIP”) provides cash rewards linked to equity performance. Both plans utilise Total Shareholder Return as the basis for determining payment. The EOP was introduced with a five year term in 2001. Following a review in 2003, it was decided to make no further issues of options under the EOP and to introduce the ELTIP to provide long-term incentives beyond the period when all options issued under the EOP had vested. No options were granted under the EOP during this financial year. Details of the EOP and ELTIP are set out below under the heading “Share-based Options”. A further review of the options available to provide executives with LTIs was undertaken in the current year and as a result a revised Plan will be introduced later in the year. The objective of the revised Plan is to implement a more cost effective Plan to the Group for a given amount of incentive. In addition, the revised Plan will take into consideration those Plans which have been introduced by a number of other companies whose equity securities are stapled. Employee Security Ownership Plan Executives may elect to participate in the Employee Security Ownership Plan on the same basis as that offered to all permanent employees. Executive Directors do not currently participate in the Plan. Details of remuneration Details of the remuneration of each director of the Transurban Group and each specified executives of the Group for the financial year, including their personally related entities, are set out in the following tables: Annual Report 2005 101 financials Notes to the financial statements for the year ended 30 June 2005 Directors of the Transurban Group Primary Post-employment Equity Cash Long Term Non- Incentive (1) monetary annuation Super- Retirement Options (2) benefits 2005 Name L G Cox P C Byers J G A Davis S M Oliver Cash salary and fees $ 265,718 100,935 77,013 97,918 G O Cosgriff 101,852 D J Ryan 117,566 2004 Name Cash salary and fees L G Cox P C Byers J G A Davis S M Oliver G O Cosgriff $ 250,043 96,347 89,997 95,429 86,253 D J Ryan 100,935 Bonus $ - - - - - - Bonus $ - - - - - - $ - - - - - - $ - - - - - - benefits $ - - - - - - 7,300 7,300 $ $ 20,331 168,992 9,085 78,822 80,000 79,311 8,812 9,167 10,581 95,940 11,585 82,340 47,078 - - - benefits $ - - - - - - 7,300 7,300 $ $ 22,504 157,393 8,671 47,705 12,020 37,767 8,589 44,186 7,763 105,774 9,084 87,000 11,002 - - - Total $ 455,041 188,842 236,324 189,070 158,097 128,147 Total $ 429,940 152,723 139,784 148,204 199,790 110,019 $ - - - - - - $ - - - - - - K Edwards 1,154,259 1,000,000 2,545,620 G R Phillips 538,509 262,500 - 183,999 4,987,118 61,333 881,227 Total 2,453,770 1,262,500 2,545,620 14,600 245,501 456,543 245,332 7,223,866 Primary Post-employment Equity Cash Long Term Non- Incentive (1) monetary annuation Super- Retirement Options (2) benefits K Edwards 1,013,000 550,000 204,528 G R Phillips 463,998 225,000 - 184,503 2,046,331 61,501 768,801 Total 2,196,002 775,000 204,528 14,600 166,633 392,825 246,004 3,995,592 102   Annual Report 2005 The Transurban Group Notes to the financial statements for the year ended 30 June 2005 Specified executives of the Group 2005 Name C Brant B Bourke K Daley P O’Shea L Hunt V Delosa Total 2004 Name B Bourke K Daley P O’Shea K Reynolds F Browne L Hunt V Delosa J Barber M Roberts C Tizi Total Primary Post-employment Equity Cash salary and fees $ Cash Bonus $ Long Term Non- Incentive (1) monetary $ $ 265,936 220,000 114,060 385,342 230,000 485,490 321,352 230,000 482,286 304,319 225,000 387,751 4,867 7,300 6,083 7,300 Super- Options (2) Total annuation $ 23,934 $ - $ 628,797 46,660 35,791 1,190,583 27,337 30,544 1,097,602 27,312 26,181 977,863 305,473 137,000 375,935 13,400 26,511 11,742 870,061 263,121 217,500 73,804 7,300 48,860 29,355 639,940 1,845,543 1,259,500 1,919,326 46,250 200,614 133,613 5,404,846 Primary Post-employment Equity Cash salary and fees $ Cash Bonus $ Non- Long Term Incentive (1) monetary $ $ Super- Options (2) Total annuation $ $ $ 332,057 150,000 38,499 15,942 42,943 43,664 623,105 218,851 100,000 40,906 18,532 91,149 37,264 506,702 193,851 130,000 31,281 9,778 91,149 31,940 487,999 261,469 90,000 30,078 18,434 23,531 31,940 455,452 348,530 - - 18,585 31,470 47,798 446,383 261,379 100,000 30,078 15,110 23,621 11,774 441,962 261,379 90,000 - 18,527 23,621 29,435 422,962 203,246 100,000 24,062 18,520 36,754 26,617 409,199 229,270 100,000 229,270 - - - 18,821 20,730 29,435 398,256 12,187 20,730 31,940 294,127 2,539,302 860,000 194,904 164,436 405,698 321,807 4,486,147 (1) (2) The amount disclosed as Long Term Incentive remuneration is that part of the value of the incentive which is attributable to the current year portion of the vesting period for each current allocation. No options were granted during the year over Transurban Group Stapled Securities. Option remuneration relates to options granted to Executive Directors and Executives in prior financial years. The amounts disclosed as remuneration in the current year is that part of the value of the options which is attributable to the current year portion of the vesting period. Annual Report 2005 103 financials Notes to the financial statements for the year ended 30 June 2005 Service agreements Remuneration for the Managing Director, the Deputy Managing Director and the executives specified above are formalised in service agreements. Each of these agreements provides for access to performance-related cash bonuses, other benefits including death and disability insurance, salary continuance insurance and car parking, and participation, when eligible, in the Employee Share Ownership Plan, the Executive Option Plan, the Executive Long Term Incentive Plan and the Business Generation Incentive Plan. Other major provisions of the agreements, relating to remuneration, are set out below: Executive Directors K Edwards, Managing Director Term of Agreement – permanent, subject to 3 months notice of termination by either party Fixed remuneration including base salary and superannuation, for the year ended 30 June 2005 of $1,250,000 to be reviewed annually by the remuneration committee and the Board On 25 July 2005, the terms of Mr Edwards’ service agreement was varied to provide for a payment of one year’s fixed remuneration upon termination. G R Phillips, Deputy Managing Director Term of Agreement – until 31 July 2005 Base salary, including superannuation, for the year ended 30 June 2005 of $550,000 On 25 July 2005, Mr Phillips’ service agreement was varied to provide for a termination benefit of $990,000 in recognition of his long service to the Group and his non- participation in the Executive Long Term Incentive Plan. Other Executives The major provisions contained in the service agreements of the other executives listed in the table in the section headed ‘Details of Remuneration” are the same for all executives except for the base salary component. These provisions are: Term of agreement – permanent, subject to termination on 3 months notice by either party Eligible to participate in the Transurban Group’s Employee Share Ownership Plan and Executive Long Term Incentive Plan Total Employment Cost is reviewed annually by the Nomination and Remuneration Committee. The components of Total Employment Cost, comprising base salary, superannuation and benefits for these executives for the year ended 30 June 2005 is set out in the above tables. Share-based compensation – options The terms and conditions of each grant of options affecting remuneration in this or future reporting periods are as follows: Grant date Expiry date Exercise price Value per option at grant date Date exercisable 26 April 2001 30 April 2006 23 October 2001 31 October 2006 1 February 2002 30 April 2007 9 April 2002 30 April 2007 20 May 2002 30 April 2007 104   Annual Report 2005 $3.817 $4.404 $4.280 $4.030 $4.220 $0.425 $0.491 $0.477 $0.449 $0.470 One-third after 28/04/03, 26/04/04, 26/04/05 One-third after 28/04/03, 26/04/04, 26/04/05 One-third after 01/02/04, 01/02/05, 01/02/06 One-third after 20/05/04, 20/05/05, 20/05/06 One-third after 20/05/04, 20/05/05, 20/05/06 The Transurban Group Notes to the financial statements for the year ended 30 June 2005 Under the ELTIP, participants are allocated “ELTI units”. Each ELTI unit entitles the holder to a cash payment on the maturity date, which will be approximately two years after the date of allocation. The cash payment per unit will be equal to the increase in the stapled security price over the period between the date of allocation and the maturity date. The proportion of ELTI units which vest with the executive at maturity is dependent on the Transurban Group’s ranking in the Total Shareholder Returns (“TSRs”) of the companies within the ASX 200 Industrials over the two years prior to maturity. If Transurban’s TSR ranking is below the 40th percentile, no payment will be made. For TSR rankings between the 40th and 70th percentiles, the proportion increases linearly from 25 per cent to 100 per cent. If Transurban’s TSR ranking is above the 70th percentile, the proportion is 100 per cent. The terms and conditions of each grant of long term incentive plan units affecting remuneration in this or future reporting periods are as follows: The exercise price of options is the volume weighted average price of the Group’s stapled securities over a period of 5 business days immediately prior to granting the options. When exercised, each option is converted into one stapled security, comprising one ordinary share in Transurban Limited, one ordinary share in Transurban Holdings Limited and one unit in Transurban Holding Trust. Options can be exercised at any time after vesting. Fair values at grant date are independently determined, using a Black-Scholes derived option valuation model taking into consideration the exercise price, the term of the option, the market price of Transurban Group stapled securities on the grant date, the expected price volatility of Transurban Group stapled securities, expected future distributions and the risk free rate of interest over the term of the options. Share-based compensation – Executive long term incentive (“ELTI”) plan The ELTIP was introduced in 2003 to provide long term incentives to executive directors and executives in the period after issued options have fully vested. Options are issued at no cost to the Option holder and vest in three equal tranches on the second, third and fourth anniversaries of their issue. The Exercise of the options is subject to an Exercise Condition. The Exercise Condition involves a comparison between Total Shareholder Return (“TSR”) of The Transurban Group’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. The Transurban Group and each of the Test Companies are 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 the Group’s TSR exceeds the 65th percentile of the ranking, 100 per cent of the vested options may be exercised. If Transurban Group’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. Annual Report 2005 105 financials Notes to the financial statements for the year ended 30 June 2005 Grant date Expiry date Grant price Units on issue Value per unit at grant date Value per unit at reporting date Date Payable 30 Sept 2003 30 Sept 2005 30 Sept 2004 30 Sept 2006 $4.23 $5.45 1,912,000 2,965,000 $0.46 $0.54 $2.98 30 Nov 2005 $1.79 30 Nov 2006 Name Directors of the Transurban Group K Edwards G Phillips Specified executives of the Transurban Group C Brant B Bourke K Daley P O’Shea L Hunt V Delosa Number of ELTIs granted during the year Number of ELTIs paid during the year 800,000 - 170,000 160,000 120,000 120,000 120,000 110,000 - - - - - - - - Equity instrument disclosures relating to directors and executives Options provided as remuneration Details of options over stapled securities provided as remuneration to each director of the Transurban Group and each specified executives of the Group are set out below. 