Transurban Group
Annual Report 2012

Plain-text annual report

ANNUAL report 2012 t r A N S U r B A N A N N U A L r e p o r t 2 0 1 2 Guidance of 31¢ 29.5¢ 27¢ 24¢ 22¢ DISTRIBUTION 2009 2010 2011 2012 2013 www.transurban.com Annual Report 1 9 Corporate Governance Statement Financial Statements 9 Transurban Holdings Limited and Controlled Entities 140 Transurban Holding Trust and Controlled Entities 225 Transurban International Limited and Controlled Entities 321 Security Holder Information This statement outlines the key aspects of Transurban’s corporate governance framework and main governance practices. Copies or summaries of certain governance documents referred to in this statement can be found in the “Corporate Governance” section of the Transurban website. These charters, policies and procedures are regularly reviewed and updated to ensure they continue to reflect best practice. Throughout the year ended 30 June 2012 (the reporting period), Transurban’s governance arrangements complied with the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations. A checklist cross-referencing the Principles and Recommendations to the relevant sections of this statement and elsewhere in the Annual Report can be found in the Corporate Governance section of the Transurban website. The Board of Transurban Holdings Limited (THL), the Board of Transurban Infrastructure Management Limited (TIML), as responsible entity of Transurban Holding Trust (THT), and the Board of Transurban International Limited (TIL) are collectively referred to as the “Board” in this statement, unless otherwise indicated. On 5 January 2012, the incorporation and registration of TIL was transferred from Bermuda to Australia. On that date, the two Bermudan based TIL Directors resigned and were replaced with those THL and TIML Directors not currently on the Board of TIL. As a result, the Board of THL, the Board of TIML and the Board of TIL now have common Directors and meetings are held concurrently. The Board currently comprises eight Directors, with seven Non-executive Directors, including the Chair, and one Executive Director, the CEO. Each Director’s skills, qualifications, experience, relevant expertise and period in office are set out in the Directors’ Report. During the reporting period: • Geoff Cosgriff and Jeremy Davis retired from the Board; • Ian Smith and Christine O’Reilly joined the Board, effectively completing the Board renewal process; and • Transurban announced the resignation of Chris Lynch as Managing Director and CEO, and the appointment of his replacement, Scott Charlton, both with effect in July 2012. Shortly after the reporting period, Scott Charlton commenced as Managing Director and CEO. Bob Officer also resigned from the Board (see below). Director independence Each Director is expected to bring unfettered and independent judgment to the Board’s deliberations. Under the Board Charter, the Board must comprise a majority of independent Non-executive Directors and have an independent Non-executive Chair. The roles of the Chair and the CEO must be exercised by separate individuals. The Board defines an independent Director as a Non-executive Director who is free of any business or other relationship that could interfere with, or could reasonably be perceived to interfere with, the exercise of their unfettered and independent judgment and ability to act in the best interests of security holders. Relevant governance documents: ! Board Charter The Board is accountable to security holders for the performance of Transurban. that sets out The Board has a Charter its authority, responsibilities and membership, and the arrangements by which it operates. The Charter also clearly establishes the relationship between the Board and management. The Board reviewed and amended the Charter during the reporting period. The primary role of the Board is to provide overall strategic guidance for Transurban and effective oversight of management. To this end, the Board has reserved to itself the specific responsibilities listed in the Charter. To assist it in discharging these responsibilities, the Board has established Committees to give detailed consideration to key issues. responsibility The Board has delegated to the CEO, and through the CEO to other Senior Executives, the day-to-day management of Transurban. The scope of, and limitations to, these delegations are clearly documented and cover areas such as operating expenditure, capital expenditure and investments. These delegations balance effective oversight with appropriate empowerment and accountability of Senior Executives. for 2 STRUCTURE AND MEMBERSHIP OF THE BOARD Relevant governance documents: ! Board Charter ! Policy and Procedure for the Nomination, Selection and Appointment of New NEDs and the Re-Election of Incumbent NEDs ! Diversity Policy Board structure The Board is structured so that its membership provides the mix of qualifications, skills, experience and diversity to enable it to discharge its responsibilities, and so that its size facilitates effective discussion and efficient decision making. The Board determines its size and composition, subject to the constitutions of THL, TIML, and TIL, and the law. 1 TRANSURBAN ANNUAL REPORT 2012 1 20120122 CORPORATE GOVERNANCE STATEMENTCORPORATE GOVERNANCE STATEMENT 1 ROLE OF THE BOARD In assessing the independent status of a Non-executive Director, the Board considers the ‘relationships affecting independent status’ set out in the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations and other the Board considers relevant. The test of whether a business or other relationship is material1 is assessed from the perspective of both Transurban and the Director. information and circumstances facts, that The Board assesses the independence of new Directors upon appointment, and reviews the independence of all Directors annually and as appropriate. Each Director is required to provide the Board with all relevant information to enable it to make this assessment. The Board has reviewed the positions and associations of the current Non-executive Directors, including the Chair. The Board considers each of them to be independent. Lindsay Maxsted, Neil Chatfield, Rodney Slater and Samantha Mostyn each hold positions in companies or with firms with which Transurban has commercial relationships, as described in note 36 in the notes to the Financial Statements in the Annual Report. The Board has considered each case separately and has concluded that these relationships are not material and do not interfere with the relevant Director’s exercise of unfettered and independent judgment or their ability to act in the best interests of security holders. None of Mr Maxsted, Mr Chatfield, Mr Slater, nor Ms Mostyn were, or are, involved in any procurement or other Board decision making regarding the companies or firms with which they have an association. Bob Officer was not considered by the Board to be independent as he was a nominee of CP2 Limited. CP2 Limited is a co- investor in DRIVe, the US toll road investment vehicle managed by Transurban, and was previously also one of Transurban’s largest security holders. Professor Officer resigned from the Board in August 2012. Tenure, retirement and re-election Each Non-executive Director’s term of appointment is subject to the provisions of the Corporations Act, the ASX Listing Rules, and the constitutions of THL, TIML and TIL. New Directors (appointed by the Board during the year to fill a casual vacancy or as an addition to the Board) are required to seek election as a Director at the Annual General Meeting (AGM) following their appointment, and then re-election on a rotational basis with the other Directors. No Director of THL, TIML or TIL (other than the CEO) may hold office without re-election past the third AGM following their appointment or 3 years, whichever is longer. Board support for Directors retiring and seeking re-election is not automatic. Prior to each AGM, the Board determines whether it will recommend to security holders that they vote in favour of the re-election of each Non-executive Director seeking re-election, having regard to any matters the Board considers relevant, including the Director’s performance evaluation and his or her tenure. 1 While the Board believes it is inappropriate to determine materiality solely on the basis of arbitrary dollar, profit or turnover percentage tests, when assessing materiality, in accounting standards are used and interests equal to more than 5% of revenue, equity or profit are potentially material. In certain circumstances, the Board considers that interests of a lesser value might also be relevant. thresholds suggested 2 TRANSURBAN ANNUAL REPORT 2012 The Board does not set fixed tenure limits for Non-executive Directors. It is the Board’s intention that Non-executive Directors serve up to three terms, but tenure remains a matter for the Board’s discretion on a case-by-case basis. In the case of long-serving Non-executive Directors who are standing for re-election at an AGM but who intend to retire from the Board within their next term, this intention to retire will be clearly disclosed in the AGM notice of meeting. Nomination and appointment of new Directors and Board gender diversity the The Board has established a policy and procedure for the nomination, selection and appointment of new Non-executive Directors. A regular assessment of the range of qualifications, skills, experience, and diversity of gender, age, experience, relationships and background on the Board is undertaken to enable identification of particular competencies and perspectives that will best increase the Board’s effectiveness. The assessment is assisted by the development and use of a Board ‘skills matrix’ to identify any gaps. Where a need or gap is identified or arises, the Nomination Committee commences a search process for potential appointees across a diverse candidate pool, with the assistance of external consultants as necessary. The Nomination Committee then undertakes an assessment of short listed potential appointees. The Chair and other Directors also meet in person with potential appointees. The Nomination Committee will then recommend the most appropriate candidate(s) for consideration by the Board as a whole. During the reporting period, the Board reviewed the mix of skills and diversity which it seeks to achieve in its membership. It identified additional gender diversity and engineering, major projects and infrastructure skills and experience as priorities. A search process as described above was undertaken and Ian Smith and Christine O’Reilly were identified as the candidates who best met the Board’s criteria. Mr Smith and Ms O’Reilly were appointed in January 2012 and April 2012 to respectively. the Board The Board recognises that diversity is a competitive advantage bringing real value and adding to the collective skills and experience of is responsible for making recommendations to the Board on strategies for addressing Board diversity. The Nomination Committee the Board. Induction of new Directors New Non-executive Directors are issued with a formal letter of appointment that sets out the key terms and conditions of appointment, rights and responsibilities, the time commitment envisaged, and the Board’s expectations regarding involvement with Committee work. the Director’s duties, including An induction program is in place to allow new Non-executive Directors to participate fully and actively in Board decision making at the earliest opportunity. The program is designed to enable new Directors to gain an understanding of Transurban’s financial, strategic, operational and risk management position, its culture and values, the role and responsibilities of Senior Executives, the role of Board Committees, meeting arrangements and Director interaction with each other, Senior Executives and other stakeholders. 2 Knowledge, skills and experience Directors are expected to maintain the knowledge and skills required to discharge their obligations to Transurban. The Board is provided with papers, presentations and briefings on Transurban’s operations, and is briefed on relevant changes in the legislative, regulatory or industry framework. Directors are expected to undertake any necessary continuing professional education and training to update and enhance their knowledge and skills. Board access to information and independent professional advice Directors have unrestricted access to management. Management is expected to provide regular detailed financial and operational reports in a form and timeframe and of a quality that enable the Board to discharge its duties effectively. Directors may request additional informed decisions. information where necessary to make The Board Charter sets out the circumstances and procedures pursuant to which a Director may seek independent professional advice at Transurban’s expense. These procedures require prior consultation with, and the consent of, the Chair and, under normal circumstances, the provision of a copy of the advice to the Board. Conflicts of interest Directors are required to take all reasonable steps to avoid actual, potential or perceived conflicts of interests. Under the Corporations Act, the constitutions of THL, TIML and TIL, and the Board Charter, Directors are required to disclose any conflicts and abstain from participating in any discussion or voting on matters in which they have a material personal interest. A Director who discloses that they may have a conflict must follow the procedures developed by the Board to deal with such circumstances. Corporate Governance Framework Independent Assurance – External Auditor – Internal Auditor Board Delegation Assurance and oversight through reporting Delegation Remuneration Committee Nomination Committee Audit and risk Committee CEO n o i t a g e e D l y t i l i b a t n u o c c A Executive Committee 3 OPERATION OF THE BOARD Relevant governance documents: ! Board Charter ! Audit and Risk Committee Charter ! Nomination Committee Charter ! Remuneration Committee Charter Board Committees The Board has established Directors: Committee and the Remuneration Committee. the Audit and Risk Committee, three standing Committees of the Nomination Each standing Committee operates under a 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 role of Committees is to advise and make recommendations to the Board. The Committees do not have decision making authority except as expressly stated in the relevant charter or as authorised by the Board. The Board periodically reviews the appropriateness of the existing Committee structure, as well as the membership and the charter of each Committee. A review was undertaken during the reporting period, which to each resulted Committee charter. in amendments The current composition of each Committee is set out on the following page. The number of meetings held by each Committee during the reporting period and each member’s attendance at those meetings are set out in the Directors’ Report. 3 TRANSURBAN ANNUAL REPORT 2012 3 Current Committee composition Audit and Risk Committee Nomination Committee Remuneration Committee • Only Non-executive Directors, all of • Only Non-executive Directors, all • Only Non-executive Directors, all of whom n o i t i s o p m o C * s r e b m e M whom are independent; of whom are independent; • At least 3 members, each of whom is financially literate and has relevant qualifications/experience; • An independent Chair who is not also • At least 3 members; • An independent Chair. Chair of the Board. - Neil Chatfield (Chair); - Lindsay Maxsted; - Christine O’Reilly; and - Bob Edgar. - Lindsay Maxsted (Chair); - Neil Chatfield; - Bob Edgar; - Samantha Mostyn; - Christine O’Reilly; and - Rodney Slater. are independent; • At least 3 members; • An independent Chair. - Bob Edgar (Chair); - Neil Chatfield; and - Samantha Mostyn. / s u c o f f o s a e r A y t i l i b i s n o p s e r • Integrity of financial reporting; • Effectiveness of systems of financial risk management and internal control; • Internal and external audit functions; • Effectiveness of the risk management framework and supporting risk management systems. • Size and composition of the Board and new Board appointments; • Board gender diversity and diversity in general; • Board, Committee and Director performance; • Board and Senior Executive succession planning. • Remuneration of Directors; • Performance and remuneration of, and incentives for, the CEO and other Senior Executives; • Remuneration by gender; • Remuneration strategies, practices and disclosures generally. *Until his resignation in August 2012, Bob Officer was a member of the Audit and Risk and Nomination Committees. Performance of the Board The Board acknowledges the importance of the regular review of its own performance and effectiveness, as well as the performance and effectiveness of its Committees and individual Directors. The Board conducts an internal evaluation each year and has an expert external consultant formally facilitate the process every third year. This arrangement is supplemented by assessments undertaken by committees, the results of which are reported to the Board. the reporting period. facilitated Board effectiveness review was An externally conducted during Interviews were conducted with each Board member and with senior management and additional feedback was gathered by completion of a detailed (confidential) questionnaire. The results of the review were formally presented to, and considered by, the Board as a whole. The review concluded that the Board is functioning well with an appropriate mix of skills and experience on the Board, and that there were effective working relationships between Board members and between the Board and management. Suggestions for improvement and actions agreed by the Board in response to those suggestions have been documented and the completion of these is monitored by the Board. As noted above, Transurban has a Diversity Policy and the Board has again set measurable objectives for achieving greater gender diversity. Achieving these objectives is a measure against which performance of the Board is assessed going forward. The Board recognises that increasing Board accountability for diversity objectives is an important element in delivering improvements in diversity on the Board and at all levels of the organisation. Performance of Senior Executives Each year the Board sets key performance indicators (KPIs) for the CEO, and approves KPIs set for other Senior Executives, against which their performance is measured. KPIs relate to both the performance of Transurban, safety and the performance of the executive individually. The performance of the CEO is reviewed by the Board. The CEO reviews the performance of each Senior Executive and reports to the Board through the Remuneration Committee on the outcome of these reviews. The outcomes directly impact each Senior Executive’s short term incentive. Performance reviews for the CEO and other Senior Executives for the year ended 30 June 2011 were conducted during the reporting period. Detailed information regarding these reviews, and the reward structure and remuneration outcomes for the CEO and other Senior Executives during the reporting period, can be found in the Remuneration Report within the Directors’ Report. Performance reviews for the year ended 30 June 2012 were conducted in July 2012. Remuneration of Directors and Senior Executives The remuneration of Non-executive Directors consists entirely of Directors’ fees and Committee fees. Non-executive Directors do not receive any variable remuneration or other performance related incentives. In September 2005, the Board resolved to discontinue previously provided retirement benefits for Non- executive Directors. Accrued “frozen” retirement benefits plus interest (at the statutory fringe benefits rate) were paid to Geoff Cosgriff and Jeremy Davis upon their retirement in December 2011. No other current Directors are entitled to any accrued retirement benefits. Further details of the remuneration paid to each Non-executive the Director during Remuneration Report within the Directors’ Report. reporting period are set out the in 4 TRANSURBAN ANNUAL REPORT 2012 4 For the reporting period, the remuneration of the CEO and other Senior Executives comprised fixed remuneration, short term incentives (cash and deferred equity) and long term equity based incentives. Transurban’s remuneration strategy and framework, and the remuneration package and outcomes for the CEO and other Senior Executives, are described the Remuneration Report within the Directors’ Report. In the year ended 30 June 2011, a comprehensive review of Transurban’s remuneration framework was undertaken in light of feedback received from security holders and other stakeholders, market expectations and regulatory developments. As a result, the Board approved and implemented a new remuneration framework for the reporting period, details of which are summarised in the Remuneration Report within the Directors’ Report. in detail in 4 ETHICAL CONDUCT AND RESPONSIBLE DECISION-MAKING Relevant governance documents: ! How We Work @ TU ! Whistleblower Policy ! Fraud Policy ! Dealing in Securities Policy ! Diversity Policy ! Supplier Sustainability Code of Practice ! Sustainability Report Conduct and ethics Transurban’s code of conduct, “How We Work @ TU”, sets the standards for how all of Transurban’s employees, consultants and contractors should act to ensure that Transurban’s organisational values (honesty, integrity, humility and accountability) are upheld. All employees are expected to align their actions with the code whenever they are representing Transurban or undertaking work on Transurban’s behalf. The code refers employees to relevant Transurban policies for further information and guidance. It also encourages employees who become aware of unethical behaviours to report these to Senior Management. A copy of How We Work @ TU is provided to new employees and is discussed as part of their induction training. New employees are also required to complete online training in relation to the code. Whistleblower protection In keeping with the spirit of How We Work @ TU, Transurban has to encourage Directors, Senior a Whistleblower Policy Executives, employees, contractors and suppliers who have witnessed, or know about, any misconduct to report it without fear of reprisal. The policy sets out how Transurban will respond to, the and protections available to those who make a whistleblower report in good faith. reports of misconduct, and outlines investigate, Transurban also has a separate Fraud Policy that sets out the procedures for the investigation of reports of fraudulent or corrupt conduct that are made other than under the Whistleblower Policy. Dealing in securities Transurban has a Dealing in Securities Policy that establishes a procedure for dealings by Directors, Senior Executives, employees, contractors and their related parties in Transurban securities, and in securities of other entities with whom Transurban may have business dealings. 