106   Annual Report 2005 The Transurban Group Notes to the financial statements for the year ended 30 June 2005 Name Directors of the Transurban Group K Edwards G R Phillips Specified executives of the Transurban Group C Brant B Bourke K Daley P O’Shea L Hunt V Delosa Number of options granted during the year Number of options vested during the year - - - - - - - - 500,000 166,667 - 116,667 116,667 100,000 33,333 83,333 Stapled Securities provided on exercise of remuneration options Details of stapled securities provided as a result of the exercise of remuneration options to each director of the Transurban Group and each specified executives of the Group are set out below. Name Date of exercise of options Number of stapled securities issued on exercise of options during the year Directors of Transurban Limited K Edwards G R Phillips Specified executives of the consolidated entity C Brant B Bourke K Daley P O’Shea L Hunt V Delosa - 8 June 2005 - 7 September 2004 9 June 2005 7 September 2004 16 February 2005 8 June 2005 - 15 June 2005 - 500,000 - 100,000 250,000 100,000 83,231 121,069 - 166,667 Annual Report 2005 107 financials Notes to the financial statements for the year ended 30 June 2005 The amounts paid per stapled security by each director and executive on the exercise of options at the date of exercise were as follows: Exercise date 7 September 2004 16 February 2005 8 June 2005 8 June 2005 9 June 2005 15 June 2005 15 June 2005 Amount paid per stapled security $3.817 $3.817 $4.404 $3.817 $3.817 $3.817 $4.220 No amounts are unpaid on any shares issued on the exercise of options. Option holdings The number of options over stapled securities held during the financial year by each director of the Transurban Group and each specified executive of the Group, including their personally-related entities, are set out below. Name Balance at the start of the year Granted during the year as remuneration Exercised during the year Balance at the end of the year Vested and exercisable at the end of the year Directors of Transurban Group K Edwards G R Phillips 1,500,000 500,000 Specified executives of the combined entity C Brant B Bourke K Daley P O’Shea L Hunt V Delosa - 350,000 350,000 204,300 100,000 250,000 108   Annual Report 2005 - - - - - - - - - 1,500,000 1,500,000 500,000 - 350,000 100,000 204,300 - - - - - - 250,000 250,000 - - - 100,000 100,000 166,667 83,333 - The Transurban Group Notes to the financial statements for the year ended 30 June 2005 Stapled Security holdings The number of Transurban Group Stapled Securities and Convertible Adjusting Rate Securities (“CARS”) held during the financial year by each director of the Transurban Group and each specified executive of the Group, including their personally-related entities, are set out below. Stapled Securities Name Directors of Transurban Limited L G Cox P C Byers G O Cosgriff J G A Davis S M Oliver D J Ryan K Edwards G R Phillips Specified executives of the consolidated entity C Brant B Bourke K Daley P O’Shea L Hunt V Delosa Balance at the start of the year Received during the year on the exercise of options Other changes during the year Balance at the end of the year 775,000 50,000 24,910 50,000 60,993 21,043 61,000 - - 5,493 14,536 179,055 1,964 4,475 - - - - - - - 500,000 - 350,000 100,000 204,300 - 166,667 367,500 20,580 - - 1,547 534 - 8,820 - 2,217 3,028 (2,616) - 2,159 1,142,500 70,580 24,910 50,000 62,540 21,577 61,000 508,820 - 357,710 117,564 380,739 1,964 173,301 Annual Report 2005 109 financials Notes to the financial statements for the year ended 30 June 2005 CARS Name Directors of Transurban Limited Balance at the start of the year Received during the year on the exercise of options L G Cox P C Byers G O Cosgriff J G A Davis S M Oliver D J Ryan K Edwards G R Phillips Specified executives of the consolidated entity C Brant B Bourke K Daley P O’Shea L Hunt V Delosa 1,000 - 121 - - - - - - 400 750 400 200 - - - - - - - - - - - - - - - Other changes during the year (1,000) - - - - - - - - - (750) (400) - - Balance at the end of the year - - 121 - - - - - - 400 - - 200 - Other transactions with directors and specified executives Mr Cox is a director of Macquarie Corporate Finance Limited (a wholly owned subsidiary of Macquarie Bank Limited). Transurban Limited is entitled to receive management fees of $6.5 million from Macquarie Bank in relation to the extension of the term of the Infrastructure Borrowing Facilities provided by Macquarie Bank. This fee was recognised during the year ended 30 June 2004. During this year $1.4 million was received with the remainder due to be received quarterly over the next 2 years. The Transurban Group also shares the cost of Mr Cox’s personal assistant. Macquarie Bank Limited acted as principal financial advisor during the acquisition of the Hills Motorway Group by the Transurban Group and was involved in the financial arrangements concerning the Land Transport Notes of which Mr Cox holds 51,188 Class B Land Transport Notes. Mr Byers is a director of Hills Motorway Limited, in which Transurban Holding Trust held a 8.1 per cent interest until the Transurban Group gained control on 12 April 2005 (refer note 30). 110   Annual Report 2005 The Transurban Group Notes to the financial statements for the year ended 30 June 2005 Aggregate amounts of each of the above types of other transactions with directors of the Transurban Group: Amounts recognised as revenue Management fees Distribution from Hills Motorway Group Amounts recognised as expenses Assistant fees Amounts recognised as acquisition costs Current liabilities – Macquarie Bank Limited 2005 $’000 2004 $’000 - 2,025 2,025 31 31 12,649 12,649 6,523 1,044 7,567 - - - - 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 or receivable from director related entities of the Transurban Group at balance date relating to the above types of transactions. Current assets – Hills Motorway Group Current assets – other related parties Current assets – Macquarie Bank Limited Non-current assets – Macquarie Bank Limited 2005 $’000 - 690 2,798 2,114 5,602 2004 $’000 2,625 - 1,395 5,128 9,148 Annual Report 2005 111 financials Notes to the financial statements for the year ended 30 June 2005 26 Remuneration of Auditors During the year the following services were paid to the auditor of the Transurban Group and its related practices: Assurance services 1 Audit services Audit and review of financial reports and other audit work under the Corporations Act 2001. Fees paid to non-PricewaterhouseCoopers audit firms for the audit or review of financial reports Total remuneration for audit services 2 Other assurance services Due diligence Compliance plan audit Other assurance services IFRS accounting services Fees paid to non-PricewaterhouseCoopers audit firms 2005 $ 2004 $ 335,750 297,150 40,000 - 375,750 297,150 432,500 168,430 24,700 - 115,000 12,360 21,200 20,100 - - Total remuneration for other assurance services 584,560 209,730 Taxation services Tax compliance services, including review of income tax returns Indirect taxes services Fees paid to non-PricewaterhouseCoopers audit Total remuneration for taxation services 191,865 200,320 619,530 26,436 - - 837,831 200,320 It is the Group’s policy to employ PricewaterhouseCoopers on assignments additional to their statutory audit duties where PricewaterhouseCoopers’ expertise and experience with the consolidated entity are important. These assignments are principally tax advice and financial due diligence. 112   Annual Report 2005 The Transurban Group Notes to the financial statements for the year ended 30 June 2005 27 Contingent Liabilities/Assets Contingent Liabilities (a) In May 2003, VicRoads submitted an invoice to CityLink Melbourne Limited for costs of approximately $5.0 million for rectification works associated with the Swan Street Bridge. CityLink Melbourne Limited does not believe that it has any liability to VicRoads to pay those costs. In January 2005, VicRoads served a writ in the Supreme Court of Victoria on CityLink Melbourne Limited and the entities forming the Transfield Obayashi joint venture, claiming certain damage was sustained by the Swan Street Bridge. VicRoads claim that this damage was due to tunnelling, roadworks and associated infrastructure works on and in the vicinity of the Swan Street Bridge, arising from the Melbourne CityLink project. The parties are currently discussing the claim. (b) The Transurban Group has established a bank guarantee of $5.0 million in favour of a controlled entity in a form prescribed by ASIC to accommodate the net tangible asset conditions of the controlled entity’s Australian Financial Services Licence. The controlled entity is unable to act as a Responsible Entity for certain Transurban Group entities if the bank guarantee conditions are not satisfied. Contingent Asset CityLink Melbourne Limited (“CML”) is seeking compensation from the State of Victoria, claiming that Wurundjeri Way (Docklands) has had a Material Adverse Effect on the toll revenue earning capacity by CML. The claim is approximately $36.0 million (net present value at the time of the initial claim under the Concession Deed). CML has appealed against the Expert Determination handed down on 3 July 2002. The appeal will be heard by a panel of arbitrators. 28 Commitments for Expenditure Lease commitments Commitments for minimum payments in relation to non-cancellable operating lease 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 Later than 5 years 2005 $’000 2004 $’000 2,706 9,354 - 1,905 8,488 - 12,060 10,393 Annual Report 2005 113 financials Notes to the financial statements for the year ended 30 June 2005 Concession Fees Promissory Notes The Melbourne CityLink Concession Deed between the Transurban Group and the State of Victoria provides for annual concession fees of $95.6 million during the construction phase and for the first 25 years of the operations phase, $45.2 million for years 26 to 34 of the operations phase and $1.0 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. Refer to note 19 for details. The Responsible Entity, on behalf of the Hills Motorway Trust, has entered into leases with the Roads and Traffic Authority of New South Wales (“RTA”). Annual lease liabilities under these leases total $7.0 million indexed annually to the Consumer Price Index over the estimated period that the M2 Motorway will be used. Until such time as a threshold return is achieved, payments under these leases can be made at the discretion of the Responsible Entity, by means of the issue of non- interest bearing promissory notes to the RTA. Refer to note 19 for details. Options Over Further Interest in Westlink M7 Motorway Project Wholly-owned entities of the Transurban Group have options to acquire an additional 10.0 per cent interest (5.0 per cent for $49.0 million and 5.0 per cent at market value) in the Westlink M7 project, which would take its overall holding to 50.0 per cent. These options are with Leighton Group and Abigroup, the construction partners in the project. Macquarie Infrastructure Group has similar options to take their holding to 50.0 per cent. 29 Employee Entitlements Employee benefit and related on-costs liabilities Current (note 17) Non-current (note 20) 2005 $’000 2004 $’000 15,146 3,999 19,145 5,570 2,036 7,606 2005 Number 2004 Number Employee numbers Average number of employees during the financial year 460 407 114   Annual Report 2005 The Transurban Group Notes to the financial statements for the year ended 30 June 2005 a) Transurban Group Executive Option Plan Refer to note 25 for details of the Transurban Group Executive Option plan. Set out below are summaries of options granted under the plan. Grant date Expiry date Exercise Balance at at start of the year price Issued during the year Exercised during the year Lapsed during the year Balance at end of the year 2005 26 April 2001 April 2006 $3.817 2,004,300 23 October 2001 October 2006 $4.404 2,000,000 1 February 2002 April 2007 $4.280 400,000 9 April 2002 20 May 2002 Total 2004 April 2007 $4.030 300,000 April 2007 $4.220 1,500,000 6,204,300 26 April 2001 April 2006 $3.817 2,100,000 23 October 2001 October 2006 $4.404 2,000,000 1 February 2002 April 2007 $4.280 400,000 9 April 2002 20 May 2002 Total April 2007 $4.030 300,000 April 2007 $4.220 1,550,000 6,350,000 - - - - - - - - - - - - 1,493,231 121,069 390,000 500,000 - 1,500,000 89,867 310,133 - 62,700 - 237,300 715,598 39,550 744,852 2,861,396 470,752 2,872,152 95,700 - - - - - - - - 2,004,300 2,000,000 400,000 300,000 50,000 1,500,000 95,700 50,000 6,204,300 Annual Report 2005 115 financials Notes to the financial statements for the year ended 30 June 2005 Options exercised during the financial year and number of stapled securities issued to employees on the exercise of options. Exercise date 26 February 2004 7 September 2004 26 November 2004 24 December 2004 21 January 2005 21 February 2005 15 June 2005 Fair value of issue shares at issue date Number 2005 Number 2004 $4.465 - 95,700 $5.630 574,510 $5.410 90,300 $6.540 89,867 $6.760 128,931 $7.420 142,791 $7.370 1,834,997 - - - - - - 2,861,396 95,700 The fair value of stapled securities issued on the exercise of options is the week weighted extra space average price at which the Transurban Group’s stapled securities were traded on the Australian Stock Exchange during the week prior to the exercise of the options. Options vested since commencement of the scheme to the reporting date 5,316,667 2,100,000 2005 Number 2004 Number Aggregate proceeds received from employees on the exercise of options and recognised as issued capital Fair value of shares issued to employees on the exercise of options as at their issue date 2005 $ 2004 $ 11,558,898 365,287 2005 $’000 19,859 2004 $’000 427 116   Annual Report 2005 The Transurban Group Notes to the financial statements for the year ended 30 June 2005 b) Employee share scheme The Transurban Employee Security Ownership Plan (“the Plan”) was introduced in March 2002. The scheme offers employees the opportunity to participate in the success of the Company by investing in securities of the Group. All current full-time and permanent part-time (excluding directors) and fixed term staff on contracts greater than 12 months are eligible to participate. Offers under the scheme are at the discretion of the Transurban Group, taking into account the Group’s success and market performance. Stapled Securities issued under the scheme may only be sold once the employee has ceased employment with the company. In all other aspects the Stapled Securities rank equally with other fully-paid securities on issue. In December 2004, each participant was issued 100 stapled securities (2004 - 120 stapled securities) at a value of $7.65 per stapled security (2004 – $4.44). Shares purchased on market under the plan and provided to participating employees on 18 February 2005 c) Employee Long Term Incentive (“ELTI”) Plan Refer to note 25 for details of the Transurban ELTI Plan. 2005 Number 2004 Number 37,000 40,440 The terms and conditions of each grant of long term incentive plan units affecting remuneration in this or future reporting periods are as follows: Grant date Expiry date Grant price Units on issue 30 Sept 2003 30 Sept 2005 30 Sept 2004 30 Sept 2006 $4.23 $5.45 1,912,000 2,965,000 Value per unit at grant date $0.46 $0.54 Value per unit at reporting date Date Payable $2.98 $1.79 30 Nov 2005 30 Nov 2006 Annual Report 2005 117 financials Notes to the financial statements for the year ended 30 June 2005 30 Investment in Controlled Entities Name of Entity Country of Incorporation Class of Security Equity Holding 2005 % Equity Holding 2004 % Date Acquired The CityLink Trust CityLink Melbourne Limited City Link Extension Pty Ltd Australia Ordinary Australia Ordinary Australia Ordinary Transurban Infrastructure Management Limited Australia Ordinary Transurban Collateral Security Pty Ltd Transurban Finance Trust Transurban Finance Company Pty Ltd Transurban Nominees Pty Ltd Transurban Nominees 2 Pty Ltd Transurban WSO Pty Ltd Transurban AL Trust Transurban CARS Trust Transurban WSO Trust Australia Ordinary Australia Ordinary Australia Ordinary Australia Ordinary Australia Ordinary Australia Ordinary Australia Ordinary Australia Ordinary Australia Ordinary Transurban Infrastructure Developments WSO Pty Ltd Australia Ordinary Transurban MF 1 Pty Ltd Transurban MF 2 Pty Ltd Transurban Asset Management Pty Ltd Transurban Operations Pty Ltd Transurban MF Holdings Pty Ltd Transurban Investments Pty Ltd Transurban (USA) Inc The Hills Motorway Ltd Hills Motorway Management Ltd Australia Ordinary Australia Ordinary Australia Ordinary Australia Ordinary Australia Ordinary Australia Ordinary USA Ordinary Australia Ordinary Australia Ordinary Hills Motorway Construction Company Pty Ltd Australia Ordinary Hills Motorway Underwriting No.1 Pty Ltd Australia Ordinary Hills Motorway Underwriting No.2 Pty Ltd Australia Ordinary Hills Motorway Trust Hills Motorway Holdings Trust Australia Ordinary Australia Ordinary 118   Annual Report 2005 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 5/04/2004 - 25/01/2005 - 26/04/2005 8.1 12/04/2005 8.1 12/04/2005 8.1 12/04/2005 8.1 12/04/2005 8.1 12/04/2005 8.1 12/04/2005 8.1 12/04/2005 The Transurban Group Notes to the financial statements for the year ended 30 June 2005 Acquisition of Controlled Entities On 12 April 2005 the Transurban Group gained control of The Hills Motorway Group. This occurred through the acquisition of the remaining 91.9 per cent of the stapled securities of The Hills Motorway Group for a total consideration of $1,907.8 million. This was satisfied by the issue of 249.9 million Transurban Group stapled securities for $1,841.7 million, a cash component of $42.5 million being 25 cents per stapled security acquired and the incidental costs of acquisition. The operating results of this newly controlled entity have been included in the aggregated Transurban Group statement of financial performance since the date of acquisition. At the date of this financial report no additional payments are anticipated. Details of the acquisition are as follows: Fair value of identifiable net assets of controlled entities acquired M2 Motorway Equipment & fittings Cash Prepayments Other debtors Deferred expenditure Trade creditors Unearned income Accrued interest Other creditors Employee provisions Tax provisions Promissory notes Bank debt Refinancing Infrastructure Bonds Cash collateral Less: existing investment of 8.1 per cent Deemed consideration paid 2005 $’000 2,445,306 9,621 27,425 1,738 47,211 324 (7,723) (638) (10,757) (32,389) (9) (10,882) (20,001) (447,000) (350,068) 350,068 2,002,226 (94,419) 1,907,807 Annual Report 2005 119 financials Notes to the financial statements for the year ended 30 June 2005 Total consideration comprised: Units issued Cash consideration paid to Hills security holders Incidental costs settled by cash Incidental costs included in current liabilities Net cash acquired from purchase of controlled entity Cash consideration Less: Balances acquired Inflow of cash 31 Investment in Associates 2005 $’000 1,841,744 42,500 2,969 20,594 1,907,807 45,469 (377,493) (332,024) Investments in associates are accounted for in the combined financial statements using the equity method of accounting. Information relating to the associates is set out below. Name of company WSO Company Pty Limited Westlink Motorway Limited WSO Finance Company Ownership interest 2005 % 2004 % 40 40 40 40 40 40 Combined entity carrying amount 2005 $’000 2004 $’000 - - - - - - WSO Company, Westlink Motorway Limited and WSO Finance Company are presently non-operational and are carried at cost of $80 each. WSO Company will be the operator of Westlink M7 Motorway which is presently under construction and is due for completion in April 2006. Westlink Motorway Limited is the nominee manager of the Westlink Motorway Partnership and WSO Finance Company will arrange debt facilities for the Westlink Motorway Project. The associates are not expected to have an impact on the combined entity’s equity accounted profits until operations commence. 120   Annual Report 2005 The Transurban Group Notes to the financial statements for the year ended 30 June 2005 Summary of performance and financial position of associates Aggregate net profits of associates after tax Assets Liabilities 32 Interest in Joint Ventures Name of company Westlink Motorway Partnership 2005 $’000 2004 $’000 - - 382,325 108,501 382,325 108,501 Ownership interest 2005 % 40 2004 % 40 Combined entity carrying amount 2005 $’000 6,236 2004 $’000 6,236 The combined entity has a 40% interest in the Westlink Motorway Partnership, the principal activity of which is the construction of the Westlink M7 Motorway in Sydney. The M7 is presently in the construction phase and is due for completion in April 2006. The partnership is unlikely to have an impact on the combined entity’s equity accounted profits until operations commence. Share of partnership assets and liabilities Current assets Non-current assets Total Assets Current liabilities Non-current liabilities Total Liabilities Net Assets Share of Profits Share of partnership commitments Capital commitments 2005 $’000 2004 $’000 5,225 2,932 580,709 355,834 585,934 358,766 28 31,306 585,906 327,460 585,934 358,766 - - - - 522,288 327,484 Annual Report 2005 121 financials Notes to the financial statements for the year ended 30 June 2005 33 Reconciliation of Operating Loss After Income Tax to Net Cash Flow from Operating Activities Operating loss after income tax Depreciation and amortisation Net exchange differences Project expenses written off Change in operating assets and liabilities Increase in Concession Note liability (Decrease)/increase in creditors Decrease/(increase) in debtors Increase in provisions Net cash inflow from operating activities 34 Non-cash Financing and Investing Activities Pre-acquisition portion of distribution receivable from Hills Motorway Group Ltd offsetting the cash purchase price Distributions satisfied by the issue of stapled securities under the distribution reinvestment plan Issue of stapled securities to acquire the Hills Motorway Group (refer note 30). 2005 $’000 2004 $’000 (87,837) (61,490) 179,396 152,400 (714) 9,423 - - 43,537 (74,818) 36,985 13,290 66,884 (4,501) 11,101 1,560 146,972 138,244 - 1,581 32,042 60,525 Agreement with the State of Victoria and VicRoads in relation to the Tullamarine/Calder Freeway Interchange (refer note 19). 122   Annual Report 2005 The Transurban Group Notes to the financial statements for the year ended 30 June 2005 35 Earnings per Stapled Security Basic earnings per Stapled Security Diluted earnings per Stapled Security 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 2005 2004 (14.8) cents (11.7) cents (6.4) cents (4.1) cents 591,871,852 524,512,875 1,044,264,422 985,000,351 Reconciliation of earnings used in calculating diluted earnings per stapled security Net loss Interest savings on CARS Earnings used in calculating diluted earnings per stapled security Information concerning the classification of securities stapled security. The options have not been included in the determination of basic earnings per stapled security. 2005 $’000 2004 $’000 (87,837) (61,490) 21,128 21,128 (66,709) (40,362) for the purpose of conversion of CARS is determined to be less than $0.98. The directors consider conversion of this basis to be a highly unlikely event. The CARS have not been included in the calculation of basic earnings per stapled security. (a) Stapled Securities All Stapled Securities are fully paid. They carry the right to participate in distributions and have been included in the determination of basic and diluted earnings per stapled security. (b) Options Options granted to executives under the Transurban Executive Option Plan are considered to be potential stapled securities and have been included in the determination of diluted earnings per (c) Convertible Adjusting Rate Securities (“CARS”) CARS on issue are convertible to stapled securities at a maximum conversion ratio of 105, at the first reset date 14 April 2007. CARS are considered to be potential stapled securities and have been included in the determination of diluted earnings per stapled security at their maximum conversion ratio. This ratio will be applicable if the volume weighted average price of stapled securities during the period over which the price 36 Event Occuring After Reporting Date Capital markets debt totaling $590.0 million matured on 8 August 2005. The debt was replaced by an issue of USD $380.0 million (AUD $500.0 million) of senior debt in the US private placement market and AUD$90.0 million from existing facilities. The refinanced debt matures between 2015 and 2020. Annual Report 2005 123 financials Notes to the financial statements for the year ended 30 June 2005 was on schedule for completion by 30 June 2005 until the acquisition of Hills Motorway Group added a further level of complexity that has not yet been fully determined. It is now expected that the project will be completed (including the calculation of the impact of AIFRS) by the first AIFRS reporting date being the period ending on 31 December 2005. The project team is undertaking a detailed analysis of AIFRS and the Group’s accounting policies to determine the effects on the opening balance sheet to be prepared on the date of transition to AIFRS and future accounting policy differences. The project team has identified a number of accounting policy choices which have been analysed by management to determine the most appropriate accounting policy for the Group on transition to IFRS. The known or reliably estimable impacts on the financial report for the year ended 30 June 2005 had it been prepared using AIFRS are set out below. As mentioned above, this may not be all of the impacts that may arise. The expected financial effects of adopting AIFRS are shown for each item with descriptions of the differences. No material impacts are expected in relation to the statements of cash flows. Although the adjustments disclosed in this note are based on management’s best knowledge of expected standards and interpretations, and current facts and circumstances, these may change. For example, amended or additional standards or interpretations may be issued by the AASB and the IASB. Therefore, until the company prepares its first full AIFRS financial statements, the possibility cannot be excluded that the accompanying disclosures may have to be adjusted. (i) Income Tax Under AASB 112 Income Taxes, deferred tax balances are determined using the balance sheet method which calculates temporary differences based on the carrying amounts of an entity’s assets and liabilities in the statement of financial position and their associated tax bases. In addition, current and deferred taxes attributable to amounts recognised directly in equity are also recognised directly in equity. This will result in a change to the current accounting policy, under which deferred tax balances are determined using the income statement method, items are only tax-effected if they are included in the determination of pre-tax accounting profit or loss and/or taxable income or loss and current and deferred taxes cannot be recognised directly in equity. At the reporting date, the Group is in the process of quantifying the full impact of the adoption of AASB 112 on the financial statements. The Group currently has deferred tax liabilities which are offset by tax losses. Whether this will still be the case will depend on the treatment of a number of items including: Treatment of the difference between the carrying value and tax value of the CityLink asset 36 Impacts of Adopting Australian Equivalents to International Financial Reporting Standards (“IFRS”) The Australian Accounting Standards Board (“AASB”) is adopting International Financial Reporting Standards (“IFRS”) for application to reporting periods beginning on or after 1 January 2005. The AASB has issued Australian equivalents to IFRS, and the Urgent Issues Group has issued interpretations corresponding to IASB interpretations originated by the International Financial Reporting Interpretations Committee or the former Standing Interpretations Committee. The adoption of Australian equivalents to IFRS