5 TRANSURBAN ANNUAL REPORT 2012 The policy prohibits Directors and all personnel from dealing in securities at any time if they are in possession of price-sensitive information. Dealing is also not permitted during designated “Closed Periods” except with prior approval in circumstances of financial hardship. Directors and all personnel may generally deal in securities during “Open Periods” if prior approval is obtained in accordance with procedure set out in the policy. For the purposes of the policy, dealing includes hedging. The policy also prohibits dealing in securities on a short-term basis, except in circumstances of financial hardship. Employees who have entitlements to securities under a Transurban equity plan may not hedge against those entitlements until they have vested. In addition, Directors and Senior Executives may not hedge against entitlements that have vested but remain subject to a holding lock. Directors and employees are also prohibited from entering into margin lending arrangements using Transurban securities as security. Diversity Transurban’s workforce is made up of individuals with diverse skills, values, backgrounds, experiences and needs. Transurban values this diversity and recognises the organisational strength, opportunities for innovation and other corporate benefits that it brings. Transurban is committed to p roviding an environment in which all employees are treated with fairness and respect, and have equal access to opportunities at work. Transurban has, and will continue to develop, practices, programs and initiatives to support and assist with improving diversity at all levels of the business. Transurban believes that genuine diversity drives strategic advantage and contributes to the achievement of its corporate objectives. It enables Transurban to attract people with the best skills and attributes, and to develop a workforce selected from all available talent, whose diversity reflects that of the customers and communities Transurban serves. Transurban was an early adopter of the diversity measures set out in the ASX Corporate Governance Council’s Principles and Recommendations that came in to effect for financial years ending on or after 1 January 2011. In 2010, Transurban established a Diversity Policy that included a requirement for the Board to set measurable objectives for achieving gender diversity and review both the objectives and the progress in achieving them annually. Transurban’s gender diversity profile as at 30 June 2012 is set out below: 25% (2) 75% (6) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 33% (10) 67% (20) 50% (310) 50% (314) Board Members CEO/Senior Executive Total Workforce Female Male 5 Transurban’s measurable gender diversity objectives for the reporting period, and the progress in achieving those objectives during that period, are outlined below: Objective FY11 Actual and FY12 Target Outcome as at 30 June 2012 Increase the proportion of women on the Board ! FY11 (Actual) – 1 female Non- executive Director ! FY12 (Target) – 1 additional female Non-executive Director Increase the proportion of women in executive and senior management positions ! FY11 (Actual) – 29% of executive/senior management positions held by women ! FY12 (Target) – 31% of executive/senior management positions held by women Proactive consideration of female candidates for Board and management positions ! Minimum of 1 female candidate included in every Board / management interview list Enhance workplace flexibility options and access to these ! FY11 (Actual) – 30.5% of employees utilising workplace flexibility programs ! FY12 (Target) – 34.6% of employees utilising workplace flexibility programs Maternity leave return rate ! FY11 (Actual) – 93% of employees due to return from maternity leave returned to work ! FY12 (Target) – 100% of employees due to return from maternity leave to return to work Christine O’Reilly was appointed to the Board on 12 April 2012. She joins Sam Mostyn as Transurban’s second female Non- executive Director. 33.3% of executive and senior management positions are held by women. This increase from previous years and above target result is due to the appointment of females into the CFO and General Counsel, Australia positions. Female candidates were included in every Board / management interview list. During the reporting period, 1 female was appointed to the Board, and management appointments occurred through the implementation of succession plans. Transurban continued to enhance and promote workplace flexibility through the reporting period. 28.6% of employees accessed workplace flexibility programs. The breakdown of these programs is as follows: • • • 19.8% of employees are employed on a part-time basis; 7.4% of employees purchased additional lifestyle leave; and 4.3% of employees utilised other formal flexible leave arrangements eg. working from home, telecommuting, flexi- hours. 80% of employees due to return from maternity leave returned to work. Diversity initiatives 5 INTEGRITY IN FINANCIAL REPORTING The Women During the reporting period Transurban retained a focus on gender diversity. in Leadership program continued – 24 females participated in two further workshops. Bi-annual in Leadership participants, providing them with an opportunity to network with participants from other programs and hear from an external speaker. forums have commenced for all Women There is continued awareness and education around opportunities for all employees to assist in improving diversity at all levels. Initiatives include enhancing workplace policies and programs, the inclusion of unconscious bias into all manager training, and equal opportunity awareness training for all employees. A gender pay equity review has also been undertaken. Sustainability to ensuring is committed The Board that all Transurban operations work to sustainable business practices. Further information on Transurban’s approach to sustainability is set out in Transurban’s Sustainability Report which will be published in to October 2012. Transurban sustainability into its procurement processes to ensure suppliers and contractors maintain a high standard of governance and compliance. its approach integrates Relevant governance documents: ! Audit and Risk Committee Charter ! External Auditor Independence Policy Role of the Audit and Risk Committee The Audit and Risk Committee assists the Board in overseeing the integrity of financial reporting, the effectiveness of systems of financial risk management and internal control, and the internal and external audit functions. The CEO, the CFO, the internal auditor and the external auditor must attend Committee meetings if requested. Other members of management and advisers may also be to attend meetings. invited The Audit and Risk Committee has unrestricted access to management and the auditors, and rights to seek explanations and additional information. The committee meets on a regular basis with the internal auditor, and separately with the external auditor, without management present. 6 TRANSURBAN ANNUAL REPORT 2012 6 Independence of the external auditor Transurban’s external auditor is PricewaterhouseCoopers. The effectiveness, performance and independence of the external auditor is reviewed by the Audit and Risk Committee. If it becomes necessary for replace the Committee will independence reasons, performance or the selection and for formalise a procedure and policy appointment of a new external auditor. the external auditor to The Corporations Act requires the external auditor to make an annual independence declaration, addressed to the Board, declaring that the auditor has maintained its independence in accordance with rules of professional accounting bodies. PricewaterhouseCoopers has provided an independence declaration to the Board for the reporting period. The declaration forms part of the Directors’ Report. the Corporations Act and the John Yeoman has been the lead audit engagement partner of PricewaterhouseCoopers in relation to the external audit of Transurban since 1 July 2007. He is currently being rotated off as lead partner and is being replaced by Chris Dodd. Restrictions on the provision of non-audit services by the external auditor Transurban has implemented policies and procedures to monitor the independence of the external auditor. The External Auditor Independence Policy regulates the provision of non-audit services by the external auditor. Under the policy, the auditor is prohibited from providing certain non-audit services, and may only provide a permissible non-audit service where there is a compelling reason for the auditor to do so. The provision of permissible non-audit services must be pre-approved by either the Audit and Risk Committee, the Chair of that Committee, or the CFO (where the proposed fee for the service does not exceed $5,000). The CFO provides a verbal report at each Audit and Risk Committee meeting describing any non-audit services pre-approved by the CFO or the Chair since the last meeting. Details of the fees paid to PricewaterhouseCoopers during the reporting period, including a breakdown of fees paid for non-audit services, are set out in the Directors’ Report. The Board has considered the nature of the non-audit services provided by PricewaterhouseCoopers during the reporting period and has determined that the services provided, and the amount paid for those services, are compatible with the general standard of independence for auditors imposed by the Corporations Act and that the auditor’s independence has not been compromised. also ensures that Transurban and its personnel are aware of the penalties for a contravention of Transurban’s continuous disclosure obligations. for The Company Secretary has primary responsibility the effective operation of the policy and for all communications with the ASX in relation to continuous disclosure issues. Under the policy, personnel must immediately notify the Company Secretary as soon as they become aware of information that should be considered for release to the ASX. The Company Secretary reviews (after appropriate consultation) whether disclosure is required and, if so, co- ordinates the actual form of the disclosure, its approval and prompt release. All ASX releases are required to be cleared by either the Board (or a Board sub-committee) or the CEO (or in the CEO’s absence, the CFO or a designated Director). information, determines that All information disclosed to the ASX is promptly posted on the Transurban website. All material used in presentations to equity investors and analysts is released to the ASX immediately prior to the making of those presentations. The Board considers potential disclosure issues at each of its meetings. 7 COMMUNICATIONS WITH SECURITY HOLDERS Relevant governance documents: ! Security Holder Communications Policy Transurban places considerable importance on effective communication with its security holders to ensure they are kept up to date with Transurban’s latest news and information. The Security Holder Communications Policy outlines the range of ways Transurban provides information to its security holders and other stakeholders. These include the Transurban website, meetings and briefings, written materials and email updates. Security holders are encouraged to elect to receive information in to electronic sustainability. line with Transurban’s commitment format in Transurban uses its website to complement the official release of information to the ASX. All ASX announcements and related information, such as information provided to analysts or the media during briefings or presentations, are promptly posted on the website. The annual and half year results presentations, media releases and other communications material are also published on the website. Attendance of the external auditor at the AGM Annual general meeting The lead audit engagement partner of PricewaterhouseCoopers attends, and is available to answer security holder questions about the conduct of the audit and the preparation and content of the auditor’s report at Transurban’s AGM. 6 CONTINUOUS DISCLOSURE Relevant governance documents: ! Continuous Disclosure Policy and Procedure Transurban has a Continuous Disclosure Policy and Procedure that establishes a best practice procedure for compliance with its continuous disclosure obligations, provides guidance for the identification of material information and requires the reporting of such information to the Company Secretary for review. The policy Transurban regards its AGM as an important opportunity to communicate with security holders. It is also a major forum for security holders to ask questions about the performance of Transurban, and to provide feedback to Transurban about information they have received. Transurban welcomes and encourages security holder attendance and participation at AGMs. The full text of notices of meeting and explanatory material is published on the Transurban website. AGMs are also webcast to accommodate security holders who are unable to attend in person. 7 TRANSURBAN ANNUAL REPORT 2012 7 8 RISK MANAGEMENT Relevant governance documents: ! Audit and Risk Committee Charter ! Risk Management Policy Risk oversight and management Transurban views effective risk management as central to achieving its objectives. Responsibility for risk management on a day to day basis rests with line management. The Board is responsible for reviewing Transurban’s policies on risk oversight and management and satisfying that management has developed and implemented a sound system of risk management and internal control. itself Transurban has a Risk Management Policy that sets out its commitment to risk management and identifies the associated roles and responsibilities of the Board, management and employees in the oversight and management of risk. The policy is supplemented by an enterprise wide risk management framework (compliant with the Australian / New Zealand standard (AS/NZ ISO 31000:2009) to embed risk management processes into Transurban’s business activities and functions. that seeks Within the framework, each business unit is required to formally consider its risk environment and create a register of identified risks, controls, actions to treat risks and where necessary, a risk management plan. Risk registers are stored in a risk management reports are derived. Risk information system Management Facilitators are appointed to each business unit to support managers in implementing a robust and consistent approach for the identification and management of risks. Progress in the management of risks is regularly reported to Senior Executives. Senior Executives have also established a strategic risk register which they review regularly. from which The Audit and Risk Committee assists the Board in overseeing Transurban’s Risk Management Policy and the effectiveness of its risk management framework and supporting systems. At each meeting, the Committee considers the ‘Key Risks’ (those with a residual risk rating of “A” or “B”). Management reports to the committee in relation to the effectiveness of the management of Key Risks. Detailed reports are provided to the Committee if the rating of a Key Risk changes or if there are any other significant developments in relation those risks. Financial reporting - CEO and CFO certifications The Board has received certifications from the CEO and the CFO in connection with the financial statements for the Transurban Group and the individual entities comprising the Transurban Group for the year ended 30 June 2012. The certifications state that the declaration provided in accordance with section 295A of the Corporations Act as to the integrity of the financial statements is founded on a sound system of risk management and internal control and that system is operating effectively in all material respects in relation to financial reporting risks. 8 TRANSURBAN ANNUAL REPORT 2012 8 Transurban Holdings Limited and Controlled Entities ABN 86 098 143 429 (including Transurban International Limited and Transurban Holding Trust) Annual report for the year ended 30 June 2012 9 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited ABN 86 098 143 429 Annual report - 30 June 2012 Contents Directors' report Auditor's Independence Declaration Financial statements Directors' declaration Independent auditor's report to the members Page 11 50 51 137 138 10 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Directors' report 30 June 2012 Directors' report The Directors of Transurban Holdings Limited (THL), Transurban International Limited (TIL), and Transurban Infrastructure Management Limited (TIML), as responsible entity of Transurban Holding Trust (THT), present their report on the Transurban Group for the year ended 30 June 2012. Group accounts The Transurban Group financial statements have been prepared as an aggregation of the financial statements of THL and controlled entities, TIL and controlled entities, and THT and controlled entities, as if all entities operate together. They are therefore treated as a combined entity (and referred to as "the 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, TIL and THT are stapled together and comprise one share in THL, one share in TIL and one unit in THT (Stapled Security). None of the components of the Stapled Security can be traded separately. Directors With the exception of the changes noted below, the following persons were Directors of THL, TIML and TIL during the whole of the financial year and up to the date of this report: THL TIML TIL Non-executive Directors Lindsay Maxsted Neil Chatfield * Geoffrey Cosgriff (resigned 6 December 2011) Jeremy Davis (resigned 6 December 2011) Robert Edgar * Samantha Mostyn * Robert Officer * Christine O'Reilly (appointed 12 April 2012) Rodney Slater * Ian Smith (appointed 1 January 2012) * James Keyes (resigned 5 January 2012) Jennifer Eve (resigned 5 January 2012) Executive Directors Christopher Lynch (resigned 16 July 2012) Scott Charlton (appointed 16 July 2012) (*) - Appointed to the Board of TIL on 5 January 2012, being the date on which the registration and incorporation of TIL was transferred from Bermuda to Australia. 