will be first reflected in the consolidated entity’s financial statements for the half year ending 31 December 2005 and the year ending 30 June 2006. Entities complying with Australian equivalents to IFRS (“AIFRS”) for the first time will be required to restate their comparative financial statements to amounts reflecting the application of AIFRS to that comparative period. Most adjustments required on transition to AIFRS will be made, retrospectively, against opening retained earnings as at 1 July 2004. The Group established an AIFRS transition project team in October 2003. The project team prepared a plan to manage the transition to AIFRS and reports regularly on progress to the audit committee. The project plan 124   Annual Report 2005 The Transurban Group Notes to the financial statements for the year ended 30 June 2005 Treatment of the difference between the carrying value and tax value of the concession notes Treatment of the losses currently not recognised to the extent that they are “probable” of recoverability. (ii) Intangible Assets – Goodwill The Group has recognised goodwill, which is presently being amortised over a 20 year period, which arose upon the payment of an amount to the Victorian State Government to be released from the Single Purpose Entity restrictions. The treatment upon adoption of AIFRS is still being determined. (iii) Employee Entitlements – Executive Option Plan Under AASB 2 Share-based Payments, equity based compensation to employees under the Executive Option Plan will be recognised as an expense in respect of the services provided. This will result in a change in accounting policy, under which no expense is currently recognised. However, the Group will be taking advantage of the exemption under AASB 1 whereby AASB 2 does not have to be applied to options granted prior to 7 November 2002. Therefore, in relation to the options currently on issue, there would be no impact if the policy required by AASB 2 had been applied during the year ended 30 June 2005. (iv) Employee Entitlements – Long Term Incentive Plan AASB 139 and AASB 132 are likely to have the following impacts: Under AASB 2, share-based compensation to employees under the Long Term Incentive Plan will be recognised as an expense in respect of the services provided. The Group currently adopts the requirements of AASB 2 and therefore there would be no impact if the policy required by AASB 2 had been applied during the year ended 30 June 2005. (v) Financial Instruments The group will be taking advantage of the exemption available under AASB 1 to apply AASB 132 Financial Instruments: Disclosure and Presentation and AASB 139 Financial Instruments: Recognition and Measurement only from 1 July 2005. This allows the group to apply previous Australian generally accepted accounting principles (Australian GAAP) to the comparative information of financial instruments within the scope of AASB 132 and 139 for the 30 June 2005 financial report. As a result of the application of this exemption, there would have been no adjustment to the classification or measurement of financial assets or liabilities from the application of AIFRS during the year ended 30 June 2005. Changes in classification on measurement will be recognised from 1 July 2005. We have noted below the likely impacts from 1 July 2005 of the adoption of AASB 132 and AASB 139. Financial assets held by the consolidated entity will be classified as either fair value through profit and loss, held-to- maturity, available for sale or loans receivable and, depending upon classification, measured at fair value or amortised cost The Group enters into interest rate swaps to hedge the Group’s exposure to interest rate movements. Presently the fair value of the hedges is not recognised in the financial statements. Under AASB 139, the fair value of the hedges will be recognised on the balance sheet at each reporting date and the change in fair value during the reporting period reflected directly in equity to the extent hedging criteria are met, or in profit and loss if the hedging criteria are not met The change in policy will lead to greater volatility in the reported balance sheet and if the hedging criteria are not met, in the reported profit and loss Under AGAAP, units in fixed life trusts are considered to be contributed equity of the trust. Under AASB 132, fixed life trusts will be required to classify units on issue as a financial liability rather than equity. This would result in the distributions to unit holders being classified as interest expense rather than as distributions to equity holders. Annual Report 2005 125 financials Notes to the financial statements for the year ended 30 June 2005 The Group has amended the trust deeds of all of its trusts from a fixed life to a perpetuity so that this potential change in practice will have no impact AASB 128 had been applied during the year ended 30 June 2005, there would be no financial impact as Westlink has not yet commenced operations. However, it may lead to greater volatility in earnings in future reporting periods. Under AIFRS, borrowings must be measured at fair value net of transaction costs incurred. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in the income statement over the period of the borrowings using the effective interest method. (vi) Accounting for Associates Under AASB 128 Investments in Associates, a long term loan to an associate can be considered as part of the investment. This is a change in present accounting policy where only the equity component of the investment is included in equity accounting and long term loans are a separate class of asset subject to recoverable amount testing. This will affect the Group’s investment in the Westlink project which is presently equity accounted. The investment is substantially represented by a long term loan rather than an equity investment. If the Westlink project incurs accounting losses from the commencement of operations greater than the Group’s equity investment, the receivable balance may be reduced to the extent of the Group’s remaining share of accounting losses. This may occur despite the recoverable amount of the long term loan not being impaired due to the expected cashflow from the Westlink project. If the policy required by 126   Annual Report 2005 (vii) Business Combinations (Pre AIFRS Transition Date) The group has elected under AASB 3 Business Combinations that all business combinations that occurred prior to 1 July 2004 be grandfathered to reflect AGAAP acquisition accounting and as such there will be no impact from restating these business combinations upon adoption of AIFRS. (Post AIFRS Transition Date) Under AIFRS, business combinations which have occurred post 1 July 2004 need to be restated to reflect the requirements of AASB 3. This applies to the acquisition of Hills Motorway Group. The full impact of AIFRS on this acquisition is being assessed and as such the impacts on the financial report are not known or reliably estimable. This will be finalised by the first AIFRS reporting date being the period ending 31 December 2005. (viii) Identifying the Parent Upon the adoption of AIFRS, the Group must apply the requirements of UIG Interpretation 1013 “Consolidated Financial Reports in relation to Pre-Date- of-Transition Stapling Arrangements”. UIG 1013 requires that where a stapling arrangement is effected prior to the date of transition, one of the combining entities shall be identified as the parent for the purposes of preparing consolidated financial reports. Further, it requires that the consolidated financial report of the “parent” under the stapling arrangement shall be the combined financial report of the entities whose securities are stapled, prepared on the same basis as the combined financial report for those entities immediately before adopting AIFRS. As such, there will be no financial impact as a result of this upon the adoption of AIFRS. The Group is in the process of identifying which entity will be the parent and will finalise this prior to the first AIFRS reporting date being 31 December 2005. (ix) Service Concession Arrangements The International Financial Reporting Interpretations Committee (“IFRIC”) has issued three draft interpretations in relation to service concession arrangements. The draft interpretations propose that concession operators will recognise either a financial asset or intangible asset rather than recognising the infrastructure as property, plant and equipment. If adopted by the IASB and AASB, draft interpretation D14 would be applicable to the Group and require that the road asset be shown as an intangible asset and amortised over the concession period. This issue continues to be monitored by the Group. The Transurban Group Directors’ Declaration In the directors’ opinion: a) The financial statements and notes set out on pages 67 to 126 are in accordance with the Corporations Act 2001, including: (i) complying with Accounting Standards the Corporations Regulations 2001 and other mandatory professional reporting requirements; and (ii) giving a true and fair view of the combined entity’s financial position as at 30 June 2005 and of its performance, as represented by the results of its operations and its cashflows, for the financial year ended on that date; and b) There are reasonable grounds to believe that the combined entity will be able to pay its debts as and when they become due and payable. The directors have been given the declarations by the chief executive officer and chief finance officer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with separate resolutions of the directors of Transurban Limited, Transurban Infrastructure Management Limited and Transurban Holdings Limited. Laurence G Cox Chairman Kimberley Edwards Managing Director Melbourne 23 August 2005 Annual Report 2005 127 financials Independent audit report to the members 128   Annual Report 2005 The Transurban Group Independent audit report to the members Annual Report 2005 129 financials Security Holder Information The security holder information set out below was applicable as at 31 August 2005. A Distribution of Stapled Securities 1. The number of holders of Stapled Securities, which comprise one share in Transurban Holdings Limited, one share in Transurban Limited and one unit in Transurban Holding Trust, was 46,369. 2. The voting rights are one vote per Stapled Security. 3. At 31 August 2005 the percentage of the total holdings held by or on behalf of the twenty largest holders of these securities was 63.03 per cent. 4. The distribution of holders was as follows: Security Grouping Number of Holders Stapled Securities Held 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 – and over Total 9,748 27,481 5,865 3,055 220 46,369 6,580,615 70,521,787 42,800,341 67,491,763 604,021,042 791,415,548 There were 205 holders of less than a marketable parcel of ordinary shares. 5. Substantial Shareholder’s as at 31 August 2005 are as follows: Name Commonwealth Bank of Australia Ontario Teacher’s Pension Plan Board Number of Stapled Securities 107,188,884 48,153,103 % 0.83 8.91 5.41 8.53 76.32 100 % of Total 13.54 6.08 130   Annual Report 2005 TheTransurban Group Security Holder Information B Twenty Largest Holders of Stapled Securities WESTPAC CUSTODIAN NOMINEES LIMITED 118,207,692 14.94 Number of Stapled Securities Held % of Issued Stapled Securities NATIONAL NOMINEES LIMITED J P MORGAN NOMINEES AUSTRALIA LIMITED CITICORP NOMINEES PTY LIMITED RBC GLOBAL SERVICES AUSTRALIA NOMINEES PTY LIMITED TRUST COMPANY OF AUSTRALIA LIMITED CITICORP NOMINEES PTY LIMITED CITICORP NOMINEES PTY LIMITED QUEENSLAND INVESTMENT CORPORATION CITICORP NOMINEES PTY LIMITED ANZ NOMINEES LIMITED COGENT NOMINEES PTY LIMITED CITICORP NOMINEES PTY LIMITED ANZ NOMINEES LIMITED WESTPAC FINANCIAL SERVICES LIMITED CITICORP NOMINEES PTY LIMITED AUSTRALIAN FOUNDATION INVESTMENT COMPANY LIMITED COGENT NOMINEES PTY LIMITED UBS PRIVATE CLIENTS AUSTRALIA NOMINEES PTY LTD RBC GLOBAL SERVICES AUSTRALIA NOMINEES PTY LIMITED 75,645,378 64,337,783 24,198,938 23,225,615 22,050,000 21,080,894 21,053,835 18,669,443 16,044,024 13,018,140 12,702,787 11,842,238 11,810,313 9,724,422 8,988,534 8,471,554 6,378,507 6,320,211 5,030,380 9.56 8.13 3.06 2.93 2.79 2.66 2.66 2.36 2.03 1.64 1.60 1.50 1.49 1.23 1.13 1.07 0.81 0.80 0.64 Total 498,800,688 63.03 Annual Report 2005 131 financials 132   Annual Report 2005 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 to the members Security Holder Information 134 140 141 142 143 163 164 166 Transurban CARS Trust and Controlled Entity The Financial Report of Transurban CARS Trust and Controlled Entity (ABN 81 656 633 158) For the Year Ended 30 June 2005 This financial report covers both Transurban CARS Trust as an individual entity and the consolidated entity consisting of Transurban CARS Trust and its controlled entity. Transurban CARS Trust is a Trust formed and domiciled in Australia. Its registered office and principal place of business is: Transurban CARS Trust Level 43 Rialto South Tower 525 Collins Street Melbourne VIC 3000 Through the use of the internet, we have ensured that our corporate reporting is timely, complete, and available globally. All releases to the ASX and the media, financial reports and other information are available on our website: www.transurban.com.au Annual Report 2005 133 financials Directors’ Report The directors of Transurban Infrastructure Management Limited, the Responsible Entity of Transurban CARS Trust, present their report on the consolidated entity consisting of Transurban CARS Trust (“the Trust”), and the entity it controlled at the end of, and during, the year ended 30 June 2005. Directors With exception to the changes noted below, the following persons were directors of TIML during the whole of the financial year and up to the date of this report: (1) (2) (3) Christopher J S Renwick was appointed a non-executive director on 26 July 2005 and continues in office at the date of this report. Kimberley Edwards was appointed an executive director on 26 July 2005 and continues in office at the date of this report. Geoffrey R Phillips was an executive director from the beginning of the financial year until his resignation on 26 July 2005. Non-executive directors Responsible Entity Transurban CARS Trust is registered as a managed investment scheme under Chapter 5C of the Corporations Act 2001 and as a result, requires a Responsible Entity. Transurban Infrastructure Management Limited (“TIML”) is the Responsible Entity of Transurban CARS Trust and is responsible for performing all functions that are required under the Corporations Act 2001. Laurence G Cox Geoffrey O Cosgriff Jeremy G A Davis Peter C Byers Susan M Oliver David J Ryan Christopher J S Renwick (1) Executive directors Kimberley Edwards (2) Geoffrey R Phillips (3) Distributions Principal Activities and Operations During the year, the Trust continued to hold the investment in the Westlink Motorway Partnership which it made in February 2003. The Trust holds a 40% interest in the partnership which was formed to undertake the Westlink M7 Motorway Project in Sydney NSW. There were no significant changes in the nature of the Trust’s activities during the year. Distributions paid to holders of Convertible Adjusting Rate Securities (“CARS”) during the financial year were as follows: Convertible Adjusting Rate Securities Distribution payment for the period 1 January 2004 to 30 June 2004 of 7.0 per cent paid on 31 July 2004 Distribution payment for the period 1 July 2004 to 31 December 2004 of 7.0 per cent paid on 31 January 2005 A further distribution for the period 1 January 2005 to 30 June 2005 of $14.9 million was paid on 31 July 2005. 2005 $’000 15,009 15,091 30,100 134   Annual Report 2005 Transurban CARS Trust and Controlled Entity Directors’ Report Review of Operations The investment policy of the Trust continues to be that detailed in the prospectus and in accordance with the provisions of the governing documents of the Trust. During the year CARS became eligible for conversion to Transurban triple stapled securities after the second anniversary of the issue date on 14 April 2005. To participate in the conversion, CARS holders were required to submit an exchange notice not less than 35 business days prior to the record date of 30 June 2005. No exchange notices were submitted during the period. Results A summary of the consolidated revenue and overall result is set out below: Revenue from ordinary activities Net loss from ordinary activities a) Construction Phase Loan Notes (“CPLN”) During the period, Transurban CARS Trust (“TCT”) received distributions from its wholly owned entity, Transurban WSO Trust (“TWT”). The distributions are funded from interest received by TWT from the CPLN’s which it acquired to fund Transurban’s contribution to the Westlink Motorway Partnership. The CPLN’s are subordinated loan notes which pay interest at the rate of 6.27 per cent per annum. Consolidated Parent 2005 $’000 2004 $’000 2005 $’000 2004 $’000 26,030 26,259 26,030 26,259 (8,939) (8,085) (8,928) (8,085) The income received by way of distribution from TWT is the principal source of cash to fund distributions payable by TCT on the Convertible Adjusting Rate Securities (“CARS”) issued by TCT. paid twice annually with payment dates of 31 July and 31 January respectively were 100 per cent tax deferred for the year ended 30 June 2005. b) Convertible Adjusting Rate Securities (“CARS”) During the period, TCT paid distributions to CARS holders at the fixed rate of 7.0 per cent per annum. The distributions which are Significant Changes in the State of Affairs In the opinion of the Directors there were no significant changes in the state of affairs of the consolidated entity that occurred during the financial year. Annual Report 2005 135 financials Directors’ Report Subsequent to the End of the Financial Period At the date of this report the directors are not aware of any circumstances that have arisen since 30 June 2005 that has significantly affected, or may significantly affect: (a) the consolidated entity’s operations in future financial years, or have not been included in this report because the directors believe it would be likely to result in unreasonable prejudice to the consolidated entity. Fees paid to and interest held in the Trust by the Responsible Entity or its Associates Environmental Regulation No significant environmental regulations apply. Fees paid to the responsible entity and its associates out of Trust property during the year are disclosed in Note 21. No fees were paid out of Trust property to the directors of the Responsible Entity during the year. The number of securities held by the Responsible Entity or its associates as at the end of the financial year are disclosed in Note 19 of the financial statements. (b) the results of those operations in future financial years, or Insurance and Indemnification of officers (c) the consolidated entity’s state of affairs in future financial years. Likely Developments and Expected Results of Operations Information on likely developments in the operations of the consolidated entity and the expected results of operations 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. Interests in the Trust issued during the financial year Consolidated Parent 2005 2004 2005 2004 CARS on issue at the beginning of the year 4,300,000 4,300,000 4,300,000 4,300,000 CARS issued during the year CARS on issue at 30 June 2005 - - - - 4,300,000 4,300,000 4,300,000 4,300,000 136   Annual Report 2005 Directors’ Report Ordinary units on issue at the beginning of the year Ordinary units issued during the year Ordinary units on issue at the end of the year Value of Assets Transurban CARS Trust and Controlled Entity Consolidated Parent 2005 Units 2004 Units 2005 Units 2004 Units 12 - 12 12 - 12 12 - 12 12 - 12 Consolidated Parent 2005 $’000 2004 $’000 2005 $’000 2004 $’000 Value of Trust assets at 30 June 437,236 445,813 437,247 445,813 The value of the Trust’s assets is derived using the basis of accounting set out in Note 1 to the financial statements. Directors’ Interests Security Holdings As at the date of this Directors’ Report, the directors of the Responsible Entity have disclosed relevant interests in Stapled Securities, options over Stapled Securities and Convertible Adjusting Rate Securities (“CARS”) issued by the Transurban Group as follows: Name L G Cox P C Byers G O Cosgriff J G A Davis S M Oliver C J S Renwick D J Ryan K Edwards Number of CARS Number of Transurban Stapled Securities Options issued over Transurban Stapled Securities - - 121 - - - - - 1,142,500 70,580 24,910 50,000 62,540 - 21,577 61,000 - - - - - - - 1,500,000 Annual Report 2005 137 financials Directors’ Report Rounding of amounts The Trust 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 directors’ report. Amounts in the directors’ report have been rounded off in accordance with that Class Order to the nearest thousand dollars, unless otherwise indicated. Auditor PricewaterhouseCoopers continues in office in accordance with the Corporations Act 2001. This report is made in accordance with a resolution of the directors of Transurban Infrastructure Management Limited. Laurence G Cox Chairman Kimberley Edwards Managing Director Melbourne 23 August 2005 138   Annual Report 2005 Transurban CARS Trust and Controlled Entity Directors’ Report Auditors’ Independence Declaration As lead auditor for the audit of the Transurban Group for the year ended 30 June 2005, I declare that, to the best of my knowledge and belief, there have been: a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of the Transurban Group and the entities it controlled during the year. Tim Goldsmith Partner Melbourne 23 August 2005 Annual Report 2005 139 financials Statements of financial performance for the year ended 30 June 2005 Consolidated Parent Notes 2005 $’000 2004 $’000 2005 $’000 2004 $’000 Revenue from ordinary activities Expenses from ordinary activities Administration Borrowing costs 4 5 26,030 26,259 26,030 26,259 (3,843) (2,483) (3,832) (2,483) (31,126) (31,861) (31,126) (31,861) Net loss from ordinary activities (8,939) (8,085) (8,928) (8,085) Basic earnings per ordinary unit Diluted earnings per ordinary unit Dollars Dollars 27 27 (744,917) (673,750) (744,917) (673,750) The above statements of financial performance should be read in conjunction with the accompanying notes. 140   Annual Report 2005 Transurban CARS Trust and Controlled Entity Statements of financial position as at 30 June 2005 CURRENT ASSETS Cash assets Receivables Other Total Current Assets NON-CURRENT ASSETS Financial assets Other Total Non-Current Assets Total Assets CURRENT LIABILITIES Payables Non-interest bearing liabilities Total Current Liabilities NON-CURRENT LIABILITIES Interest bearing liabilities Total Non-Current Liabilities Total Liabilities NET ASSETS UNITHOLDERS’ FUNDS Accumulated losses Total Unitholders’ Funds Consolidated Parent Notes 2005 $’000 2004 $’000 2005 $’000 2004 $’000 7 8 9 10 11 12 13 32,531 40,707 32,531 40,707 262 92 366 - 262 103 366 - 32,885 41,073 32,896 41,073 392,000 392,000 392,000 392,000 12,351 12,740 12,351 12,740 404,351 404,740 404,351 404,740 437,236 445,813 437,247 445,813 14,941 15,026 14,941 15,026 2,178 2,420 2,178 2,420 17,119 17,446 17,119 17,446 14 449,785 449,096 449,785 449,096 449,785 449,096 449,785 449,096 466,904 466,542 466,904 466,542 (29,668) (20,729) (29,657) (20,729) 15 (29,668) (20,729) (29,657) (20,729) (29,668) (20,729) (29,657) (20,729) The above statements of financial position should be read in conjunction with the accompanying notes. Annual Report 2005 141 financials Statements of cash flows for the year ended 30 June 2005 Cash flows from operating activities Receipts from customers (inclusive of GST) Payments to suppliers (inclusive of GST) Interest received Distributions received Borrowing costs Net cash (outflows)/inflows from operating activities Cash flows from investing activities Loans to related parties Net cash outflows from investing activities Cash flows from financing activities Loans from related parties Repayment of loans to related parties Net cash inflows from financing activities Consolidated Parent Notes 2005 $’000 2004 $’000 2005 $’000 2004 $’000 355 (4,503) 838 (431) 26,051 26,221 355 (4,492) 1,473 838 (431) 1,575 - - 24,578 24,646 (30,135) (21,528) (30,135) (21,528) 25 (8,232) 5,100 (8,221) 5,100 (92) (92) 171 (23) 148 - - 368 - 368 (103) (103) 171 (23) 148 - - 368 - 368 Net (decrease)/increase in cash held Cash at the beginning of the financial year (8,176) 5,468 40,707 35,239 Cash at the end of the financial year 7 32,531 40,707 (8,176) 40,707 32,531 5,468 35,239 40,707 The above statements of cash flows should be read in conjunction with the accompanying notes. 142   Annual Report 2005 Transurban CARS Trust and Controlled Entity Notes to the financial statements for the year ended 30 June 2005 1 Summary of a) Principles of consolidation Significant Accounting Policies This financial report covers Transurban CARS Trust and its controlled entity. The responsible entity of Transurban CARS Trust is Transurban Infrastructure Management Limited. The responsible entity’s registered office is Level 43, 525 Collins Street, Melbourne VIC 3000. Transurban CARS Trust (the “Trust”) was constituted on 20 December 2002. The Trust was due to terminate on 20 December 2082 unless terminated earlier. However, amendments made to the Trust Deed have extended the Trust to perpetuity. This general purpose financial report has been prepared in accordance with the requirements of the Trust Constitution, Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board, Urgent Issues Group Consensus Views, and the Corporations Act 2001 in Australia. It is prepared in accordance with the historical cost convention, except for certain assets which, as noted, are at valuation. The accounting policies adopted are consistent with those of the previous year. Comparative information is reclassified where appropriate to enhance comparability. The consolidated financial statements incorporate the assets and liabilities of all entities controlled by Transurban CARS Trust (“trust” or “parent entity”) as at 30 June 2005 and the results of all controlled entities for the period then ended. Transurban CARS Trust and its controlled entity together are 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. Where control of an entity is obtained during the financial period, its results are included in the consolidated statement of financial performance from the date on which control commences. Where control of an entity ceases during a financial year its results are included for that part of the year during which control existed. 