11 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Directors' report 30 June 2012 (continued) Result The consolidated net profit $118,158,000). The profit attributable to ordinary equity holders of $112,467,000). for the year ended 30 June 2012 for the Group was $58,558,000 (2011: the Group was $54,905,000 (2011: Principal activities The principal activities of the Group during the financial year were the development, operation and maintenance of toll roads. Distributions Distributions paid to the ordinary equity holders of the Group during the financial year were as follows: Distribution payable Final distribution for 2012 financial year payable and recognised as a liability: 15.0 cents (2011: 14.0 cents) per fully paid Stapled Security payable 14 August 2012 Fully franked (2011: 0% franked) based on tax paid @ 30% - 3.5 cents (2011: 0.0 cents) per fully paid Stapled Security Unfranked final distribution - 11.5 cents (2011: 14.0 cents) per fully paid Stapled Security Distributions paid during the year Final (unfranked) distribution for 2011 financial year of 14.0 cents (2010: 12.0 cents) per fully paid Stapled Security paid 11 August 2011 Interim distribution for 2012 financial year of 14.5 cents (2011: 13.0 cents) per fully paid Stapled Security paid 14 February 2012 Fully franked (2011: 0% franked) based on tax paid @ 30% - 3.5 cents (2011: 0.0 cents) per fully paid Stapled Security Unfranked interim distribution - 11.0 cents (2011: 13.0 cents) per fully paid Stapled Security Total distributions paid during the year Distributions paid in cash or satisfied by the issue of Stapled Securities under the distribution reinvestment plan during the years ended 30 June 2012 and 30 June 2011 Paid in cash Satisfied by issue of Stapled Securities Funds available (from)/for future distribution reinvestment plans 30 June 2012 $'000 30 June 2011 $'000 51,041 167,707 218,748 - 202,096 202,096 202,096 202,096 169,760 169,760 50,801 159,654 210,455 - 187,367 187,367 412,551 357,127 336,549 76,001 1 412,551 232,577 124,557 (7) 357,127 12 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Directors' report 30 June 2012 (continued) Review of operations Transurban's net profit for the year ended 30 June 2012 was $58.6 million. Toll revenue increased by 5.7 per cent to $765.4 million. The key driver behind the increase was the price escalation and traffic growth on CityLink, partially offset by the construction impact of the Hills M2 Upgrade works on the Hills M2 and Lane Cove Tunnel. Performance of Transurban's portfolio of assets CityLink (Melbourne) CityLink toll revenue for the year ended 30 June 2012 increased 8.5 per cent to $471.6 million on the back of a 1.9 per cent increase on average daily transactions. CityLink traffic growth was impacted by the planned major resurfacing works on Western Link during the year; overall the Western Link grew 0.7 per cent and the Southern Link 2.9 per cent. Hills M2 (Sydney) Toll revenue for the year ended 30 June 2012 for the Hills M2 decreased by 3.1 per cent to $141.2 million. As expected average daily trips decreased by 5.1 per cent, reflecting the construction impact of the Hills M2 Upgrade. As at 30 June 2012 the upgrade was over 70 per cent complete with the first stage, the Windsor Road ramps, opened for traffic on the 25 July 2012. The project completion is scheduled for mid 2013 and remains consistent with Transurban’s expectations. On 30 January 2012, Hills M2 and M1 Eastern Distributor successfully implemented full electronic tolling with minimal impact on traffic. The move to cashless tolling will result in improved travel times for customers across the corridor and operational efficiencies. Lane Cove Tunnel/Military Road e-Ramps (Sydney) Toll revenue for the year ended 30 June 2012 was $60.0 million. Average daily trips decreased by 0.7 per cent compared to the previous year. The decrease in traffic is a reflection of the construction impact of the Hills M2 Upgrade on Lane Cove Tunnel, a connecting road. M1 Eastern Distributor (Sydney) – Airport Motorway Group Toll revenue for the year ended 30 June 2012 for the M1 Eastern Distributor increased 0.6 per cent to $92.7 million. Average daily trips increased 0.7 per cent. As previously mentioned, M1 Eastern Distributor implemented cashless tolling on 30 January 2012. M5 Motorway (Sydney) - Interlink Roads Pty Limited Toll revenue for the year ended 30 June 2012 for the M5 increased by 8.1 per cent to $181.1 million. Average daily trips decreased 0.1 per cent. The car toll price increased from $3.80 to $4.40 on 25 November 2011, the first car toll price increase since August 2006. On the 26 June 2012, Transurban announced that it had reached financial close with the NSW Government for the M5 West Widening Project, a $400 million project of which the Government will fund approximately $50 million. Under the agreement, an extra lane in each direction will be added from Camden Valley at the western end to King Georges Road in the east. The expected traffic increase will be approximately 4.4 per cent, with the truck toll multiplier progressively moving to three times the car toll at construction completion. Construction is expected to take 2.5 years and the concession extended by 3.3 years to December 2026. 13 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Directors' report 30 June 2012 (continued) Review of operations (continued) Performance of Transurban's portfolio of assets (continued) Westlink M7 (Sydney) - Westlink Motorway Group Toll revenue for the year ended 30 June 2012 increased by 5.2 per cent to $200.5 million. Average daily trips increased by 1.3 per cent. Both the northern and southern sectors of the Westlink M7 have been impacted by the flow-on effects of development activities and upgrade works on the connecting roads. Pocahontas 895 (Virginia USA) - Transurban DRIVe Toll revenue for the year ended 30 June 2012 increased by 5.7 per cent to US$14.9 million. Average daily trips increased by 3.2 per cent, due to milder weather conditions and the benefit of the completion of the Airport Connector in January 2011. Transurban announced on the 18 June 2012, that after a detailed review of traffic and operating forecasts for Pocahontas 895, it was necessary to reduce the carrying value of the asset based on revised lower revenue forecasts. This resulted in an equity accounting charge for the year ended 30 June 2012 of $138.1 million. Transurban’s investment in Pocahontas is held via Transurban DRIVe, which is 75 per cent owned by Transurban. As a result of this equity accounting charge, Transurban’s carrying value of its investment in DRIVe has been reduced to zero. Business development activities Capital Beltway (Virginia USA) - Transurban DRIVe Construction on the Capital Beltway 495 Express Lane project is now more than 95 per cent complete. The construction project remains on budget and on track for completion late 2012, with first tolls expected in early 2013. 95 Express Lanes (Virginia USA) – Transurban DRIVe On 1 August 2012, the Group announced that financial close had been reached with the Commonwealth of Virginia to build and operate the 95 Express Lanes in northern Virginia, USA. The 95 Express Lanes will be a 29 mile (46 kilometre), reversible two and three lane facility, with a 73 year operating concession from opening date (2015). Other corporate activities Chief Executive Officer (CEO) On 30 January 2012, Transurban announced Mr Chris Lynch’s intention to resign as CEO and as a Director effective from July 2012 after a four year tenure. After a comprehensive Board selection process, Transurban announced on 3 April 2012 the appointment of Mr Scott Charlton as new CEO effective from July 2012. 14 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Directors' report 30 June 2012 (continued) Review of operations (continued) Refinancing activities Transurban continued to have success in financing activities in the year ended 30 June 2012. July 2011 Refinanced $520.0 million of non-recourse project debt on the M1 Eastern Distributor. August 2011 Raised $100.0 million of new corporate working capital facilities December 2011 Refinanced $375.0 million of syndicated bank debt. This replaced the $375.0 million that was due to mature in August 2012. March 2012 June 2012 Issued C$250 million of Canadian dollar denominated secured fixed rate medium term notes under the Euro Medium Term Note (“EMTN”) Programme Maple bonds established in October 2011. Raised $735.0 million of non-recourse project debt on Interlink Roads Pty Limited, comprising of $525.0 million of existing debt ($15 million undrawn facility) and $210.0 million of additional syndicated bank debt to fund the upgrade project. Significant changes in the state of affairs On 5 January 2012, TIL and its wholly owned susbidiary, Transurban International Holdings Limited, changed registered domicile from Bermuda to Australia. The change in domicile has had no financial impact on the Group. There have been no other significant changes in the state of affairs of the Group during the year. Matters subsequent to the end of the financial year As noted above, on 1 August 2012, the Group reached financial close on the 95 Express Lanes project. Transurban also announced that the 95 Express Lanes investment will be the final new toll road project undertaken by Transurban's co-investment vehicle, DRIVe. Transurban will continue to manage the assets owned by DRIVe. At the date of this report the Directors are not aware of any other circumstances that have arisen since 30 June 2012 that have significantly affected, or may significantly affect, the Group's operations in future financial years, the results of those operations in future financial years, or the Group's state of affairs in future financial years. Likely developments and expected results of operations Likely developments in the operations of the Group and the expected results of operations have not been included in these financial statements because the Directors believe it would be likely to result in unreasonable prejudice to the Group. Environmental regulation The Group is subject to environmental regulations under Australian Commonwealth and State laws and certain applicable laws in the USA. The Group maintains a comprehensive environmental management plan to monitor the performance of its motorways, and any external parties responsible for operating any of the Group’s motorways, and takes remedial steps where necessary. There were no significant breaches reported during the financial year on the Group’s assets. 15 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Directors' report 30 June 2012 (continued) Information on Directors Lindsay Maxsted Dip Bus, FCA Chair and independent Non-executive Director Term of office Director since 1 March 2008. Chair since 12 August 2010. Lindsay is currently Chairman and a Non-executive Director of Westpac Banking Corporation, and a Non-executive Director of BHP Billiton Limited and BHP Billiton plc. He is the Managing Director of Align Capital Pty Ltd and the Honorary Treasurer of Baker IDI Heart and Diabetes Institute. Lindsay was formerly the CEO of KPMG Australia from 2001 - 2007. His principal area of practice prior to this was in the corporate recovery field managing a number of Australia’s largest insolvency / workout / turnaround engagements. Lindsay was previously a Non-executive Director of both St George Bank and of VicRacing Pty Ltd. Lindsay holds interests in 30,000 Stapled Securities. Transurban Board Committee membership Chair of the Nomination Committee and a member of the Audit and Risk Committee. Christopher Lynch B Comm, MBA, FCPA, FAICD Chief Executive Officer Term of office Director since 18 February 2008. CEO since April 2008. Resigned 16 July 2012. Chris has experience in senior leadership roles in global corporations operating across multiple markets, and the development and operation of major projects with large up-front capital requirements. Chris came to Transurban from BHP Billiton, where he held senior roles, including as CFO and as Executive Director and Group President - Carbon Steel Materials. Prior to this the bulk of Chris’s career was with Alcoa Inc where his roles included Vice President and CIO, CFO-Europe and Managing Director of KAAL Australia Limited. Chris is currently a Non-executive Director of Rio Tinto plc and Rio Tinto Limited and a Commissioner of the Australian Football League. Chris holds interests in 713,563 Stapled Securities and 2,016,918 performance awards. Scott Charlton BSci, MBA (Texas) Chief Executive Officer Term of office Director since 16 July 2012. CEO since 16 July 2012. Scott recently joined Transurban from Lend Lease, where he was Group COO (since November 2011) and Group Director of Operations (from March 2010). Prior to this, Scott held several senior appointments across a range of infrastructure and financial institutions, including as CFO of Leighton Holdings (2007-2009) and as Managing Director of Deutsche Bank in Australia and Hong Kong (1995 - 2003). Scott does not hold interests in any Stapled Securities. 16 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Directors' report 30 June 2012 (continued) Information on Directors (continued) Neil Chatfield M.Bus, FCPA, FAICD Independent Non-executive Director Term of office Director since 18 February 2009. Neil served as Executive Director and the CFO of Toll Holdings Limited from 1997 until September 2008. Neil has extensive experience in general and financial management, capital markets, mergers and acquisitions and risk management. Neil is currently the Chairman of Virgin Australia Holdings Limited and a Non-executive Director of Seek Limited and of Grange Resources Limited. Neil is also Honorary Chairman of HomeGround Services. He was previously a Non-executive Director of Whitehaven Coal Limited. Neil holds interests in 30,910 Stapled Securities. Transurban Board Committee membership Chair of the Audit and Risk Committee and a member of the Nomination and Remuneration Committees. Robert Edgar BEc (Hons), PhD, FAICD Independent Non-executive Director Term of office Director since 21 July 2009. Bob has over 30 years experience as a Senior Executive, with 25 years at ANZ Banking Group in various senior roles, including Deputy CEO, Senior Managing Director, COO, and Chief Economist. Bob is currently the Chairman of Centro Retail Australia and a Non-executive Director of Asciano Group and of Linfox Armaguard Pty Ltd. He is also Chairman of the Prince Henry’s Institute of Medical Research. He was previously a Non-executive Director of Nufarm Limited, AMMB Holdings Berhad, Shanghai Rural Commercial Bank and of the Bank of Tianjin. Bob holds interests in 23,733 Stapled Securities. Transurban Board Committee membership Chair of the Remuneration Committee and member of the Audit and Risk and Nomination Committees. 17 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Directors' report 30 June 2012 (continued) Information on Directors (continued) Samantha Mostyn BA, LLB Independent Non-executive Director Term of office Director since 8 December 2010. Sam is a Non-executive Director and corporate advisor and has previously held Senior Executive positions at IAG, Optus and Cable & Wireless Plc. Sam is currently Chair of the Stakeholder Advisory Council of the CSIRO’s Climate Adaptation Flagship and Deputy Chair of the Diversity Council of Australia. She is a member of the NSW Climate Change Council, the advisory boards of ClimateWorks Australia and the Crawford School of Government and Economics, ANU. Sam is a Commissioner of the Australian Football League and the National Mental Health Commission. She is currently a Non-executive Director of Virgin Australia Holdings Limited, Sydney Theatre Company, Citigroup Pty Ltd, Australian Volunteers International and St James Ethics Centre Foundation. Sam holds interests in 10,300 Stapled Securities. Transurban Board Committee membership Member of the Remuneration and Nomination Committees. Robert Officer BAgSc (Melb), MAgEc (New Eng), MBA, PhD (Chicago), FASSA, FINSIA Non-independent Non-executive Director Term of office Director since 20 August 2010. Bob is currently Professor Emeritus of the University of Melbourne and a specialist in financial economics. His career has spanned academia and consulting across private and public organisations. Bob has held a number of finance professorships at Australian and overseas universities and consulted to a large number of public, private and government organisations in valuation and investment appraisal, international finance, capital markets and takeovers. Bob is currently Chairman of Acorn Capital Ltd and JCP Investment Partners Ltd. He is on the Boards of CP2 Limited, the Transport Accident Commission and Colonial Foundation. He is a past Chairman of Victorian WorkCover Authority and was previously on the Boards of the Bank of Melbourne, the Over Fifty Group and Melbourne University Publishing Pty Ltd. Bob holds interests in 20,115 Stapled Securities. Transurban Board Committee membership Member of the Nomination and Audit and Risk Committees. 18 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Directors' report 30 June 2012 (continued) Information on Directors (continued) Christine O'Reilly BBus Independent Non-executive Director Term of office Director since 12 April 2012. Christine is the Head of Asset Management for Unlisted Infrastructure at Colonial First State Global Asset Management, with a primary focus on direct investment in and management of major infrastructure projects. In this capacity, Christine is a Director of the Anglian Water Group (UK) and Electricity North West (UK). She will step down from these positions on 30 September 2012. Prior to her time with Colonial, Christine was CEO and Director of the Gasnet Australia Group. She has more than 20 years of infrastructure and financial experience including an early involvement in the reform and establishment of the regulatory framework for the Australian gas industry. Christine is currently a Non-executive Director of CSL Limited and of Care Australia. Christine does not hold interests in any Stapled Securities. Rodney Slater J.D., BS Independent Non-executive Director Term of office Director since 22 June 2009. Rodney is a partner in the public policy practice group of Washington DC firm Patton Boggs, where he has been a leader of its transportation practice since 2001. He served as US Secretary of Transportation from 1997 until the end of the Clinton Administration in January 2001 and was the Administrator of the Federal Highway Administration between 1993 and 1996. In the US, Rodney’s current directorships include Kansas City Southern (railroads), Verizon Communications Inc, Atkins Global, and Southern Development Bancorporation. He was previously a Director of Parsons Brinckerhoff, Delta Airlines, Northwest Airlines, and ICx Technologies Inc. He also served on Transurban’s US Advisory Board until November 2008. Rodney is a Director of the Congressional Awards Foundation and United Way Worldwide. Rodney does not hold interests in any Stapled Securities. Transurban Board Committee membership Member of the Nomination Committee. 19 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Directors' report 30 June 2012 (continued) Information on Directors (continued) Ian Smith BE Mining (Hons), BFin Admin Independent Non-executive Director Term of office Director since 1 January 2012. Ian has more than 30 years experience in the global mining industry in a variety of operational and project management roles. He is currently the Managing Director and CEO of Orica Limited. Ian is President of The Australian Mines and Metals Association. He was previously the CEO at Newcrest Mining Limited and a Director of the Australian Chamber of Commerce and Industry. Ian holds interests in 70,000 Stapled Securities. Company Secretaries Amanda Street LLB (Hons), BComm Amanda joined Transurban in September 2008 and was appointed as Company Secretary in February 2011. Before joining Transurban, Amanda was Assistant Company Secretary at SP Ausnet, and Senior Corporate Counsel at National Australia Bank. She has over 10 years of legal, company secretarial and other relevant experience. Prior to her in-house work, Amanda was a solicitor specialising in M&A work with Australian law firm Mallesons. Julie Galligan LLB, BA Julie joined Transurban in November 2008 and was appointed as General Counsel, Australia in February 2012. Julie has over 10 years legal experience in private practice and in-house roles in both Australia and the United Kingdom. Prior to joining Transurban, Julie worked in-house at Associated British Ports. 