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 consolidated entity. The entity has not adopted a policy of revaluing its non-current assets on a regular basis. c) Income Tax Income tax has not been brought to account in the financial statements of the Trust as under the terms of the Constitution 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) 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 and outflows arising from its continued use and subsequent disposal. Where the carrying amount of a non-current asset is greater than its recoverable amount, the asset is written down to its recoverable amount. Where net cash inflows are derived from a group of assets working together, the recoverable amount is applied to the relevant group of assets. The decrement in the carrying amount is recognised as an expense in net profit or loss in the reporting period in which the recoverable amount write-down occurs. In assessing recoverable amounts of non- current assets, the relevant cash flows have been discounted to their present value, except where specifically stated. Annual Report 2005 143 financials Notes to the financial statements for the year ended 30 June 2005 e) Investments h) Distributions l) Earnings per Unit Interests in listed and unlisted securities, other than controlled entities and associates in the consolidated financial statements, are brought to account at cost and distribution income is recognised in the statement of financial performance when receivable. The interest in the joint venture partnership is accounted for as set out in Note 1(i). f) Trade and other creditors Trade and other creditors represent liabilities for goods and services provided to the consolidated entity prior to the end of the financial period and which are unpaid. The amounts are unsecured and are usually paid within 45 days of recognition. g) Interest bearing liabilities On issue of CARS, the fair value of the liability component, being the obligation to make future payments of principal and interest to security holders, is calculated using a market interest rate for an equivalent non-convertible security. The residual amount, representing the fair value of the conversion option, is included in equity as other equity securities with no recognition of any change in the value of the option in subsequent periods. The liability is included in borrowings and carried on an amortised cost basis with interest on the securities recognised as borrowing costs on an effective yield basis until the liability is extinguished on conversion or maturity of the securities. 144   Annual Report 2005 Provision is made for the amount of any distribution declared, determined or publicly recommended by the directors on or before the end of the financial period but not distributed at balance date. i) Joint Venture entity The interest in the joint venture partnership is accounted for using the equity method. Under this method, the share of the profits or losses of the partnership is recognised in the statement of financial performance, and the share of movements in reserves is recognised in reserves in the statement of financial position. Details relating to the partnership are set out in note 23. j) Borrowing Costs Borrowing costs are recognised as expenses in the period in which they are incurred, except to the extent to which they relate to the construction of a qualifying asset in which case borrowing costs are capitalised into the cost of the asset. Borrowing costs include interest on short term, long term borrowings and amortisation of deferred borrowing costs. Cost incurred in connection with the arrangement of borrowings are deferred and amortised over the effective period of funding. k) Cash For the purpose of the statement of cash flows, cash includes cash on hand. (i) Basic Earnings per Unit Basic earnings per unit is determined by dividing the net result from ordinary activities by the weighted average number of units outstanding during the period. (ii) Diluted Earnings per Unit Diluted earnings per unit adjusts the figures used in the determination of basic earnings per unit to take into account the weighted average number of units assumed to have been issued for no consideration in relation to dilutive potential units. m) Rounding of amounts The Trust 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 have been rounded off in accordance with that Class Order to the nearest thousand dollars. 2 Trust Formation and Termination The Trust was established on 20 December 2002 through the issue of 12 ordinary units at $1 per unit to Transurban Holding Trust. The Trust was due to terminate on 20 December 2082 unless terminated earlier. However, amendments made to the Trust Deed have extended the Trust to perpetuity. Transurban CARS Trust and Controlled Entity Notes to the financial statements for the year ended 30 June 2005 3 Segment Information The Trust’s sole business segment for the period ending 30 June 2005 was investing in the Westlink Motorway Partnership. All revenues and expenses are directly attributable to this sole purpose. Internal financial reporting is based on this sole business segment. 4 Revenue Revenue from operating activities Interest Trust distributions Consolidated Parent 2005 $’000 2004 $’000 2005 $’000 2004 $’000 26,030 26,259 1,451 1,613 - - 24,578 24,646 Revenue from ordinary activities 26,030 26,259 26,030 26,259 5 Loss From Ordinary Activities Expenses Borrowing costs Interest and finance charges paid/payable (30,732) (31,467) (30,732) (31,467) Capitalised underwriting fees expensed (394) (394) (394) (394) (31,126) (31,861) (31,126) (31,861) 6 Income Tax Tax losses at beginning of period Tax losses for the period Tax losses at end of period 36,403 26,079 35,723 10,324 36,403 35,723 26,079 10,324 72,126 36,403 72,126 36,403 Potential future income tax benefits at 30 June 2005 for tax losses not brought to account for the consolidated entity are $21.6 million (2004: $10.9 million). These losses cannot be used directly by the consolidated entity for the reason outlined in note 1c, but may be available for the benefit of unit holders in the future. Annual Report 2005 145 financials Notes to the financial statements for the year ended 30 June 2005 These benefits of tax losses will only be realised for the benefit of security holders in the consolidated entity 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; and (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 entity to realise the benefit from the deductions for the losses. 7 Current Assets – Cash Assets Cash at bank Consolidated Parent 2005 $’000 2004 $’000 2005 $’000 2004 $’000 32,531 40,707 32,531 40,707 32,531 40,707 32,531 40,707 Included in the above amount is $20.1 million (2004: $28.2 million) which is held in a reserve account to fund future CARS distributions and was not available for general use at 30 June 2005. 8 Current Assets – Receiveables Sundry debtors 9 Current Assets – Other Loans to related parties 262 262 366 366 92 92 - - 262 262 103 103 366 366 - - 10 Non-current Assets – Other Financial Assets Non traded investments Units in controlled entity - - 392,000 392,000 Construction Phase Loan Notes 392,000 392,000 - - 392,000 392,000 392,000 392,000 146   Annual Report 2005 Transurban CARS Trust and Controlled Entity Notes to the financial statements for the year ended 30 June 2005 Investment in controlled entity The investment in controlled entity represents 100% ownership of the issued ordinary units of The Transurban WSO Trust (registered in Australia). Investment in Construction Phase Loan Notes (“CPLN”) The CPLN represent Transurban’s funding contribution to the Westlink Motorway Partnership. The CPLN earn interest at the fixed rate of 6.27 per cent for the period from the financial close of the Westlink M7 project (“the Project”) to the date of completion of the Project, or 3.5 years, which ever is the lesser, at which time they convert to Term Loan Notes. Consolidated Parent 2005 $’000 2004 $’000 2005 $’000 2004 $’000 11 Non-Current Assets – Other Deferred Borrowing Costs 12,351 12,740 12,351 12,740 12,351 12,740 12,351 12,740 12 Current Liabilities – Payables Trade creditors CARS coupon payment Other creditors 4 5 4 5 14,926 15,009 14,926 15,009 11 12 11 12 14,941 15,026 14,941 15,026 CARS coupon payment represents the interest payment due to holders of Convertible Adjusting Rate Securities (“CARS”). The distribution on these securities of 7.0 per cent for the period 1 January 2005 to 30 June 2005 totalling $14.9 million has been charged to the statement of financial performance as a borrowing cost because the CARS are classified as a liability. This coupon was paid to CARS holders on 31 July 2005. Consolidated Parent 2005 $’000 2004 $’000 2005 $’000 2004 $’000 13 Current Liabilities – Non-interest Bearing Liabilities Loans from related parties 2,178 2,178 2,420 2,420 2,178 2,178 2,420 2,420 Annual Report 2005 147 financials Notes to the financial statements for the year ended 30 June 2005 Consolidated Parent 2005 $’000 2004 $’000 2005 $’000 2004 $’000 14 Non-current Liabilities – Interest Bearing Liabilities Loan from related parties 19,785 19,096 19,785 19,096 Convertible Adjusting Rate Securities 430,000 430,000 430,000 430,000 449,785 449,096 449,785 449,096 Financing Arrangements and Credit Facilities Convertible Adjusting Rate Securities (“CARS”) Transurban CARS Trust issued 4.3 million convertible securities for $430 million on 14 April 2003. Semi-annual interest is paid at a fixed rate of 7 per cent per annum until the first reset date on 14 April 2007. On a reset date, certain terms of the CARS may be reset and Holders will be given the option of: (i) taking no action and therefore, be bound by the new terms from the reset date; or (ii) submitting an Exchange Notice. The term of the Guarantee may also be extended on terms and conditions determined by Transurban Holding Trust (“THT”) in its absolute discretion. The interest payments are guaranteed by THT until the first reset date. Following the submission of an Exchange Notice, Transurban will elect to either: convert the CARS into Transurban Securities arrange the acquisition of CARS by a third party and deliver to the Holder, the cash proceeds and to the extent there is a shortfall, Transurban Securities, or a combination of both. It is the present intention of Transurban that Exchange will be satisfied by conversion into Transurban Securities. These securities will rank ahead of Transurban Stapled Securities on the winding up of Transurban, in conjunction with the winding up of the Transurban CARS Trust. Other Loans The loan from Transurban Holding Trust does not have any fixed date for repayment and bears interest at 7.05 per cent (2004 – 7.05 per cent) 148   Annual Report 2005 Transurban CARS Trust and Controlled Entity Notes to the financial statements for the year ended 30 June 2005 15 Accumulated Losses Accumulated losses at the beginning of the financial year Consolidated Parent 2005 $’000 2004 $’000 2005 $’000 2004 $’000 (20,729) (12,644) (20,729) (12,644) Net loss from ordinary activities after tax (8,939) (8,085) (8,928) (8,085) Available for distribution Dividends provided for or paid (29,668) (20,729) (29,657) (20,729) - - - - Accumulated losses carried forward (29,668) (20,729) (29,657) (20,729) 16 Unitholders’ Funds Consolidated Parent 2005 Units 2005 $’000 2004 Units 2004 $’000 2005 Units 2005 $’000 2004 Units 2004 $’000 Units fully paid 12 - 12 - 12 - 12 - The Trust has issued 12 ordinary units at $1 each. Each unit represents a right to an individual unit in the Trust and does not extend to a right to the underlying assets of the scheme. There are no separate classes of units and each unit has the same rights attaching to it as all other units of the Trust. There were no movements in the number of units during the financial year. 17 Distributions Convertible Adjusting Rate Securities Distribution payment for the period 1 January 2004 to 30 June 2004 of 7.0 per cent paid on 31 July 2004 Distribution payment for the period 1 July 2004 to 31 December 2004 of 7.0 per cent paid on 31 January 2005 The coupon payment for the half year ended 30 June 2005 of $14.9 million was paid on 31 July 2005. 2005 $’000 15,009 15,091 30,100 Annual Report 2005 149 financials Notes to the financial statements for the year ended 30 June 2005 18 Remuneration of Auditors During the year the following services were paid to the auditor, PricewaterhouseCoopers Australian Firm: Audit Services Audit or review of financial reports 14,900 13,800 14,900 13,800 Consolidated Parent 2005 $ 2004 $ 2005 $ 2004 $ Taxation Services Review of income tax returns 14,900 13,800 14,900 13,800 12,705 19,000 12,705 19,000 12,705 19,000 12,705 19,000 19 Director Disclosures Executive directors Details of remuneration The following persons were directors of Transurban Infrastructure Management Limited during the financial year: Chairman – non-executive Laurence G Cox Non-executive directors Peter C Byers, Geoffrey O Cosgriff, Jeremy GA Davis, Susan M Oliver, David J Ryan Geoffrey R Phillips Kimberley Edwards was appointed an executive director on 26 July 2005 and continues in office at the date of this report. Geoffrey R Phillips was an executive director from the beginning of the financial year until his resignation on 26 July 2005. Details of the remuneration of each director of Transurban Infrastructure Management Limited, including their personally related entities, are set out in the following tables. The Options granted, relate to the Transurban Group as a whole. A reasonable basis of apportionment is not available, resulting in the full amount being disclosed. 