20 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Directors' report 30 June 2012 (continued) Meetings of Directors The number of meetings of the Boards of Directors of THL, TIML and TIL held during the year ended 30 June 2012, and the number of meetings attended by each Director are set out in the following tables. Meetings of the Boards of Directors of THL and TIML were held jointly. Meetings of the Board of Directors of TIL were held separately until 5 January 2012, when the incorporation and registration of TIL was transferred from Bermuda to Australia. Since that date, meetings of all three Boards have been held jointly. Board of Directors Board of Directors Board of Directors TIML Attended Held# Attended Held# Attended Held# THL TIL Lindsay Maxsted Christopher Lynch Neil Chatfield Geoffery Cosgriff (resigned 6 December 2011) Jeremy Davis (resigned 6 December 2011) Robert Edgar Samantha Mostyn Robert Officer Christine O'Reilly (appointed 12 April 2012) Rodney Slater Ian Smith (appointed 1 January 2012) Jennifer Eve (resigned 5 January 2012) James Keyes (resigned 5 January 2012) 11 11 11 5 4 9 10 11 3 9 5 * * 11 11 11 5 5 11 11 11 3 11 6 * * 11 11 11 5 4 9 10 11 3 9 5 * * 11 11 11 5 5 11 11 11 3 11 6 * * 8 8 6 * * 5 6 6 3 5 5 2 2 8 8 6 * * 6 6 6 3 6 6 2 2 # = Number of meetings held during the time the Director held office * = Not a member of the relevant Board The number of meetings of each Board Committee held during the year ended 30 June 2012, and the number of meetings attended by each Director, are set out in the following table. Audit and Risk Committee(1) Remuneration Committee(2) Nomination Committee(3) Special purpose Sub- committees Attended Held# Attended Held# Attended Held# Attended Held# Lindsay Maxsted Christopher Lynch Neil Chatfield Geoffery Cosgriff (resigned 6 December 2011) Jeremy Davis (resigned 6 December 2011) Robert Edgar Samantha Mostyn Robert Officer Christine O'Reilly (appointed 12 April 2012) Rodney Slater Ian Smith (appointed 1 January 2012) Jennifer Eve (resigned 5 January 2012) James Keyes (resigned 5 January 2012) 8 8 8 2 3 8 * 5 1 1 * * * 8 * 8 * 3 8 * 4 * * * * * 4 4 4 2 2 5 5 1 * 1 * * * * * 2 2 2 4 2 * * * * * * 2 2 2 * * 1 1 2 2 2 1 * * 2 * 2 * * 2 2 2 * 2 * * * 3 3 2 * * * * * * * * * * 3 3 2 * * * * * * * * * * # = Number of meetings held during the time the Director held office and was a member of the Committee * = Not a member of the relevant Committee (1) Chris Lynch, Geoffrey Cosgriff, Christine O'Reilly and Rodney Slater were not members of the Audit and Risk Committee but attended meetings during the year. Bob Officer attended a meeting prior to becoming a member. (2) Lindsay Maxsted, Chris Lynch, Bob Officer and Rodney Slater were not members of the Remuneration Committee but attended meetings during the year. Neil Chatfield, Samantha Mostyn and Bob Edgar attended meetings prior to becoming members. Chris Lynch was excluded from discussions involving his remuneration during meetings which he attended. (3) Chris Lynch, Christine O'Reilly and Ian Smith were not members of the Nomination Committee but attended meetings during the year. 21 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Directors' report 30 June 2012 (continued) 2012 REMUNERATION REPORT (AUDITED) INTRODUCTION This report, prepared in accordance with the Corporations Act 2001, contains detailed information regarding the remuneration arrangements for the Directors and Senior Executives who are the 'key management personnel' (KMP) of the Transurban Group (Group). The KMP for the year ended 30 June 2012 are listed in the table below: Current Non-executive Directors Name Lindsay Maxsted, Chair Neil Chatfield Bob Edgar Samantha Mostyn Bob Officer Christine O'Reilly (appointed 12 April 2012) Rodney Slater Ian Smith (appointed 1 January 2012) Current Senior Executives Name and position Chris Lynch, Executive Director, CEO1 Ken Daley, President, International Development Andrew Head, Group General Manager, New South Wales Samantha Hogg, CFO2 Michael Kulper, President, North America Elizabeth Mildwater, Group General Manager, Victoria Former Non-executive Directors Jeremy Davis (retired 6 December 2011) Geoff Cosgriff (retired 6 December 2011) Jennifer Eve (Director of TIL only) (resigned 5 January 2012) James Keyes (Director of TIL only) (resigned 5 January 2012) Former Senior Executives Tom Honan, CFO (resigned 2 May 2012)2 1 On 30 January 2012, Transurban announced Chris Lynch’s intention to resign as CEO, and on 3 April 2012, Transurban announced the appointment of Scott Charlton as CEO-elect, both with effect in July 2012. 2 On 2 May 2012, Transurban announced the appointment of Samantha Hogg as CFO following the resignation of Tom Honan, with immediate effect. Until 2 May 2012, Ms Hogg was Transurban’s Group General Manager, Corporate Services. Ms Hogg has been a member of KMP for the full financial year. CONTENTS The remuneration information contained in this report is presented as follows: Content 1 Remuneration snapshot 2 Remuneration governance 3 Remuneration in context 4 CEO and Senior Executive remuneration for the year ended 30 June 2012 5 Link between Group performance, security holder wealth and remuneration 6 Non-executive Director remuneration All values in this report are in Australian dollars, unless otherwise stated. Page 23 25 26 27 43 45 22 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) 1 A REMUNERATION SNAPSHOT THE NEW REMUNERATION FRAMEWORK A new Group remuneration framework was implemented for the year ended 30 June 2012. Details of the new framework were summarised in the 2011 report, and security holders voted in favour of the adoption of that report at the 2011 Annual General Meeting (AGM). The implementation of the new framework followed a comprehensive review by the Board of the Group’s remuneration arrangements in the year ended 30 June 2011. The review took into account feedback sought and received from security holders and other stakeholders, market expectations and regulatory developments. The key elements of the new framework for the CEO and other Senior Executives were as follows: Remuneration mix The remuneration of the CEO and other Senior Executives was structured as a mix of fixed remuneration and variable or 'at risk' remuneration through short term and long term incentive components. The relative weightings of the three remuneration components were as follows: % of total remuneration (annualised) (at target) - 2012 * Fixed TEC Variable (performance based) CEO Other Senior Executives 33.3 45 STI 33.3** 30** LTI 33.3 25 * Refer to page 28 for the new CEO's remuneration arrangements. The transition to the remuneration mix for Michael Kulper and Ken Daley will be achieved by FY2014. ** With 30 per cent STI deferral. Short term incentive (STI) In the year ended 30 June 2012, the performance measures for the STI plan were linked to growth in proportional EBITDA, cost management based on proportional net costs, safety, and performance against individual KPIs. In the year ended 30 June 2012, mandatory deferral of 30 per cent of the overall STI award was introduced for the CEO and other Senior Executives. The deferral period is three years (comprising the 2012 financial year performance period and a two year trading restriction). For Australian Senior Executives, deferral is into securities. Due to legal restrictions on the issue of securities to US residents, US Senior Executives receive deferred cash awards. The deferred component of remuneration may, at the discretion of the Board, be subject to forfeiture or clawback (e.g. in the event of misconduct or material misstatement of financial results). Long term incentive (LTI) In the year ended 30 June 2012, the performance measures for the LTI plan were as follows: • 50 per cent relative Total Shareholder Return (TSR) measured against a bespoke comparator group comprising companies in the transport, utilities, real estate, construction and infrastructure Global Industry Classification Standards (GICS) sectors of the ASX150; and • 50 per cent Free Cash Flow (FCF) per security, reflecting the Group's focus on the maximisation of free cash flow to drive security holder return. The definition of FCF per security is set out on page 36. The FCF calculation is included in note 21 of the audited financial statements. 23 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) B OTHER EVENTS/ACTIONS IMPACTING REMUNERATION IN THE YEAR ENDED 30 JUNE 2012 CEO transition On 30 January 2012, Transurban announced Chris Lynch’s intention to resign as CEO. On 3 April 2012, Transurban announced the appointment of Scott Charlton as CEO-elect. Mr Charlton became CEO on 16 July 2012. A summary of Mr Lynch’s entitlements on resignation is set out on page 28. Further details of Mr Lynch’s resignation arrangements and remuneration details for any part of the year ended 30 June 2013 worked by Mr Lynch will be set out in the 2013 report. The remuneration arrangements for Mr Charlton were designed in accordance with the Group’s remuneration strategy: to ensure alignment of reward with the creation of security holder value and with the achievement of corporate objectives as determined by the Board. They were developed with the benefit of input from remuneration consultants and Australian peer company benchmark data. Mr Charlton’s remuneration package was disclosed at the time of his appointment as CEO-elect and is outlined on page 28. CFO transition On 2 May 2012, Transurban announced Tom Honan’s resignation as CFO and the appointment of Samantha Hogg to the role with immediate effect. Details of Mr Honan’s entitlements on resignation are set out on page 29. Details of Ms Hogg’s remuneration are set out elsewhere in this report. Her remuneration arrangements as CFO were designed in accordance with the Group’s remuneration strategy and were developed with the benefit of Australian peer company benchmark data. Legislative changes to executive remuneration In the year ended 30 June 2012, legislative changes introduced by the Federal Government in relation to the governance of executive remuneration arrangements came into effect. The legislation in large part concerns the appointment process for, and recommendations of, independent remuneration advisers. In response, the Remuneration Committee adopted a protocol governing the appointment of ‘remuneration consultants’ and the manner in which any recommendations made by those consultants concerning the remuneration of KMP are to be provided to the Group, and in particular the circumstances in which management may be given access to those recommendations. The purpose of the protocol is to ensure that any remuneration recommendations provided by consultants are provided without undue influence by KMP. 24 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) 2 A REMUNERATION GOVERNANCE BOARD AND REMUNERATION COMMITTEE RESPONSIBILITY The Remuneration Committee assists the Board in fulfilling its responsibilities relating to the remuneration the CEO and other Senior Executives, and of Directors, remuneration practices, strategies and disclosures generally. The Committee also reviews gender pay equity. the remuneration of, and incentives for, It is critical that the Remuneration Committee is independent of management when making decisions affecting employee remuneration. Accordingly, the Committee comprises Non-executive Directors, all of whom are independent. Where appropriate, members of Management attend Committee meetings by invitation, however they do not participate in formal decision making. The membership of the Remuneration Committee changed in the year ended 30 June 2012. Geoff Cosgriff stood down as Chair and Jeremy Davis stood down as a member of the Committee on their respective retirement from the Board in December 2011. Bob Edgar was appointed Chair and Samantha Mostyn and Neil Chatfield joined the Committee as new members. Further details regarding the Committee’s composition are set out in the Directors’ report. B ENGAGEMENT OF REMUNERATION CONSULTANTS To ensure it has all relevant the Remuneration Committee may seek and consider advice from independent remuneration consultants where appropriate. Any advice from consultants is used to guide the Committee and the Board, but does not serve as a substitute for thorough consideration of the issues by Directors. its disposal when making remuneration decisions, information at Those consultants who provided the Remuneration Committee with a remuneration recommendation relating to KMP during the year ended 30 June 2012, and who have been deemed by the Group to be ‘remuneration consultants’ for the purposes of the new executive remuneration legislation, are listed below: Consultant Ernst & Young Remuneration recommendations and fees Other advice and fees to the Group during FY2012 $26,000 $98,921 (General HR advice) $455,825 (IT, finance, sustainability assurance work, tax advice and other general consulting services) Ernst & Young was selected by the Remuneration Committee and commissioned and instructed by the Chair of the Committee in accordance with the applicable protocol. Ernst & Young’s appointment terms specified that all remuneration recommendations and advice be sent directly to the Committee through the Chair, and prohibited the provision of such material or other information directly to Management. The terms also required that Ernst & Young provide, with their recommendations, both a appointment their independence from the KMP to whom their recommendations related, and also declaration of confirmation that the Committee’s conditions for contact and dialogue with Management had been observed. Ernst & Young provided such a declaration and confirmation in relation to their remuneration recommendations. In this way, the Committee and the Board have been assured and are satisfied that Ernst & Young’s remuneration recommendations and advice were made free from undue influence from Management generally and from KMP specifically. 25 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) 3 REMUNERATION IN CONTEXT Toll road concessions are an asset class characterised by defensive, predictable cash flows, which grow over the life of long dated concession agreements. There is high upfront capital expenditure during the construction phase of a project, which for quality assets shifts to a low cost, high margin cash generative business for the remainder of the concession life. The investment proposition for high quality toll road assets lies in providing investors with access to long dated, predictable, growing cash flows generated by the assets over the life of the concessions. The Group is an international toll road developer and manager with interests in Australia and the US. The Group is focused on the long term management of toll road assets at various stages of maturity to achieve the best outcomes for investors, Government partners and the community. In Australia, the Group's interests include 100 per cent ownership of CityLink in Melbourne, and Hills M2 and Lane Cove Tunnel in Sydney. The Group has partial interests in a further three roads on the Sydney orbital network, being the M1 Eastern Distributor (75.1 per cent), the M5 (50 per cent), and the Westlink M7 (50 per cent). In North America, the Group has interests in two assets, Pocahontas 895 (75 per cent) and the Capital Beltway Express (67.5 per cent), which is under construction in Northern Virginia. The Board and Management are focused on ensuring security holder value is enhanced through the strong performance of the current asset portfolio. Development activities also provide opportunities to further expand the portfolio in value accretive ways. The maximisation of free cash available to security holders over the near, medium and longer term is the Group’s aim and the Group’s remuneration framework has been determined with a focus on this outcome. 26 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) 4 CEO AND SENIOR EXECUTIVE REMUNERATION FOR THE YEAR ENDED 30 JUNE 2012 A REMUNERATION STRATEGY AND POLICY The Group's executive remuneration strategy is designed to attract, retain and motivate a highly qualified and experienced Management team with the necessary skills and attributes to lead the Group in achieving its business objectives. The strategy also aims to encourage Management to strive for superior performance by rewarding the achievement of targets that are challenging, clearly understood and within the control of individuals to achieve through their own actions. The Group's remuneration strategy and policy as set by the Board is summarised below: Creating Security Holder Value Remuneration Strategy Attract, retain, motivate and reward executives who are critical to the Group's growth and success by: • Offering competitive remuneration that is benchmarked against the external market. • Providing a balance of fixed and variable or 'at risk' remuneration. Align executive reward with individual and Group performance by: • Making short and long term components of remuneration 'at risk' based on performance. • Assessing rewards against appropriate financial and non-financial performance measures. • Encouraging executive security holdings. Fixed remuneration Total Employment Cost (TEC): Remuneration Structure • Comprises cash salary, superannuation and other prescribed benefits. • Provides a base level of reward for effective completion of Group and specific accountabilities. • Appropriately benchmarked and set with reference to role, responsibilities, skills and experience. Variable (or 'at risk') remuneration Short term incentive (STI): Annual rewards tied to pre-determined individual and Group performance measures, and includes a deferred element. Individual targets reflect individual specific accountabilities and key drivers for growth and success. • • • Group performance targets linked to earnings, cost management and safety. Long term incentive (LTI): • Equity rewards to align executive and security holder interests. • • Vest after three years, subject to achievement of pre-determined internal and external performance measures. Encourages sustainable performance in the medium to longer term, and provides a retention element. 27 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) B CHANGE OF CEO AND CFO - TRANSITION ARRANGEMENTS On ceasing employment on 30 July 2012, the following arrangements applied to Chris Lynch: • he will receive an STI award for the year ended 30 June 2012, to be awarded at 116 per cent of his current TEC based on performance against applicable performance targets (see page 34). The cash component of the award (70 per cent or $1,764,963) will be paid in August 2012. The deferred (into equity) component of the award (30 per cent or $756,413) will vest, subject to clawback provisions, on 30 June 2014; • he is contractually entitled to receive an STI award for the 30 days worked in the year ended 30 June level payment for the 30 days ($178,652) after satisfying 2013, and will receive a pro rated 'target' performance targets for the period which related to his role in a successful CEO transition process; The award will be paid in cash in August 2012; • equity instruments previously granted to him under the Group’s LTI plans will continue on foot in accordance with their original terms, with the applicable performance measures for each grant to be tested at the end of the applicable original performance period; • as he is contractually entitled to receive an LTI award for every day he is employed by the Group, the Board determined to pay him $1,060,000 in lieu of an LTI grant earned but not received for a 6 month period during his tenure. The cash sum will be paid in August 2012; • as he worked out his notice period, he will not receive any amount in lieu of notice; and • he will not receive any ex gratia payments on separation. Details of payments made to Mr Lynch in and for the year ended 30 June 2013 will be set out in the 2013 report. Incoming CEO - Scott Charlton Scott Charlton’s appointment as CEO took effect on 16 July 2012. Mr Charlton was not a member of KMP during the year ended 30 June 2012 and he was paid no remuneration during that year. As disclosed to the ASX at the time of his appointment, the following arrangements apply to Mr Charlton under his service agreement in relation to the year ended 30 June 2013. He is provided with the following elements of remuneration (on an annualised basis): • Total fixed remuneration (TEC) of $1,875,000; and • Variable annual remuneration comprised of a STI target opportunity of 30 per cent of his total remuneration package ($1,406,250); and an LTI target opportunity of 30 per cent of his total remuneration package ($1,406,250). In recognition of Mr Charlton giving up certain STI deferred awards for the years ended 30 June 2011 and 2012 and LTI awards for the years ended 30 June 2010 to 30 June 2012 with his former employer to join Transurban, he will receive a one-off grant of equity as a sign-on award. The grant will consist of 236,256 performance awards, which will vest in three tranches (of 78,752 each) on the first, second and third anniversaries of his commencement with Transurban. Each performance award is an entitlement to receive a fully paid Transurban security on vesting. Further details of Mr Charlton’s remuneration in his first year as CEO will be set out in the 2013 report. 