150   Annual Report 2005 Transurban CARS Trust and Controlled Entity Notes to the financial statements for the year ended 30 June 2005 Directors of Transurban Infrastructure Management Limited 2005 Name Cash salary and fees L G Cox P C Byers J G A Davis S M Oliver G O Cosgriff D J Ryan G R Phillips $ 55,362 19,309 15,128 18,571 21,502 21,797 - Total 151,669 2004 Name Cash salary and fees L G Cox P C Byers J G A Davis S M Oliver G O Cosgriff D J Ryan G R Phillips $ 55,009 21,196 19,799 20,994 18,976 18,168 - Total 154,142 Bonus $ - - - - - - - - Bonus $ - - - - - - - - Primary Post-employment Equity Cash Long Term Non- Incentive monetary annuation benefits $ $ $ Super- Retirement benefits $ 33,606 15,675 4,236 1,738 15,714 15,772 1,671 1,935 1,962 - 16,374 9,362 - - Options Total $ - - - - - - 61,333 $ 93,204 36,722 46,614 36,616 32,799 23,759 61,333 27,256 90,789 61,333 331,047 - - - - - - - - - - - - - - - - Primary Post-employment Equity Cash Long Term Non- Incentive monetary annuation benefits $ $ $ Super- Retirement benefits - - - - - - - - - - - - - - - - 4,951 1,908 2,644 1,889 1,708 1,635 - Options Total $ - - - - - - 61,501 $ 94,586 33,599 30,752 32,604 43,954 19,803 61,501 $ 34,626 10,495 8,309 9,721 23,270 - - 14,735 86,421 61,501 316,799 Annual Report 2005 151 financials Notes to the financial statements for the year ended 30 June 2005 Share-based compensation – options The terms and conditions of each grant of options affecting remuneration in this or future reporting periods are as follows: Grant date Expiry date Exercise price Value per option at grant date Date exercisable 26 April 2001 30 April 2006 23 October 2001 31 October 2006 1 February 2002 30 April 2007 9 April 2002 30 April 2007 20 May 2002 30 April 2007 $3.817 $4.404 $4.280 $4.030 $4.220 $0.425 $0.491 $0.477 $0.449 $0.470 One-third after 28/04/03, 26/04/04, 26/04/05 One-third after 28/04/03, 26/04/04, 26/04/05 One-third after 01/02/04, 01/02/05, 01/02/06 One-third after 20/05/04, 20/05/05, 20/05/06 One-third after 20/05/04, 20/05/05, 20/05/06 Options are issued at no cost to the Option holder and vest in three equal tranches on the second, third and fourth anniversaries of their issue. The Exercise of the options is subject to an Exercise Condition. The Exercise Condition involves a comparison between Total Shareholder Return (“TSR”) of The Transurban Group’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. The Transurban Group 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 the Group’s TSR exceeds the 65th percentile of the ranking, 100% of the vested options may be exercised. If Transurban Group’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. The exercise price of options was the 5 day variable weighted average price of the Group’s stapled securities prior to granting the options. When exercised, each option is converted into one stapled security, comprising one ordinary share in Transurban Limited, one ordinary share in Transurban Holdings Limited and one unit in Transurban Holding Trust. Options can be exercised at any time after vesting. The amounts disclosed as remuneration in the above tables are the assessed fair values of the options granted to executive directors allocated evenly over the period from grant date to vesting date. Fair values at grant date are independently determined, using a Black-Scholes derived option valuation model taking into consideration the exercise price, the market price of Transurban Group Stapled Securities on the date of grant, the expected price volatility of Transurban group Stapled Securities, expected future distributions and risk free rate of interest over the term of the options. 152   Annual Report 2005 Transurban CARS Trust and Controlled Entity Notes to the financial statements for the year ended 30 June 2005 Equity instrument disclosures relating to directors Options provided as remuneration Details of options over Transurban Group stapled securities provided as remuneration to each director of Transurban Infrastructure Management Limited are set out below. Name Number of options granted during the year Number of options vested during the year Directors of Transurban Infrastructure Management Limited G R Phillips Option holdings - 166,667 The number of options over Transurban Group stapled securities during the financial year held by each director of Transurban Infrastructure Management Limited, including their personally-related entities, are set out below. Name Balance at the start of the year Granted during the year as remuneration Exercised during the year Other changes during the year Balance at the end of the year Vested and Vested and exercisable unexercisable at the end of the year at the end of the year Directors of Transurban Infrastructure Management Limited G R Phillips 500,000 - 500,000 - - - - Annual Report 2005 153 financials Notes to the financial statements for the year ended 30 June 2005 Share holdings The number of Transurban Group Stapled Securities and Covertible Adjusting Rate Securities (“CARS”) held during the financial year by each director of Transurban Infrastructure Management Limited, including their personally-related entities, are set out below. Stapled Securities Name Balance at the start of the year Received during the year on the exercise of options Other changes during the year Balance at the end of the year Directors of Transurban Infrastructure Management Limited L G Cox P C Byers G O Cosgriff J G A Davis S M Oliver D J Ryan G R Phillips CARS Name 775,000 50,000 24,910 50,000 60,993 21,043 - - - - - - - 500,000 367,500 1,142,500 20,580 - - 1,547 534 8,820 70,580 24,910 50,000 62,540 21,577 508,820 Balance at the start of the year Received during the year on the exercise of options Other changes during the year Balance at the end of the year Directors of Transurban Infrastructure Management Limited L G Cox P C Byers G O Cosgriff J G A Davis S M Oliver D J Ryan G R Phillips 154   Annual Report 2005 1,000 - 121 - - - - - - - - - - - (1,000) - - - - - - - - 121 - - - - Transurban CARS Trust and Controlled Entity Notes to the financial statements for the year ended 30 June 2005 Company directors and their director- related entities received normal distributions on these securities. All transactions relating to securities were on the same basis as similar transactions with other security holders. Other transactions with directors and director-related entities Fees have been paid to Transurban Infrastructure Management Limited in its capacity as Responsible Entity of the Transurban CARS Trust. The Responsible Entity is also the Responsible Entity for the Transurban Holding Trust which provides financial assistance and acts as guarantor to the consolidated entity. Aggregate amounts of each of the above types of other transactions with directors of the consolidated entity and their director related entities: Amounts recognised as expense Interest Responsible Entity Fee Aggregate amounts payable to director-related entities at balance date: Consolidated Parent 2005 $’000 2004 $’000 2005 $’000 2004 $’000 685 3,500 1,281 2,200 685 3,500 1,281 2,200 Non-interest bearing current liability 2,178 2,420 2,178 2,420 Interest bearing non-current liability 19,785 19,096 19,785 19,096 20 Contingent Liabilities As at the reporting date there are no contingent liabilities. 21 Related Parties Responsible entity’s fees Transurban Infrastructure Management Limited (“TIML”) is the Responsible Entity of the Trust and is entitled to receive a fee calculated at the rate of up to 2.0 per cent per annum of the Gross Asset Value of the Trust. For the 2005 financial year, the responsibility entity fee paid by the Trust was calculated at a rate of 0.8 per cent (2004: 0.5 per cent) of the value of the Trust’s assets at 30 June 2005. Annual Report 2005 155 financials Notes to the financial statements for the year ended 30 June 2005 Responsible Entity 2005 $000 Responsible Entity 2004 $000 Fees for the year paid by the Trust Fees earned by the responsible entity in respect of its role as responsible entity of other entities within the Transurban Group Management fees earned by the responsible entity which are reimbursed in accordance with the Constitution Aggregate amounts payable to the responsible entity at reporting date 3,500 2,009 25,949 26,783 Wholly-owned group 2,200 4,187 8,577 7,839 The wholly-owned group consists of The Transurban CARS Trust and its wholly-owned controlled entity, The Transurban WSO Trust. Details of this controlled entity are set out in note 22. Transactions between Transurban CARS Trust and the other entity in the wholly-owned group during the years ended 30 June 2004 and 30 June 2005 consisted of: (a) Loans from Transurban WSO Trust (b) Loans to Transurban WSO Trust (c) Distribution paid to Transurban CARS Trust Aggregate amounts included in the determination of profit from ordinary activities before income tax that resulted from transactions with entities in the wholly owned group: Distribution revenue Aggregate amounts receivable from entities in the wholly-owned group: Current receivable 156   Annual Report 2005 Consolidated Parent 2005 $’000 2004 $’000 2005 $’000 2004 $’000 - - - - 24,578 9,158 11 - Transurban CARS Trust and Controlled Entity Notes to the financial statements for the year ended 30 June 2005 Consolidated Parent 2005 $’000 2004 $’000 2005 $’000 2004 $’000 Other related parties Aggregate amounts included in the determination of profit from ordinary activities before related income tax that resulted from transactions with each class of other related parties: CPLN’s interest revenue 24,578 24,646 Aggregate amounts receivable from other related parties at balance date: Non-current receivable Controlling entities 392,000 392,000 - - - - The ultimate parent entity is Transurban Holding Trust which owns 100% of the issued ordinary units of Transurban CARS Trust. Ownership interests in related parties Transurban CARS Trust, through its wholly owned subsidiary Transurban WSO Trust, has a 40.0 per cent interest in the joint venture partnership Westlink Motorway. Details of this interest is set out in Note 22. 22 Investments in Controlled Entity Name of Entity Country of Incorporation Class of Security Equity Holding 2005 2004 Transurban WSO Trust Australia Ordinary 100% 100% The investment in the partnership is carried at cost of $80 (2004: $80). Refer note 23 for details. 23 Interest in Joint Venture Westlink Motorway Partnership Ownership Interest 2005 $’000 40 2004 $’000 40 Combined entity carrying amount 2005 $’000 6,236 2004 $’000 6,236 Annual Report 2005 157 financials Notes to the financial statements for the year ended 30 June 2005 The consolidated entity has a 40.0 per cent interest in the Westlink Motorway Partnership. The principal activity of the partnership is the construction of the Westlink M7 Motorway in Sydney. The M7 is presently in the construction phase and is due for completion in April 2006. The partnership is unlikely to have any impact on the consolidated entity’s equity accounted profits until construction is completed and the operations commence. Information relating to the joint venture partnership, presented in accordance with the accounting policy described in note 1(i), is set out below: Consolidated Parent 2005 $’000 2004 $’000 2005 $’000 2004 $’000 Share of partnership assets and liabilities Current assets Non-current assets Total Assets Current liabilities Non-current liabilities Total Liabilities Net Assets Share of Profits 5,225 2,932 580,709 355,834 585,934 358,766 28 31,306 585,906 327,460 585,934 358,766 - - - - Share of partnership commitments Capital commitments 522,288 327,484 24 Financial Instruments Disclosure Credit risk Credit risk represents the loss that would be recognised if counterparties failed to perform as contracted. - - - - - - - - - - - - - - - - - - 158   Annual Report 2005 Transurban CARS Trust and Controlled Entity Notes to the financial statements for the year ended 30 June 2005 Interest rate risk The consolidated entity’s exposure to interest rate risk and the effective weighted average interest rate by maturity periods is set out in the following table. 2005 Fixed Interest Rate Maturing in: Floating Interest Rate Note $’000 1 year or less $’000 between 1 to 5 years more than 5 years Non interest bearing $’000 $’000 $’000 TOTAL $’000 Financial Assets Cash Sundry debtors Loans to related parties 7 8 9 Construction Phase Loan Notes 10 32,531 - - - - - - 392,000 Total Financial Assets 32,531 392,000 Weighted average interest rate 4.81% 6.27% Financial Liabilities Creditors CARS 12 14 Loan from related parties 13, 14 Total Financial Liabilities Weighted average interest rate - - - - - - - - - - - - - - - - - 430,000 - 430,000 7.00% Net Financial Liabilities 32,531 392,000 (430,000) - - - - - - - - - - - - - 32,531 262 92 - 262 92 392,000 354 424,885 14,941 14,941 - 430,000 21,963 21,963 36,904 466,904 (36,550) (42,019) Annual Report 2005 159 financials Notes to the financial statements for the year ended 30 June 2005 2004 Fixed Interest Rate Maturing in: Floating Interest Rate $’000 1 year or less $’000 between 1 to 5 years $’000 more than 5 years $’000 Non interest bearing $’000 Note TOTAL $’000 Financial Assets Cash Sundry debtors Construction Phase Loan Notes Total Financial Assets Weighted average interest rate Financial Liabilities Creditors CARS 7 8 10 12 14 40,707 142 - 40,849 5.08% - - Loan from related parties 13, 14 19,096 Total Financial Liabilities Weighted average interest rate Net Financial Liabilities 19,096 7.05% 21,753 - - - - - - - - - - - - - 392,000 392,000 6.27% - 430,000 - 430,000 7.00% (38,000) - - - - - - - - - - - - 40,707 224 366 - 392,000 224 433,073 - - 15,026 15,026 - 430,000 2,420 21,516 17,446 466,542 - - (17,222) (33,469) Reconciliation of net financial liabilities to net liabilities Net financial liabilities as above Non-financial assets Deferred borrowing costs Net liabilities per Balance Sheet Notes 2005 $’000 2004 $’000 (42,019) (33,469) 11 12,351 12,740 (29,668) (20,729) 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. 