28 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) Outgoing CFO - Tom Honan On ceasing employment as CFO on 2 May 2012, the following arrangements applied to Tom Honan: • he received a sum equivalent to 3 months TEC as a payment in lieu of notice ($246,160); • he was paid a cash sum equivalent to the pro rata vesting of his STI award for the year ended 30 June 2012, calculated based on performance against the applicable performance hurdles during the 10 month period from the start of the year up until the date his employment ceased ($475,000); • equity instruments previously granted to him under the Group’s LTI plans lapsed in accordance with their original terms ($962,416 forfeited); and • he did not receive any ex gratia payments on separation. Further details of Mr Honan’s resignation payments can be found on page 40. C REMUNERATION MIX For the year ended 30 June 2012, the remuneration of the CEO and other Senior Executives was structured as a mix of fixed remuneration and variable (or 'at risk') remuneration through short term and long term incentive components. The relative weightings of the three remuneration components were determined by the Board (on the recommendation of the Remuneration Committee) and are set out in the table below: Relative weightings of remuneration components 1 % of total remuneration (annualised) (at target) - FY20122 Fixed TEC Variable (performance based) CEO Other Senior Executives 33.3 45 STI (with 30% deferral) 33.3 30 LTI 33.3 25 1These figures do not necessarily reflect the relative value derived from each of the components, which depends on actual performance against targets for the variable components (refer to page 30). The above STI percentages are based on achieving the relevant performance targets. The above LTI percentages are based on the maximum LTI available at the time of grant to each Senior Executive if the awards granted vest at the end of the performance period. The table above reflects the percentage value of remuneration which consists of rights for each KMP. 2Refer to page 28 for the new CEO's remuneration arrangements. The transition to the remuneration mix for Michael Kulper and Ken Daley will be achieved over a maximum of three years (or by FY2014). 29 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) D FIXED REMUNERATION - TOTAL EMPLOYMENT COST (TEC) What is TEC? Fixed remuneration is represented by total employment cost superannuation contributions. (TEC) comprising base salary and Fixed remuneration is not 'at risk' but is set by reference to appropriate benchmark information for an individual’s responsibilities, performance, qualifications and experience. There are no guaranteed base salary increases in any Senior Executive's employment agreement. How is TEC determined? TEC levels are reviewed annually by the Remuneration Committee with reference to an individual’s role, experience and performance, as well as relevant comparative market data. Independent remuneration consultants and surveys, internal relativities and market conditions also provide guidance. TEC is also reviewed on a change in role. Executives' TEC is determined with reference to the market median. The primary reference for determining the market median is the ASX 20 - 50. Consideration is given to sizing factors including market capitalisation and revenue. A range around the median provides flexibility to recognise individual performance. E SHORT TERM INCENTIVE (STI) How does the STI plan operate? All permanent Group employees, including the CEO and other Senior Executives, participate in the annual STI plan. The STI plan puts a significant proportion of remuneration 'at risk' subject to meeting specific pre determined Group, team and individual performance measures linked to business objectives. This aligns executive interests with the Group's financial performance, as well as management principles and the Group’s cultural values. For the year ended 30 June 2012, the CEO had a target STI opportunity of 33 per cent of his total remuneration package. Other Senior Executives had a target STI opportunity of 30 per cent of their total remuneration package. Mandatory STI deferral of 30 per cent of the overall STI award was introduced for the CEO and other Senior Executives in the year ended 30 June 2012. The deferral period is three years (comprising the 2012 financial year performance period and a two year trading restriction). For Australian Senior Executives, deferral is into securities. Due to legal restrictions on the issue of securities to US residents, US Senior Executives receive deferred cash awards. The deferred component of remuneration may, at the discretion of in the event of misconduct or the material misstatement of financial results). to forfeiture or clawback (e.g. the Board, be subject 30 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) What were the STI performance measures for the year ended 30 June 2012? There were two categories of STI performance measures for the CEO and other Senior Executives for the year ended 30 June 2012. They were chosen to provide a balance between corporate, individual, operational, strategic, financial and non-financial aspects of performance and are described below. STI performance measures and targets for FY2012 Measure % weighting Description of targets/indicators for FY2012 Group performance targets 20% (1) Growth in proportional EBITDA The proportional EBITDA targets for FY2012 were set against the previous year's results and the Group's FY2012 budget, and are set out below: Proportional EBITDA result Less than 7% above forecast underlying result for FY2011 7% above forecast underlying result for FY2011 Budget EBITDA for FY2012 (9% increase on result for FY2011) 17% above forecast underlying result for FY2011 150% 50% 100% % of STI that vests^ 0% ^ Straight line vesting applies between 50-100% and 100-150%. 20% (2) Cost management based on proportional net costs The proportional net costs targets for FY2012 were set against the previous year's results and the Group's FY2012 budget, and are set out below: Proportional net costs result Over budget for FY2012 On budget for FY2012 5% below budget for FY2012 10% below budget for FY2012 % of STI that vests^ 0% 50% 100% 150% ^ Straight line vesting applies between 50-100% and 100-150%. (3) Safety targets, including multiple indicators that focus on improving the Group's safety culture and reducing workplace injuries for employees and contractors. Individual KPIs are unique to the individual's area of accountability, and in FY2012 related to critical business sustainability measures, including: operational performance; cost reduction; customer satisfaction; project outcomes; succession planning; risk management; people management; strategy development; and business plan implementation. Individual KPIs reflect the behaviours valued by the Group, and are capable of measurement. Individuals have a clear line of sight to KPIs and are able to directly affect outcomes through action. 10% 50% Individual key performance indicators (KPIs) Who sets the STI performance measures? STI performance measures are set at the beginning of the financial year. The CEO's individual KPIs are set by the Board. All other Senior Executives’ individual KPIs are set by the CEO and approved by the Board. The Board sets the Group performance targets. 31 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) What is proportional EBITDA and why does Transurban use it as an STI performance measure? EBITDA is a common operational performance measure used by many companies. Proportional EBITDA is one of the Board uses to assess the operating performance of the Group, with an aim to maintain a focus on the Group’s operating results and associated cash generation. It reflects the contribution from individual assets to the Group's operating performance and focuses on elements of the result that Management can influence to drive improvements in short term earnings. the primary measures that Proportional EBITDA is the aggregation of EBITDA from each asset multiplied by the Group's percentage ownership, as well as any contribution from Group functions. Proportional EBITDA provides a better reflection of the underlying performance of the Group’s assets than statutory EBITDA. The EBITDA calculation from the statutory accounts would not include the EBITDA contribution of the M5, M7 or DRIVe (equity accounted in the statutory results), which are meaningful contributors to the Group’s performance. Proportional EBITDA figures used to assess performance are included in note 2 of the audited financial statements. The Board can decide to exclude specific items (including contributions from acquisitions or divestments made during any one year) from proportional EBITDA to provide an underlying result when determining performance incentives. There were no such exclusions for the year ended 30 June 2012. Proportional EBITDA has been used by the Group as an STI performance measure since 2009. What are proportional net costs and why does Transurban use it as a performance measure? Proportional net costs are the operating, corporate and business development costs of the Group less non these non toll revenues encourages and allows toll revenues (fees and other). The deduction of Management to incur additional costs where these are justified by increased revenue results (e.g. toll collection activities such as video tolling and/or enforcement). The use of a cost related STI performance measure reflects the fact that Management has the ability to influence the expenditure of the business. Strong cost management throughout the business drives an increase in proportional EBITDA and free cash flow and ultimately security holder value. Proportional net costs was first used by the Group as an STI performance measure in 2010. How are the varying levels of performance achievement rewarded? STI targets are designed to differentiate and reward high performance. 50 per cent of the available STI vests for on-target performance, 100 per cent vests for high performance and up to an additional 50 per cent can be earned for exceptional performance. These targets are consistent for all of the Group’s eligible employees. Given that STI awards are contingent on performance across a range of measures, maximum STI awards can only be achieved for performance that is strong on all measures. 32 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) How is performance assessed? Performance against independently reviewed. the Group performance targets is assessed by the Board. The results are The CEO's performance against his individual KPIs is assessed by the Remuneration Committee which then makes recommendations to the Board. The performance of other Senior Executives against their individual KPIs is assessed by the CEO, who confers with the Committee and then the Board regarding his assessment. Once KPIs have been assessed, the Board approves STI awards. STI cash awards for the year ended 30 June 2012 will be paid in August 2012. The STI deferred component for the year ended 30 June 2012 will vest, subject to continuity of employment (unless otherwise determined by the Board) and clawback provisions, on 30 June 2014. The Board believes the method of assessment is rigorous and provides a balanced evaluation of the CEO and each other Senior Executive's performance. What if a Senior Executive ceases employment? Under the service agreements for Senior Executives (other than the CEO - refer to page 28) in place for the year ended 30 June 2012, if a Senior Executive ceased employment with the Group before performance against STI targets was assessd, they would generally not be entitled to receive any STI award, unless otherwise determined by the Board. In recognition of Tom Honan’s exceptional contribution to the business during the year ended 30 June 2012, and to facilitate an orderly succession in the CFO role, the Board determined to pay Mr Honan a sum equivalent to the pro-rata vesting of his STI for that year, calculated based on performance against the applicable performance measures during the 10 month period from the start of the year up until 2 May 2012, being the date his employment as CFO ceased. What were the STI performance outcomes for the year ended 30 June 2012? Group performance in respect of the proportional EBITDA, proportional net costs and safety performance measures for the year ended 30 June 2012 was assessed by the Board as 97 per cent in Australia and 127 per cent in the US. 33 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) STI awards for the CEO and other Senior Executives for the year ended 30 June 2012 are set out in the table below: STI outcome (%) Actual STI awarded1($) STI forfeited (%) Group performance Individual KPIs Total Cash2 Deferred into equity2 Name Chris Lynch Ken Daley Andrew Head Samantha Hogg Tom Honan3 Michael Kulper Elizabeth Mildwater 112% 127% 97% 97% 97% 127% 97% 120% 110% 120% 90% 100% 120% 95% 116% 119% 109% 94% 83% 124% 96% 1,764,963 354,612 756,413 151,976 297,686 127,580 251,598 475,000 107,828 - 492,765 211,185 263,390 112,882 - - - 6% 17% - 4% 1 On-target performance must be achieved before any STI is awarded. Therefore, the minimum potential value of the STI in respect of FY2012 was nil. The maximum potential value of the STI was the “Actual STI awarded”. 2 The cash STI payments in respect of FY2012 will be paid in August 2012. The STI deferred component for FY2012 (30 per cent of the actual STI awarded) will vest, subject to continuity of employment (unless otherwise determined by the Board) and clawback provisions, on 30 June 2014. 3 Tom Honan received an STI pro-rated and awarded based on individual performance and Group performance on his resignation in May 2012. The Board determined to waive the deferred element of this award and pay it in cash. F LONG TERM INCENTIVE (LTI) How does the LTI plan operate? The LTI plan aligns reward with security holder value by tying this component of executive remuneration to the achievement of performance measures that underpin sustainable long term growth. Participation in the LTI plan is only offered to the CEO and other Senior Executives, and certain other employees nominated by the CEO and approved by the Board. For the year ended 30 June 2012, the CEO was offered an LTI grant equivalent to 33 per cent of his total remuneration package. Other Senior Executives were offered grants equivalent to 25 per cent of their total remuneration package. LTI grants are delivered in the form of performance awards under the Group’s Performance Awards Plan (PAP). Each performance award is an entitlement to receive a fully paid Transurban security on terms and conditions determined by the Board, subject to the achievement of certain vesting conditions linked to performance over a three year period. If the performance measures are satisfied, the performance awards vest and Transurban securities are delivered to the participant. Whilst the Board has discretion to grant cash payments of equivalent value at the performance period, and certain US based participants may be required to receive cash settled awards, the Board generally intends to settle any vested performance awards in Transurban securities. the end of Performance awards that do not vest after testing of the performance measures lapse, without retesting. Performance awards are not transferable and do not carry voting or distribution rights. However securities allocated upon vesting of performance awards carry the same rights as other Transurban securities. 34 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) What were the LTI performance measures for the year ended 30 June 2012? Performance awards granted during the year ended 30 June 2012 are subject to a three year performance period and the following dual performance measures over that period: LTI performance measures for FY2012 Measure % weighting Description of measure Relative TSR 50% Relative TSR is measured against a bespoke comparator group comprising companies in the transport, utilities, real estate, construction and infrastructure Global Industry Classification Standards (GICS) sectors of the ASX150. The other 33 companies in this group are: Singapore Telecommunications Ltd, Telstra Corporation Ltd, Westfield Group, QR National Ltd, Westfield Retail Trust, Stockland, Leighton Holdings Ltd, AGL Energy Ltd, MAP Group, GPT Group, Goodman Group, CFS Retail Property Trust, Lend Lease Group, Asciano Ltd, Qantas Airways Ltd, Dexus Property Group, Mirvac Group, Telecom Corporation of New Zealand Ltd, Toll Holdings Ltd, SP Ausnet, APA Group, Commonwealth Property Office Fund, UGL Ltd, ConnectEast Group, Boart Longyear Ltd, Investa Office Fund, Spark Infrastructure Group, Charter Hall Office Reit, Australand Property Group, Monadelphous Group Ltd, Duet Group, TPG Telecom Ltd and Australian Infrastructure Fund. TSR measures total return on investment of a security, taking into account both capital appreciation and distributed income which was reinvested on a pre-tax basis. For performance awards granted during the year ended 30 June 2012, the relative TSR component will vest on a straight line basis if the Group’s relative TSR performance is above the median of the bespoke comparator group at the end of a three year performance period, in accordance with the following table: TSR vesting schedule: The Group’s relative TSR ranking in the comparator group At or below the 50% percentile Above the 50th percentile but below the 75th percentile At or above the 75th percentile % of performance awards that vest Nil Straight line vesting between 50% and 100% 100% 35 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) Measure % weighting Description of measure 50% Growth in Free Cash Flow (FCF) per security Within Transurban, FCF per security is defined as: • the Group's cash flow from operating activities; • less: cash flows from operating activities of non-100% owned controlled assets; • add back: maintenance capital expenditure for 100% owned assets; • less: accounting charge for maintenance provision for the year; • less: actual tag expenditure in 100% owned assets; • add: dividends received from non 100% owned assets; • divided by: weighted average number of securities issued. The FCF calculation is included in note 21 of the audited financial statements. For performance awards granted during the year ended 30 June 2012, the FCF per security component will vest based on the Group's compound annual growth in FCF per security over the three year performance period, as set out below: Growth in FCF per security vesting schedule: % compound annual growth in FCF per security 7% Between 7% and 10% 10% or more % of performance awards that vest 50% Straight line vesting between 50% and 100% 100% For performance awards granted during the year ending 30 June 2013, the performance target range for compound growth in FCF per security is between 6 per cent and 9 per cent. Why were these LTI performance measures selected? The TSR target is a relative, external, market-based performance measure against those companies with which the Group competes for capital. It provides a direct link between executive reward and security holder return. For the year ended 30 June 2012, the Group changed the relative TSR comparator group from the S&P/ASX 100 to the bespoke comparator group described above. The Group considered this comparator group to be more reflective of its competitive market. For the year ended 30 June 2012, the Group also changed the second LTI measure to FCF per security instead of proportional EBITDA to reflect the Group’s focus on the maximisation of free cash. The FCF calculation is included in note 21 to the audited financial statements. 36 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) How will the LTI performance targets be measured? Relative TSR The Group will receive an independent report that sets out the Group's TSR growth and that of each company in the bespoke comparator group. A volume weighted average price of securities for the four weeks up to and including the test date is used in the calculation of TSRs for Transurban and the comparator group. The level of TSR growth achieved by the Group will be given a percentile ranking having regard to the Group’s performance compared to the performance of other companies in the comparator group (the highest ranking company being ranked at the 100th percentile). This ranking will determine the extent to which performance awards subject to this target will vest. FCF per security The Group's FCF per security percentage growth rate (as set out in note 21 to the audited financial statements) will be calculated based on the cumulative weighted average over the three year performance period. The Board considers these methods of measurement to be rigorous and transparent. What if a Senior Executive ceases employment? Under the terms of the service agreements for Senior Executives (other than the CEO - refer to page 28) in place for the year ended 30 June 2012, if a Senior Executive ceased employment with the Group before the performance measures were tested, then their unvested performance awards would lapse, unless otherwise determined by the Board. On cessation of Tom Honan’s employment on 2 May 2012, Mr Honan forfeited his unvested performance awards. What will happen in the event of a change in control? In the event of a takeover or change of control of the Group, the treatment of any unvested performance awards granted in the year ended 30 June 2012 will be subject to the incumbent Board's discretion. What was the grant, and movement in the number and value, of performance awards during the year ended 30 June 2012? Performance awards granted in FY2012 Performance criteria Grant date Vesting date Fair value of awards at grant date1($) VWAP at grant date ($) Relative TSR FCF per security 26 Sep 2011 CEO: 11 Nov 2011 26 Sep 2011 CEO: 11 Nov 2011 30 June 2014 30 June 2014 $3.37 $3.27 $4.63 $4.81 $5.35 $5.41 $5.35 $5.41 1 An explanation of the pricing model used to calculate these values is set out in note 35 to the audited financial statements. 37 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) Performance Awards granted in FY2012 Name Chris Lynch1 Ken Daley Andrew Head Samantha Hogg Tom Honan4 Michael Kulper Elizabeth Mildwater Number of performance awards granted2 Value at grant date ($) Maximum total value of grant yet to vest3($) 715,024 128,294 107,766 101,320 171,058 159,286 107,766 2,888,697 2,888,697 513,176 431,064 405,280 684,232 637,144 431,064 513,176 431,064 405,280 684,232 637,144 431,064 1 The grant made to the CEO constituted his full LTI entitlement for FY2012 and was made following security holder approval at the 2011 AGM on the terms summarised above. Performance awards vest subject to performance over the period from 1 July 2011 through to 30 June 2014. 2 The grants made to Senior Executives assumed full vesting of their full LTI entitlement for FY2012 and were made on the terms summarised above. Performance awards actually vest subject to performance over the period from 1 July 2011 through to 30 June 2014. 3 The maximum value of the grant has been estimated based on the fair value per instrument at date of grant. The minimum total value of the grant, if the applicable performance measures are not met, is nil. 4 Performance awards lapse where the performance measures are not satisfied on testing. As the performance awards only vest on satisfaction of performance and service conditions which are to be tested in future financial periods, Tom Honan forfeited 171,058 awards. The value of the forfeited awards was $684,232. No other Senior Executives forfeited performance awards during the year. 38 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) G LEGACY LTI PLANS The Group has a number of participants. Details of these plans are set out below. legacy LTI plans that are no longer offered but which have existing Plan FY2011 PAP FY2010 PAP FY2009 PAP Grant date 1 Nov 2010 11 Dec 2009 Performance period 1 Nov 2010 - 1 Nov 2013 1 July 2009 - 30 June 2012 1 Nov 2008 1 Nov 2008 - 1 Nov 2011 FY2009 Executive Equity Plan 1 Nov 2008 1 Nov 2008 - 1 Nov 2011 External performance measure (50% of grant) Comparator group Relative TSR Relative TSR Relative TSR N/A Retention grant with service condition only The S&P/ASX 100 Relative TSR % of performance awards that vest Vesting schedule Above 50th percentile to 75th percentile Straight line vesting between 50% - 100% At or above the 75th percentile 100% vests Internal performance measure (50% of grant) Group’s annual growth in proportional EBITDA Group’s annual growth in proportional EBITDA Group’s annual growth in proportional EBITDA From 7% - 11% From 6% - 9% From 5% - 9% Compound growth % of performance awards that vest At target % 50% vests Vesting schedule From target % to stretch % Straight line vesting between 50% - 100% At or above stretch % 100% vests N/A N/A N/A N/A Current status To be tested after 1 Nov 2013 TESTED 100% to vest on 11 Dec 2012 TESTED 94.72% vested 5.28% lapsed TESTED 100% vested Value of performance awards vested and lapsed in the year ended 30 June 2012 The FY2009 Executive Equity Plan and the FY2009 PAP vested on 1 November 2011. Regarding the FY2009 PAP, 90 per cent of awards subject to the TSR performance measure vested based on the Group’s ranking against the constituents of the S&P/ASX 100. 99.43 per cent of awards subject to the proportional EBITDA measure vested based on performance against target. In total 5.28 per cent of awards lapsed. 39 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) FY2009 Executive Equity Plan FY2009 PAP Lapsed Vested Lapsed Vested Name Number Value ($) Number Value ($) Number Value ($) Number Value ($) C Lynch T Honan A Head E Mildwater S Hogg K Daley M Kulper - - - - - - - - - - - - - - 79,647 340,093 25,565 85,701 458,156 1,745,183 85,474 364,974 12,291 41,202 220,267 839,030 19,146 81,753 19,146 81,753 15,316 65,399 19,146 81,753 23,944 102,241 2,458 1,536 1,229 3,549 7,686 8,241 5,150 4,120 44,054 167,807 27,534 104,880 22,027 83,904 11,897 63,602 242,269 25,764 137,736 524,658 H REMUNERATION PAID TO THE CEO AND OTHER SENIOR EXECUTIVES Short-term employee benefits Non- monetary benefits2 Cash STI1 Deferred STI3 Post- employment benefits Termination benefits Super -annuation Share based benefits4 Total Long term benefits Long service leave - 456,860 - 227,968 704,498 702,287 2,153,375 2,033,360 Cash salary and fees Executive director C Lynch 2012 2011 Other KMP B Bourke 2012 2011 K Daley5 2012 2011 M Fletcher 2012 2011 A Head 2012 2011 S Hogg 2012 2011 T Honan6 2012 2011 M Kulper 2012 2011 E Mildwater 2012 2011 Total 2012 2011 6,660,430 6,930,103 1,149,822 976,398 955,653 1,017,385 571,722 541,554 569,468 540,797 555,892 433,494 1,764,963 2,461,680 46,299 18,557 252,138 - 15,775 47,500 - - 40,812 21,309 3,086,801 2,167,745 7,360,163 6,750,151 - 254,163 354,612 431,438 - 110,656 297,686 323,640 251,598 241,285 475,000 587,250 492,765 573,750 263,390 319,633 - 9,097 - - 118,030 123,596 50,659 - - 3,114 2,260 6,232 1,903 5,882 3,951 8,178 - 8,199 2,028 6,311 - - 42,527 - 35,943 - - - 70,395 - 37,627 - - 58,333 45,813 48,995 - 22,917 22,760 24,243 15,775 25,000 26,775 25,000 9,458 9,800 15,775 25,000 - 958,759 - - - (57,846) - 1,679,366 - - 21,983 11,627 594,613 180,209 1,890,208 1,498,152 - 402,234 - - - 64,842 - 831,731 - - - - - - - - - - 15,258 25,662 11,492 3,342 347,920 209,779 1,300,133 1,131,110 280,575 173,608 1,153,178 882,611 - - (824,365) 761,984 831,183 2,358,810 16,165 19,690 10,015 5,419 1,033,606 400,734 2,578,042 2,029,558 350,916 234,376 1,249,219 1,131,536 3,900,014 5,303,495 174,471 189,166 489,289 - 152,131 286,788 - 1,360,993 115,725 87,049 4,870,066 16,362,126 4,135,431 18,293,025 40 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) 1 The amount represents the cash STI payment to the Senior Executive for FY2012, which will be paid in August 2012. The cash component is 70% of the STI award. 2 Non-monetary benefits include Group insurance, vehicle allowances and expatriate allowances (where relevant). 3 30 per cent of STI award is deferred into equity. In accordance with Accounting Standards, the deferred component will be recognised over the three year service period from 1 July 2011 to 30 June 2014. The amount recognised in this table is the FY2012 accounting charge. 4 In accordance with the requirements of the Accounting Standards, remuneration includes a proportion of the fair value of equity compensation granted or outstanding during the year (i.e. performance awards under the LTI plan). The fair value of equity instruments is determined as at the grant date and is progressively allocated over the vesting period. The amount included as remuneration may be different to the benefit (if any) that Senior Executives may ultimately realise should the equity instruments vest. The fair value of performance awards at the date of their grant has been independently determined in accordance with AASB 2. The fair value of the performance awards has been valued applying a Monte Carlo simulation to model Transurban’s security price and where applicable, the TSR performance against the comparator group performance. The assumptions underpinning these valuations are set out in note 35 to the audited financial statements. 5 Ken Daley’s 2008 PAP allocation was based on his TEC as at November 2008 of $577,500 per year. On 5 December 2008, his TEC was increased to $750,000 per year effective 1 July 2008. The 2008 PAPs were granted on 15 October 2008. The Board determined to compensate Ken for the shortfall in his performance awards allocation given that his new TEC was effective prior to the grant. 6 On ceasing employment as CFO on 2 May 2012, Tom Honan was paid all accrued entitlements owing to him (e.g. earned but unpaid salary and annual leave), a sum equivalent to the pro-rata vesting of this FY2012 STI ($475,000), and a sum equivalent to 3 months TEC as payment in lieu of notice ($246,160). He did not receive any ex gratia payments on separation. I ADDITIONAL REMUNERATION INFORMATION EMPLOYEE SECURITY PLANS The Group has three broad employee based security plans. ShareLink Incentive Plan Under the ShareLink Incentive Plan, subject to Board approval, an allocation of Transurban securities or cash payments may be made to eligible employees (excluding the CEO and other Senior Executives) in recognition of the Group’s prior year performance. Eligible employees received a grant of 100 securities at no cost to them on 20 February 2012. Due to legal restrictions on the issue of securities to US residents, eligible employees in the US received a cash payment of equivalent value in lieu of securities. Given that the plan is designed to reward employees for the Group's prior year performance and is not intended to serve as a future incentive, there are no performance measures attached to grants of securities or cash payments under the plan. ShareLink Investment Tax Exempt Plan and ShareLink Investment Tax Deferred Plan The ShareLink Investment Tax Exempt Plan provides eligible employees (excluding the CEO and other Senior Executives) the opportunity to invest up to $1,000 per year in Transurban securities on a tax exempt basis. Participants contribute up to $500 by way of salary sacrifice which is matched by the Group dollar for dollar. Security acquisitions are made quarterly in September, December, March and June each year. The ShareLink Investment Tax Deferred Plan provides eligible employees (excluding the CEO and other Senior Executives) with the opportunity to contribute up to $5,000 per year by way of salary sacrifice to be invested in Transurban securities. The Group matches participants’ contributions dollar for dollar up to $3,000. The plan has a maximum disposal restriction period of three years from the date of acquisition, including a 12 month forfeiture period. Grants under both of these plans are designed to encourage employee security holdings and to align the interests of employees with those of the Group and are therefore not subject to performance measures. 41 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) DEALINGS IN SECURITIES In accordance with the Group’s Dealing in Securities Policy, employees who have awards under a Group equity plan may not hedge against those awards. In addition, KMP may not hedge against entitlements that have vested but remain subject to a holding lock. Employees and Directors are not permitted to obtain margin loans using Transurban securities (either solely or as part of a portfolio) as security for loans. SERVICE AGREEMENTS The remuneration and other terms of employment for the CEO and other Senior Executives are formalised in service agreements which have no specified term. Chris Lynch's service agreement included an entitlement to participate in the Group’s STI and LTI plans (or equivalent cash plan). Scott Charlton and other Senior Executives are eligible to participate in the STI and LTI plans (or equivalent cash plans for US executives). Some key aspects of the agreements in place in the year ended 30 June 2012 are outlined below: CEO Other Senior Executives Period of notice to terminate (executives) Period of notice to terminate (the Group*) 6 months 3 months 12 months 6 months * Payment in lieu of the notice period may be provided (based on the executive's fixed remuneration). The Group may also terminate at any time without notice for serious misconduct. 42 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) 5 LINK BETWEEN GROUP PERFORMANCE, SECURITY HOLDER WEALTH AND REMUNERATION The variable or 'at risk' remuneration of the CEO and other Senior Executives is linked to the Group’s performance through the use of measures based on the operating performance of the business. A GROUP PERFORMANCE AND STI For the year ended 30 June 2012, 20 per cent of the Senior Executive STIs were determined with reference to proportional EBITDA, 20 per cent with reference to proportional net costs, and 10 per cent with reference to safety as discussed on page 31. Proportional EBITDA The underlying proportional EBITDA result for the year ended 30 June 2012 was $784.0 million, a 9.1 per cent increase from the prior year result. This resulted in the payment of 93.4 per cent of STI's attributable to proportional EBITDA. The proportional EBITDA result was driven by the Group's continued focus on cost control and the performance of the asset portfolio. This result was delivered despite significant disruption caused by construction on Sydney’s Hills M2 Motorway. Proportional net costs The underlying proportional net costs result for the year ended 30 June 2012 was $159.9 million, a 7.2 per cent improvement from the prior year result. This resulted in the payment of 149.6 per cent of STI's attributable to proportional net costs. Importantly, the Group’s continued focus on proportional net costs resulted in a cost decrease across operational, corporate and business development areas (when taking into account the impact of volume based cost increases). Safety For the year ended 30 June 2012, the safety performance measure resulted in a zero STI payment for Senior Executives based in Australia, and 150 per cent for Senior Executives based in the US. The safety KPI target included several components as discussed on page 31 of which a reduction in recordable injury frequency rate was one. Strong results were attained for some aspects of the Australian safety measure, however other areas did not meet all targets. B GROUP PERFORMANCE AND LTI For the year ended 30 June 2012, LTIs were linked to relative TSR and, for the first time, FCF per security (see pages 35 and 36). Relative TSR The relative TSR for the year ended 30 June 2012 is calculated on a bespoke comparator group from the ASX150 (see page 35). FCF per security The performance target range for compound growth in FCF per security of between 7 per cent and 10 per that reflects the Group’s focus on the cent over three years is considered an appropriate target maximisation of free cash to drive security holder return. For performance awards granted during the year ending 30 June 2013, the performance target range for compound growth in FCF per security is between 6 per cent and 9 per cent. The table below summarises the Group’s five year results for the relevant performance measures. These results show that since the year ended 30 June 2009, Transurban’s distribution policy has been to pay out 100 per cent (rounded) of FCF per security. Since that time, Transurban has delivered consistent growth on this measure based on consistent revenue and EBITDA growth. Based on investor feedback, this remains Transurban’s financial focus. 43 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) Group Performance1 Measure Security price at year end Distribution paid per security Underlying proportional EBITDA - $m TSR performance2 FCF per security performance - weighted average 2012 $5.69 29.5c 784.0 15% 2011 $5.23 27.0c 718.7 2010 $4.24 24.0c 2009 $4.18 2008 $4.23 22.0c 57.0c* 635.4 583.3 523.0 32% 10% 2% (41%) 29.8c 27.5c 27.4c 22.2c 26.0c * Distributions made under a previous distribution policy no longer applied by the Group. 1 For FY2012, LTIs were linked to relative TSR and FCF per security. In prior years, LTIs were linked to relative TSR and proportional EBITDA. 2 The TSR performance is the total security holder return for that financial year. 44 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) 6 A NON-EXECUTIVE DIRECTOR REMUNERATION REMUNERATION POLICY The diagram below sets out the key objectives of the Group’s Non-executive Director remuneration policy and how they are implemented through the Group’s remuneration framework: Securing and retaining talented, qualified Directors Preserving independence and impartiality Aligning Director and security holder interests Director fee levels are set with regards to: the responsibilities and risks attached to the role, the time commitment expected and the workload, Director experience and expertise, and market benchmark data provided by independent remuneration consultants. Director remuneration consists of base (Director) fees and Committee fees. No element of Director remuneration is 'at risk' - that is, fees are not based on the performance of the Group or individual Directors from year to year. Directors are encouraged to hold Transurban securities. B REMUNERATION ARRANGEMENTS Maximum aggregate remuneration The amount of aggregate remuneration that may be paid to Non-executive Directors in any year is capped at a level approved by security holders. The current aggregate fee pool of $2,400,000 per year (inclusive of superannuation contributions) was approved by security holders at the 2010 AGM. No change to this amount is proposed for the year ending 30 June 2013. The aggregate fee pool and the manner in which it is apportioned amongst Non-executive Directors is reviewed annually. The Remuneration Committee undertakes this review and makes recommendations to the Board. In conducting the review, the Committee considers market benchmark data from independent remuneration consultants. 2012 Non-executive Director fees A review of Non-executive Director fees was undertaken during the year ended 30 June 2012, and it was determined that there be no increase in fees. Non-executive Director fees were last increased in January 2010. Current base (Director) fees and Committee fees per year are set out below: Board Audit and Risk Committee Nomination Committee Remuneration Committee Chair fee $ 455,000 40,000 10,000 25,000 Member fee $ 170,000 20,000 10,000 20,000 The Chair of the Board does not receive any additional fees for his Committee responsibilities. 