160   Annual Report 2005 Transurban CARS Trust and Controlled Entity Notes to the financial statements for the year ended 30 June 2005 25 Reconciliation of Loss from Ordinary Activities to Net Cash (Outflow)/Inflow from Operating Activities Net loss from ordinary activities Deferred borrowing costs Amortisation deferred borrowing costs Change in operating assets and liabilities (Decrease)/increase in creditors Decrease in debtors Increase in loans from related parties Consolidated Parent 2005 $’000 2004 $’000 2005 $’000 2004 $’000 (8,939) (8,085) (8,928) (8,085) (6) 394 (85) 104 300 - 394 8,513 577 3,701 5,100 (6) 394 (85) 104 300 (8,221) 394 8,513 577 3,701 5,100 Net cash (outflow)/inflow from operating activities (8,232) 26 Economic Dependency Transurban CARS Trust is reliant on the receipt of distributions from Transurban WSO Trust for its ongoing viability. Transurban CARS Trust has $20.1 million (2004: $28.2 million) in reserve to fund future Convertible Adjusting Rate Securities (“CARS”) coupon payments which is not available for general use. The CARS coupon payments are guaranteed by Transurban Holding Trust (parent entity) until the first reset date 14 April 2007. 27 Earnings Per Unit Net tangible asset backing per ordinary unit Basic earnings per unit Diluted earnings per unit Weighted average number of units used as the denominator in calculating basic earnings per unit Weighted average number of unit and potential units used used as the denominator in calculating diluted earnings per unit Consolidated 2005 2004 ($2,472,333) ($1,727,417) ($744,917) ($673,750) ($744,917) ($673,750) 12 12 12 12 Annual Report 2005 161 financials Notes to the financial statements for the year ended 30 June 2005 28 Impacts of Adopting Australian Equivalents to IFRS The Australian Accounting Standards Board (“AASB”) is adopting International Financial Reporting Standards (“IFRS”) for application to reporting periods beginning on or after 1 January 2005. The AASB has issued Australian equivalents to IFRS, and the Urgent Issues Group has issued interpretations corresponding to IASB interpretations originated by the International Financial Reporting Interpretations Committee or the former Standing Interpretations Committee. The adoption of Australian equivalents to IFRS will be first reflected in the consolidated entity’s financial statements for the half year ending 31 December 2005 and the year ending 30 June 2006. Entities complying with Australian equivalents to IFRS (“AIFRS”) for the first time will be required to restate their comparative financial statements to amounts reflecting the application of AIFRS to that comparative period. Most adjustments required on transition to AIFRS will be made, retrospectively, against opening retained earnings as at 1 July 2004. 2005 until the acquisition of the Hills Motorway Group added a further level of complexity that has not yet been fully determined. It is now expected that the project will be completed (including the calculation of the impact of AIFRS) by the first AIFRS reporting date being the period ending on 31 December 2005. The project team is undertaking a detailed analysis of AIFRS and the Group’s accounting policies to determine the effects on the opening balance sheet to be prepared on the date of transition to AIFRS and future accounting policy differences. The project team has identified a number of accounting policy choices which have been analysed by management to determine the most appropriate accounting policy for the Group on transition to IFRS. The known or reliably estimable impacts on the financial report for the year ended 30 June 2005 had it been prepared using AIFRS are set out below. As mentioned above, this may not be all of the impacts that may arise. The expected financial effects of adopting AIFRS are shown for each item with descriptions of the differences. No material impacts are expected in relation to the statements of cash flows. The Transurban Group established an AIFRS transition project team in October 2003. The project team prepared a plan to manage the transition to AIFRS and reports regularly on progress to the audit committee. The project plan was on schedule for completion by 30 June Although the adjustments disclosed in this note are based on management’s best knowledge of expected standards and interpretations, and current facts and circumstances, these may change. For example, amended or additional standards or interpretations may be issued by the AASB and the IASB. Therefore, until the company prepares its first full AIFRS financial statements, the possibility cannot be excluded that the accompanying disclosures may have to be adjusted. Accounting for Associates Under AASB 128 Investments in Associates, a long term loan to an associate can be considered as part of the investment. This is a change in present accounting policy where only the equity component of the investment is included in equity accounting and long term loans are a separate class of asset subject to recoverable amount testing. This will affect the Group’s investment in the Westlink project which is presently equity accounted. The investment is substantially represented by a long term loan rather than an equity investment. If the Westlink project incurs accounting losses from the commencement of operations greater than the Group’s equity investment, the receivable balance may be reduced to the extent of the Group’s remaining share of accounting losses. This may occur despite the recoverable amount of the long term loan not being impaired due to the expected cashflow from the Westlink project. If the policy required by AASB 128 had been applied during the year ended 30 June 2005, there would be no financial impact as Westlink has not yet commenced operations. However, it may lead to greater volatility in earnings in future reporting periods. 162   Annual Report 2005 Transurban CARS Trust and Controlled Entity Notes to the financial statements for the year ended 30 June 2005 Directors’ Declaration In the directors’ opinion: a) The financial statements and notes set out on pages 140 to 162 are in accordance with the Corporations Act 2001, including: (i) (ii) complying with Accounting Standards the Corporations Regulations 2001 and other mandatory professional reporting requirements; and giving a true and fair view of the company’s and consolidated entity’s financial position as at 30 June 2005 and of their performance, as represented by the results of their operations and their cashflows, for the financial year ended on that date; and b) There are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable. The directors have been given the declarations by the chief executive officer and chief finance officer required by section 295A of the Corporations Act 2001, This declaration is made in accordance with a resolution of the directors of Transurban Infrastructure Management Limited. Laurence G Cox Chairman Kimberley Edwards Managing Director Melbourne 23 August 2005 Annual Report 2005 163 financials Independent audit report to the members 164   Annual Report 2005 Transurban CARS Trust and Controlled Entity Independent audit report to the members Annual Report 2005 165 financials Security Holder Information The security holder information set out below was applicable as at 31 August 2005. A Distribution of Convertible Adjusting Rate Securities 1. The number of holders of Convertible Adjusting Rate Securities, which are preference units in Transurban CARS Trust, was 5,803. 2. The voting rights are one vote per security. 3. At 31 August 2005 the percentage of the total holdings held by or on behalf of the twenty largest holders of these securities was 70.46 per cent. 4. The distribution of holders was as follows: Security Grouping Number of Holders 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 – and over Total 5,670 102 6 15 10 5,803 Number of Convertible Securities Held 971,526 193,410 40,785 415,210 2,679,069 4,300,000 There were 43 holders of less than a marketable parcel of preference units. 5. Substantial Holders as at 31 August 2005 are as follows: Name UBS Nominees Pty Ltd Number of Convertible Securities 680,746 % 22.59 4.50 0.95 9.66 62.30 100 % of Total 15.8 166   Annual Report 2005 Transurban CARS Trust and Controlled Entity Security Holder Information B Twenty Largest Holders of Convertible Adjusting Rate Securities Number of Convertible Securities Held % of Issued Convertible Securities BRISPOT NOMINEES PTY LTD CITICORP NOMINEES PTY LIMITED NATIONAL NOMINEES LIMITED FORTIS CLEARING NOMINEES P/L RBC GLOBAL SERVICES AUSTRALIA NOMINEES PTY LIMITED J P MORGAN NOMINEES AUSTRALIA LIMITED ANZ NOMINEES LIMITED RBC GLOBAL SERVICES AUSTRALIA NOMINEES PTY LIMITED WESTPAC CUSTODIAN NOMINEES LIMITED ANZ NOMINEES LIMITED GOLDMAN SACHS JBWERE CAPITAL MARKETS LTD UBS PRIVATE CLIENTS AUSTRALIA NOMINEES PTY LTD AUSTRALIAN FOUNDATION INVESTMENT COMPANY LIMITED PAN AUSTRALIAN NOMINEES PTY LIMITED SANDHURST TRUSTEES LTD CAMBOOYA PTY LIMITED AUSTRALIAN EXECUTOR TRUSTEES LIMITED IRREWARRA INVESTMENTS PTY LTD PERPETUAL TRUSTEE COMPANY LIMITED COGENT NOMINEES PTY LIMITED 794,188 310,243 295,857 247,469 233,277 203,115 197,678 149,030 148,138 100,074 59,252 53,713 52,700 43,585 26,751 25,900 24,360 24,044 19,798 19,739 18.47 7.21 6.88 5.76 5.43 4.72 4.60 3.47 3.45 2.33 1.38 1.25 1.23 1.01 0.62 0.60 0.57 0.56 0.46 0.46 Total 3,028,911 70.46 Annual Report 2005 167 financials This page is intentionally left blank 168   Annual Report 2005 enquiries and information Removal from Annual Report mailing list Security Holders can nominate not to receive an Annual Report by written notice to the Stapled Securities Register. Security holders will continue to receive all other shareholder information, including Notice of Annual General Meeting and proxy form. Tax File Number (‘TFN’) information While it is not compulsory for security holders to provide a TFN, the Company is obliged to deduct tax from distributions or dividends to holders resident in Australia who have not supplied such information. If you have not already supplied your TFN, you may do so by writing to the Stapled Securities Register. Change of address or name A security holder should notify the Register immediately, in writing, if there is any change in his or her registered address or name. Auditors PricewaterhouseCoopers Freshwater Place 2 Southbank Boulevard Melbourne Victoria 3006 Telephone +613 8603 1000 Facsimile +613 8603 1999 Enquiries about your stapled securities The Stapled Securities Register is maintained by Computershare Investor Services Pty Limited. If you have a question about your Transurban Securities, transfer of securities or distributions, please contact: Computershare Investor Services Pty Limited. Yarra Falls, 452 Johnston Street, Abbotsford Victoria 3067 GPO Box 2975 Melbourne Victoria 3001 |(within Australia) 1300 850 505 (outside Australia) +613 9415 4000 Facsimile +613 9473 2500 Enquiries about Transurban Contact Transurban’s Investor Relations: Manager, Investor Relations Telephone +613 9612 6999 Facsimile +613 9649 7380 Email via our website: www.transurban.com.au Transurban Group Transurban Holdings Limited ABN 86 098 143 429 Transurban Holding Trust ABN 30 169 362 255 Transurban Limited ABN 96 098 143 410 Transurban Infrastructure Management Limited ABN 27 098 147 678 (as responsible entity of the Transurban CARS Trust ARSN 103 090 928) Registered Office Level 43 Rialto South Tower 525 Collins Street Melbourne Victoria 3000 Telephone +613 9612 6999 Facsimile +613 9649 7380 www.transurban.com.au Or write to: Manager, Investor Relations, Transurban Group Level 43 Rialto South Tower 525 Collins Street, Melbourne Victoria 3000 Stock Exchange listing The Stapled Securities are listed on the Australian Stock Exchange under the name Transurban Group and under the code ‘TCL’. Transurban CARS Trust: the securities are listed on the Australian Stock Exchange under the name Transurban CARS Trust and under the code ‘TCS’. The securities participate in the Clearing House Electronic Subregister System (‘CHESS’). Directors Laurence G Cox, Chairman Kim Edwards, Managing Director Peter C Byers Geoffrey O Cosgriff Jeremy G A Davis Susan M Oliver Christopher J S Renwick David J Ryan Company Secretary Mark Licciardo Paul O’Shea www.transurban.com.au moving T r a n s u r b a n A n n u a l R e p o r t 2 0 0 5 m o v i n g A n n u a l R e p o r t 2 0 0 5 

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