45 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) Non-executive Directors are permitted to be paid additional fees for special duties or exertions. No such fees were paid during the year ended 30 June 2012. Non-executive Directors are also entitled to be reimbursed for all business related expenses, including travel, as may be incurred in the discharge of their duties. Retirement benefits No current Non-executive Directors are entitled to any retirement benefits. In September 2005, the Board resolved to discontinue previously provided retirement benefits for Non-executive Directors with effect from 30 September 2005. The value of benefits accrued up to that date attracted interest at the statutory fringe benefits rate. Accrued ‘frozen’ retirement benefits plus interest were paid to Geoff Cosgriff and Jeremy Davis on their retirement from the Board on 6 December 2011. The following table details the retirement benefits paid and expensed in the years ended 30 June 2012 and 30 June 2011. Geoff Cosgriff Jeremy Davis FY2012 $ 251,028 (paid) 418,186 (paid) FY2011 $ 16,301 (accrued) 27,155 (accrued) ShareLink Investment Tax Deferred Plan Under the ShareLink Investment Tax Deferred Plan, Non-executive Directors are able to sacrifice up to 50 per cent of their pre tax fees to acquire up to $5,000 of Transurban securities per year. No securities were issued to Non-executive Directors under the plan for the year ended 30 June 2012. 46 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) C REMUNERATION PAID TO NON-EXECUTIVE DIRECTORS Details of Non-executive Directors’ remuneration for the years ended 30 June 2012 and 30 June 2011 are set out below: Short-term benefits Post-employment benefits Total Fees Superannuation1 Retirement benefits2,3 34,225 - 176,047 141,066 207,114 196,552 176,047 93,996 439,411 394,593 207,631 199,828 Current Non-executive Directors Lindsay Maxsted 2012 2011 Neil Chatfield 2012 2011 Bob Edgar 2012 2011 Samantha Mostyn 2012 2011 Bob Officer 2012 2011 Christine O'Reilly (appointed 12 April 2012) 2012 2011 Rodney Slater 173,720 2012 155,268 2011 Ian Smith (appointed 1 January 2012) 77,983 2012 2011 - Former Non-executive Directors Geoff Cosgriff (resigned 6 December 2011) 2012 2011 Jeremy Davis (resigned 6 December 2011) 2012 2011 David Ryan (resigned 12 August 2010) 2012 2011 Jennifer Eve (resigned 5 January 2012) 2012 2011 James Keyes (resigned 5 January 2012) 2012 2011 Total 2012 2011 1,717,908 1,747,043 81,778 188,153 69,903 201,920 - 49,199 25,793 34,984 48,256 91,484 15,775 35,513 15,775 17,985 15,775 17,690 15,398 8,460 15,398 12,696 3,080 - - - 7,018 - 7,044 16,934 25,648 27,750 - 4,428 - - - - - - - - - - - - - - - - - - - - 251,028 16,301 418,186 27,155 - - - - - - 455,186 430,106 223,406 217,813 222,889 214,242 191,445 102,456 191,445 153,762 37,305 - 173,720 155,268 85,001 - 339,850 221,388 513,737 256,825 - 53,627 48,256 91,484 25,793 34,984 120,911 141,456 669,214 43,456 2,508,0333 1,931,955 1 Superannuation contributions made on behalf of Non-executive Directors to satisfy the Group’s obligations under applicable superannuation guarantee legislation. 2 Amounts represent contractual retirement benefits paid (in the year ended 30 June 2012) and provided for (in the year end 30 June 2011) for two former Non-executive Directors. No current Non-executive Directors are entitled to any retirement benefits. 3 Retirement benefits are excluded from the amount of aggregate remuneration that may be paid to Non-executive Directors in any year. 47 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Directors' report 30 June 2012 (continued) Non-audit services The Group has an "External Auditor Independence" policy which is intended to support the independence of the external auditor by regulating the provision of services by the external auditor. The external auditor will not be engaged to perform any service that may impair or be perceived to impair the external auditor's judgement or independence. The external auditor will only provide a permissible non-audit service where there is a compelling reason for it to do so, and the aim is for the external auditor not to provide non-audit services at all. All non-audit services must be pre-approved by the CFO (services less than $5,000) or the Chair of the Audit and Risk Committee (in all other cases). The Board has considered the position and, in accordance with advice received from the Audit and Risk 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, as set out below, did not compromise the auditor independence requirements of the Corporations Act 2001 for the following reasons: • • the Audit and Risk Committee reviews the non-audit services to ensure they do not impartiality and objectivity of the auditor; and none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants, including reviewing or auditing the auditor’s own work, acting in a management or a decision making capacity for the Group, acting as advocate for the Group or jointly sharing economic risk and rewards. impact the During the year the following fees were paid or payable for audit and non-audit services provided by the auditor of THL, its related practices and non-related audit firms: Amounts received or due and receivable by PricewaterhouseCoopers Audit and other assurance services: Audit and review of financial reports Other assurance services Total remuneration for PricewaterhouseCoopers Total auditors' remuneration 30 June 2012 $ 30 June 2011 $ 1,100,000 189,300 1,289,300 1,091,000 69,887 1,160,887 1,289,300 1,160,887 Indemnification and insurance Each officer (including each Director) of the Group is indemnified, to the maximum extent permitted by law, against any liabilities incurred as an officer of the Group pursuant to agreements with the Group. Each officer is also indemnified against incurred in relation to relevant reasonable costs (whether proceedings in which the officer is involved because the officer is or was an officer. legal or otherwise) The Group has arranged to pay a premium for a Directors and officers liability insurance policy to indemnify Directors and officers in accordance with the terms and conditions of the policy. This policy is subject to a confidentiality clause which prohibits disclosure of the nature of the liability covered, the name of the insurer, the limit of liability and the premium paid for this policy. Auditor's independence declaration A copy of the auditor's independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 50. 48 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Directors' report 30 June 2012 (continued) Rounding of amounts The Group is of a kind referred to in Class Order 98/100, 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, or in certain cases, to the nearest dollar. Auditor PricewaterhouseCoopers continues in office in accordance with section 327 of the Corporations Act 2001. This report is made in accordance with a resolution of Directors. Lindsay Maxsted Director Scott Charlton Director Melbourne 7 August 2012 49 TRANSURBAN ANNUAL REPORT 2012 50 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited ABN 86 098 143 429 Annual report - 30 June 2012 Contents Financial statements Consolidated income statement Consolidated statement of comprehensive income Consolidated balance sheet Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements Directors' declaration Independent auditor's report to the members Page 52 53 54 55 56 57 137 138 This financial report covers the Transurban Group which consists of Transurban Holdings Limited, Transurban Holding Trust and Transurban International Limited and their controlled entities as described in Note 1 to the Financial Statements. The financial report is presented in the Australian currency. The equity securities of the parent entities are stapled and cannot be traded separately. Entities within the Group are domiciled and incorporated in Australia and the United States of America. Transurban Holdings Limited's registered office and principal place of business is: Level 3 505 Little Collins Street Melbourne VIC 3000 The financial report was authorised for issue by the Directors on 7 August 2012. The Directors have the power to amend and reissue the financial report. 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 51 TRANSURBAN ANNUAL REPORT 2012 Revenue Toll, fee and other road revenue Construction revenue Business development and other revenue Road operating costs Corporate costs Business development costs Construction costs Profit before depreciation and amortisation, net finance costs, equity accounted investments and income taxes Depreciation and amortisation expense Finance income Finance costs Net finance costs Share of net losses of equity accounted investments Profit / (loss) before income tax Income tax benefit Profit for the year Profit is attributable to: Ordinary equity holders of the stapled group Non-controlling interests Transurban Holdings Limited Consolidated income statement For the year ended 30 June 2012 30 June 2012 $'000 30 June 2011 $'000 Notes 3 4 5 9 6 846,196 286,258 22,030 1,154,484 799,217 220,015 17,284 1,036,516 (186,134) (31,602) (19,591) (280,222) (517,549) (160,396) (39,117) (13,070) (220,015) (432,598) 636,935 603,918 (301,641) (289,435) 157,030 (367,024) (209,994) 270,757 (456,270) (185,513) (137,946) (20,198) (12,646) 108,772 71,204 58,558 54,905 3,653 58,558 9,386 118,158 112,467 5,691 118,158 Cents Cents Earnings per security attributable to ordinary equity holders of the stapled group: Basic earnings per stapled security Diluted earnings per stapled security 33 33 3.8 3.8 7.8 7.8 The above consolidated income statement should be read in conjunction with the accompanying notes. 52 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Consolidated statement of comprehensive income For the year ended 30 June 2012 Profit for the year Other comprehensive income Changes in the fair value of cash flow hedges, net of tax Exchange differences on translation of foreign operations, net of tax Other comprehensive income for the year, net of tax Total comprehensive income for the year Total comprehensive income for the year is attributable to: Owners of Transurban Holdings Limited Non-controlling interests 30 June 2012 $'000 30 June 2011 $'000 58,558 118,158 (210,773) 12,980 (197,793) (17,216) (7,613) (24,829) (139,235) 93,329 119,618 (258,853) (139,235) 110,722 (17,393) 93,329 The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. 53 TRANSURBAN ANNUAL REPORT 2012 ASSETS Current assets Cash and cash equivalents Trade and other receivables Derivative financial instruments Total current assets Non-current assets Equity accounted investments Held to maturity investments Derivative financial instruments Property, plant and equipment Deferred tax assets Intangible assets Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables Borrowings Derivative financial instruments Current tax liabilities Provisions Other liabilities Total current liabilities Non-current liabilities Borrowings Deferred tax liabilities Provisions Derivative financial instruments Other liabilities Total non-current liabilities Total liabilities Net assets EQUITY Contributed equity Reserves (Accumulated losses) Non-controlling interest - Transurban International Limited Non-controlling interests Total equity Transurban Holdings Limited Consolidated balance sheet As at 30 June 2012 30 June 2012 $'000 30 June 2011 $'000 Notes 7 8 11 9 10 11 12 13 14 15 16 11 17 18 16 13 17 11 18 19 20 20 318,148 78,420 - 396,568 411,880 217,560 1,065 630,505 335,190 791,392 137 191,964 12,551 8,174,115 9,505,349 524,834 724,225 55,238 177,548 12,899 8,278,281 9,773,025 9,901,917 10,403,530 110,103 - 1,315 8,510 293,485 73,251 486,664 221,363 202,870 136,431 13,706 296,586 89,622 960,578 4,489,397 687,287 193,755 504,016 53,673 5,928,128 4,035,817 843,846 262,573 255,711 52,654 5,450,601 6,414,792 6,411,179 3,487,125 3,992,351 7,847,912 (138,340) (4,232,045) (148,505) 158,103 3,487,125 7,772,117 26,461 (4,085,426) 104,041 175,158 3,992,351 The above consolidated balance sheet should be read in conjunction with the accompanying notes. 54 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Consolidated statement of changes in equity For the year ended 30 June 2012 Attributable to members of Transurban Holdings Limited Contributed equity $'000 Reserves $'000 Accumulated losses $'000 Notes Total $'000 Non- controlling interests $'000 Total equity $'000 Balance at 1 July 2010 7,656,383 52,594 (3,836,959) 3,872,018 304,491 4,176,509 Comprehensive income Profit (loss) for the year Other comprehensive income Total comprehensive income Transactions with owners in their capacity as owners: Treasury securities Distribution reinvestment plan Distributions provided for or paid Distributions to non-controlling interest Changes in value of share-based payment reserve 19 19 20 20 - - - - (30,193) (30,193) 140,915 - 140,915 140,915 (30,193) 110,722 (22,757) 5,364 (17,393) 118,158 (24,829) 93,329 91 115,831 - - - - - - - - (389,463) 91 115,831 (389,463) 12 8,719 - 103 124,550 (389,463) - - (17,226) (17,226) (188) 115,734 4,060 4,060 81 (389,382) 3,953 (269,588) 596 (7,899) 4,549 (277,487) Balance at 30 June 2011 7,772,117 26,461 (4,085,426) 3,713,152 279,199 3,992,351 Balance at 1 July 2011 7,772,117 26,461 (4,085,426) 3,713,152 279,199 3,992,351 Comprehensive income Profit (loss) for the year Other comprehensive income Total comprehensive income Transactions with owners in their capacity as owners: Treasury securities Distribution reinvestment plan Distributions provided for or paid Distributions to non-controlling interest Changes in value of share-based payment reserve 19 19 20 20 - - - - (162,813) (162,813) 282,431 - 282,431 282,431 (162,813) 119,618 (223,873) (34,980) (258,853) 58,558 (197,793) (139,235) 1,433 72,961 - - - - - - - - (429,203) 1,433 72,961 (429,203) 207 3,040 - 1,640 76,001 (429,203) - - (13,610) (13,610) 1,401 75,795 (1,988) (1,988) 153 (429,050) (434) (355,243) (385) (10,748) (819) (365,991) Balance at 30 June 2012 7,847,912 (138,340) (4,232,045) 3,477,527 9,598 3,487,125 Non-controlling interests include Transurban International Limited and other non-controlling interests outside of the Group. The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 55 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Consolidated statement of cash flows For the year ended 30 June 2012 30 June 2012 $'000 30 June 2011 $'000 Notes 945,544 (340,656) (27,731) 34,078 229,786 (421,841) (45,937) 373,243 (6,975) (18,271) (262,306) (41,832) 53,500 (275,884) 912,781 (338,579) (18,429) 24,869 217,598 (380,900) (42,649) 374,691 - (29,356) (797,733) (36,617) 41,000 (822,706) 1,606,050 (1,445,870) - (336,549) (14,891) (191,260) 1,067,641 (639,130) 103 (232,577) (15,542) 180,495 (93,901) (267,520) 411,880 169 318,148 681,259 (1,859) 411,880 31 21 7 Cash flows from operating activities Receipts from customers (inclusive of GST) Payments to suppliers and employees (inclusive of GST) Payments for maintenance of intangible assets Other revenue Interest received Interest paid Income taxes paid Net cash inflow from operating activities Cash flows from investing activities Payments for held-to-maturity investments, net of fees Payments for equity accounted investments Payments for intangible assets Payments for property, plant and equipment Distributions received from equity accounted investments Net cash (outflow) from investing activities Cash flows from financing activities Proceeds from borrowings, net of costs Repayment of borrowings Proceeds from sale of treasury securities, net of costs Dividends and distributions paid to the Group's security holders Distributions paid to non-controlling interests Net cash (outflow) inflow from financing activities Net (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents at end of the year The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. 56 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 Contents of the notes to the consolidated financial statements 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 Summary of significant accounting policies Segment information Revenue Expenses Net finance costs Income tax benefit Current assets - Cash and cash equivalents Current assets - Trade and other receivables Equity accounted investments Non-current assets - Held to maturity investments Derivative financial instruments Non-current assets - Property, plant and equipment Deferred tax assets and liabilities Non-current assets - Intangible assets Current liabilities - Trade and other payables Borrowings Provisions Other liabilities Contributed equity Reserves and accumulated losses Distributions Remuneration of auditors Contingencies Intra-group Guarantees Commitments Related party transactions Subsidiaries Parent entity financial information Deed of cross guarantee Events occurring after the reporting period Reconciliation of profit after income tax to net cash inflow from operating activities Non-cash investing and financing activities Earnings per stapled security Net tangible asset backing Share-based payments Key management personnel disclosures Critical accounting estimates and judgements Financial risk management Page 58 73 80 80 81 82 83 84 85 88 89 91 92 93 95 96 100 101 103 105 107 109 110 110 111 112 114 116 117 119 119 119 120 121 121 125 130 131 57 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 1 Summary of significant accounting policies The principal accounting policies adopted in the preparation of the consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. (a) Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board, Urgent Issues Group Interpretations and the Corporations Act 2001. The Transurban Group financial statements have been prepared as an aggregation of the financial statements of Transurban Holdings Limited (THL) and controlled entities, Transurban International Limited (TIL) and controlled entities and Transurban Holding Trust (THT) and controlled entities, as if all entities operate together. They are therefore treated as a combined entity (hereon referred to as "the Group"), notwithstanding that none of the entities controls any of the others. The principles of consolidation have been applied in order to present the aggregated financial statements on a combined basis. THL has been deemed the parent of the Group. The financial statements have been aggregated in recognition of the fact that the securities issued by THL, THT and TIL are stapled together and comprise one share in THL, one unit in THT and one share in TIL (Stapled Security). None of the components of the Stapled Security can be traded separately. The Group’s current liabilities exceed its current assets by $90.1 million as at 30 June 2012. The financial report has been prepared on a going concern basis, which contemplates the continuity of normal operations, as the Group is trading profitably and has continually been able to refinance maturing debt. In addition, at 30 June 2012 the Group has available a total of $398.2 million of undrawn borrowing facilities. Where necessary, comparatives have been reclassified for consistency with current year disclosures. Compliance with IFRS The consolidated financial statements of Transurban Holdings Limited also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. Early adoption of standards The Group has not elected to adopt any new accounting standard early. Historical cost convention These financial statements have been prepared under the historical cost convention, as modified by the revaluation of other financial assets and liabilities (including derivative financial instruments). Rounding of amounts The Group is of a kind referred to in Class Order 98/100, issued by the Australian Securities and Investments Commission, relating to the 'rounding off' of amounts in the financial statements. Amounts in the financial statements have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, to the nearest dollar. (b) Principles of consolidation Subsidiaries Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one-half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control de-consolidated from the date that control ceases. is transferred to the Group. They are 58 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 1 Summary of significant accounting policies (continued) (b) Principles of consolidation (continued) Subsidiaries (continued) The aggregated financial statements 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 except as otherwise indicated. The acquisition method of accounting is used to account for business combinations by the Group (refer to note 1(h)). Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated income statement, statement of comprehensive income, balance sheet and statement of changes in equity respectively. Associates and joint ventures Associates are all entities over which the Group has significant influence but not control. Interests in joint ventures are where the Group jointly controls an entity with another party (refer to note 9). Investments in associates are accounted for using the equity method of accounting, after initially being recognised at cost. The Group's share of its associates' and joint ventures' post-acquisition profits or losses is recognised in the income statement, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group’s share of losses in an associate or joint venture equals or exceeds its interest in the associate or joint venture, the Group does not recognise further losses. Dividends received from associates and joint ventures reduce the carrying amount of the investment. Application of UIG 1013 Pre-date of Transition Stapling Arrangements and AASB Interpretation 1002 Post-date of Transition Stapling Arrangements For the purpose of UIG 1013 and AASB Interpretation 1002, THL was identified as the parent entity in relation to the pre-date of transition stapling with THT and the post-date of transition stapling with TIL. In accordance with UIG 1013 the results and equity of THL and THT have been combined in the financial statements. AASB Interpretation 1002 however requires the results and equity of TIL to be treated and disclosed as non-controlling interest. Changes in ownership interest The Group treats transactions with non-controlling interests that do not result in a loss of control as transactions with equity owners of the Group. A change in ownership interest results in an adjustment between the carrying amounts of the controlling and non-controlling interests to reflect their relative interests in the subsidiary. Any difference between the amount of the adjustment to non-controlling interests and any consideration paid or received is recognised in a separate reserve within equity. (c) Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the Chief Executive Officer (the chief operating decision maker) and the Executive Committee, who report to the Chief Executive Officer (CEO). (d) Foreign currency translation Functional and presentation currency The consolidated financial statements are presented in Australian dollars, which is Transurban Holdings Limited's functional and presentation currency. 59 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 1 Summary of significant accounting policies (continued) (d) Foreign currency translation (continued) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated income statement, except when they are deferred in equity as qualifying cash flow hedges and qualifying net investment hedges or are attributable to part of the net investment in a foreign operation. Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Translation differences on assets and liabilities carried at fair value are reported as part of translation differences on non-monetary assets and liabilities such as equities held at fair value through profit or loss are recognised in profit or loss as part of the fair value gain or loss and translation differences on non-monetary assets such as equities classified as available-for-sale financial assets are recognised in the fair value reserve in equity. the fair value gain or loss. For example, Foreign operations The results and financial position of all of the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • • • assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; income and expenses for each income statement are translated at average exchange rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and all resulting exchange differences are recognised in other comprehensive income. On consolidation, exchange differences arising from the translation of any net investment in foreign entities, and of borrowings and other financial instruments designated as hedges of such investments, are taken to shareholders' equity. (e) Revenue recognition Revenue is measured at the fair value of the consideration received or receivable. Revenue is recognised for the major business activities as follows: 60 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 1 Summary of significant accounting policies (continued) (e) Revenue recognition (continued) • • • • Toll and fee revenue - Toll charges and related fees are recognised when the charge is incurred by the user. Business development revenue - Business development revenue is recognised when earned, and to the extent of costs incurred and that these costs will be recovered. Interest income - Interest income is recognised using the effective interest rate method. Construction revenue - During the construction phase of service concession infrastructure assets, the Group records an intangible asset representing the right to charge users of the infrastructure and recognises revenue from the construction of the infrastructure. Revenue and expenses associated with construction contracts are recognised in accordance with the percentage of completion method. (f) Income tax The income tax expense or benefit for the period is the tax payable or benefit on the current period's taxable income based on the applicable income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the Group operates and generates taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the reporting date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in foreign operations where the Group is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. Current and deferred tax is recognised in the income statement, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. Investment allowances Companies within the Group may be entitled to claim special tax deductions for investments in qualifying assets (investment allowances). The Group accounts for such allowances as tax credits, which means that the allowance reduces income tax payable and current is recognised for unclaimed tax credits that are carried forward as tax losses. tax expense. A deferred tax asset 61 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 1 Summary of significant accounting policies (continued) (f) Income tax (continued) Tax consolidation legislation The Transurban Group has adopted the tax consolidation legislation for Transurban Holdings Limited and its wholly-owned Australian entities as of 1 July 2005. All entities within the tax consolidated group continue to account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidation group is a separate taxpayer within the tax consolidated group. (g) Leases Leases in which a significant portion of the risks and rewards of ownership are not transferred to the Group as lessee are classified as operating leases (note 25). Payments made under operating leases (net of any incentives received from the lessor) are charged to the consolidated income statement on a straight-line basis over the period of the lease. Lease incentives are recognised as a reduction of the rental expense over the lease term on a straight line basis. (h) Business combinations The acquisition method of accounting is used to account for all business combinations, including business combinations involving entities or businesses under common control, regardless of whether equity instruments or other assets are acquired. The consideration transferred for the acquisition of a subsidiary comprises the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred also includes the fair value of any contingent consideration arrangement and the fair value of any pre-existing equity interest in the subsidiary. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are, with limited exceptions, measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the non-controlling interest's proportionate share of the acquiree's net identifiable assets. the Group recognises any non-controlling interest in the acquiree either at fair value or at The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the Group's share of the net identifiable assets acquired is recorded as goodwill. If those amounts are less than the fair value of the net identifiable assets of the subsidiary acquired and the measurement of all amounts has been reviewed, the difference is recognised directly in income statement as a bargain purchase. Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the entity's incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions. Contingent consideration is classified either as equity or a financial liability. Amounts classified as a financial liability are subsequently remeasured to fair value with changes in fair value recognised in the income statement. 62 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 1 Summary of significant accounting policies (continued) (i) Impairment of assets At each reporting date, the Group assesses whether there is any indication that an asset may be impaired. Where an indicator of impairment exists, the Group makes an estimate of the recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount the asset is considered impaired and is written down to its recoverable amount through the income statement. The decrement in the carrying amount is recognised as an expense in the income statement in the reporting period in which the impairment occurs. Recoverable amount is the greater of fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. (j) Cash and cash equivalents For the purpose of presentation in the consolidated statement of cash flows, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities. (k) Investments and other financial assets Classification The Group classifies its investments and other financial assets in the following categories: financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments and available-for-sale financial assets. The classification depends on the purpose for which the investments and other financial assets were acquired. The classification of the Group's investments and other financial assets are determined at initial recognition and, in the case of assets classified as held-to-maturity, is re-evaluated at the end of each reporting period. Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss are financial assets held-for-trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term. Derivatives are classified as held-for-trading unless they are designated as hedges. Assets in this category are classified as current assets. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for those with maturities greater than 12 months after the reporting date which are classified as non-current assets. Loans and receivables are included in trade and other receivables (note 8) in the consolidated balance sheet. 63 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 1 Summary of significant accounting policies (continued) (k) Investments and other financial assets (continued) Loans and receivables (continued) Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less allowance for impairment. Trade receivables are due for settlement no more than 30 days from revenue recognition. Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off by reducing the carrying amount directly. An impairment allowance account (provision for impairment of trade receivables) is used when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. The amount of the impairment allowance is the difference between the asset’s carrying amount and the present value of estimated future cash flows. The amount of the impairment allowance is recognised in the income statement. Held-to-maturity investments Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group's management has the positive intention and ability to hold to maturity. If the Group were to sell other than an insignificant amount of held-to-maturity financial assets, the whole category would be tainted and reclassified as available-for-sale. Held-to-maturity financial assets are included in non-current assets, except for those with maturities less than 12 months from the reporting date, which are classified as current assets. Available-for-sale financial assets Available-for-sale financial assets, comprising principally marketable equity securities, are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless the investment matures or management intends to dispose of the investment within 12 months of the end of the reporting period. Recognition and derecognition Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognised at fair value and transaction costs are expensed in the income statements. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership. When securities classified as available-for-sale are sold, the accumulated fair value adjustments recognised in other comprehensive income are reclassified to profit or loss as gains and losses from investment securities. Subsequent measurement Loans and receivables and held-to-maturity investments are carried at amortised cost using the effective interest method. Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Gains or losses arising from changes in the fair value of the 'financial assets at fair value through profit or loss' category are presented in the income statements within other income or other expenses in the period in which they arise. Dividend income from financial assets at fair value through profit or loss is recognised in the income statements as part of revenue from continuing operations when the Group's right to receive payments is established. 64 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 1 Summary of significant accounting policies (continued) (k) Investments and other financial assets (continued) Impairment The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of a security below its cost is considered as an indicator that the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in the income statement - is reclassified from equity and recognised in the income statement as a reclassification adjustment. Impairment losses recognised in the income statement on equity instruments classified as available-for-sale are not reversed through the income statement. (l) Derivatives and hedging activities Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at the end of each reporting period. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as either: • • • hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value hedges); hedges of a particular risk associated with the cash flows of recognised assets and liabilities and highly probable forecast transactions (cash flow hedges); or hedges of a net investment in a foreign operation (net investment hedges). At the inception of the hedging transaction the Group documents the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions have been and will continue to be highly effective in offsetting changes in fair values or cash flows of hedged items. The fair values of various derivative financial instruments used for hedging purposes are disclosed in note 11. Movements in the hedging reserve in shareholders' equity are shown in note 20. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item is more than 12 months; it is classified as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. The treatment of derivatives is as follows: Fair value hedges Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statements, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The gain or loss relating to the effective portion of interest rate swaps and cross currency swaps hedging fixed rate borrowings is recognised in the income statements within finance costs, together with changes in the fair value of the hedged fixed rate borrowings attributable to interest rate risk. The gain or loss relating to the ineffective portion is recognised in the income statement. If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortised to profit or loss over the period to maturity using a recalculated effective interest rate. Cash flow hedges The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income and accumulated in reserves in equity. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. 65 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 1 Summary of significant accounting policies (continued) (l) Derivatives and hedging activities (continued) Cash flow hedges (continued) Amounts accumulated in equity are reclassified to the income statement in the periods when the hedged item affects profit or loss. The gain or loss relating to the effective portion of interest rate swaps hedging variable rate borrowings is recognised in the income statement. When a hedging instrument expires or is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statements. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement. Net investment hedges Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in other comprehensive income and accumulated in reserves in equity. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. Gains and losses accumulated in equity are included in the income statement when the foreign operation is partially disposed of or sold. Derivatives that do not qualify for hedge accounting Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any derivative instrument that does not qualify for hedge accounting are recognised immediately in the income statement. (m) Property, plant and equipment Property, plant and equipment is stated at historical cost less accumulated depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Costs incurred on development projects (including computer software and hardware) are recognised as an asset when it is probable that the project will, after considering its commercial and technical feasibility, be completed and generate future economic benefits and its costs can be reliably measured. The expenditure capitalised comprises all directly attributable costs, including costs of materials, services, direct labour and an appropriate proportion of overheads. Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of any component accounted for as a separate asset is derecognised when replaced. All other repairs and maintenance are charged to the income statements during the reporting period in which they are incurred. Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the income statement. Depreciation 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 annually for all assets. The expected useful lives are 3 - 15 years. Impairment Fixed assets are assessed for impairment in line with the policy stated in note 1(i). 66 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 1 Summary of significant accounting policies (continued) (n) Intangible assets Concession Assets Concession Assets represent the Group's rights to operate roads under Service Concession Arrangements. Concession Assets constructed by the Group are recorded at the fair value of consideration received or receivable for the construction services delivered. Concession Assets acquired by the Group are recorded at the fair value of the assets at the date of acquisition. All Concession Assets are classified as intangible assets and are amortised over the term of the right to operate the asset on a straight line basis. For details of concession agreement dates refer to note 14. Where work is in progress, it is classified as assets under construction. Goodwill Goodwill is measured as described in note 1(h). Goodwill on acquisitions of businesses is included in intangible assets. Goodwill on acquisitions of associates is included in investments in associates. Goodwill is not amortised. Instead, goodwill is tested for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to the relevant cash-generating units for the purpose of impairment testing. (o) Financial liabilities Trade and other payables These amounts represent liabilities for goods and services provided to the Group prior to the end of financial year which are unpaid. The amounts are unsecured and are usually paid within 30 days of recognition. Concession and promissory notes The Group has non-interest bearing long term debt, represented by Concession and Promissory Notes, payable to the government, measured at the net present value of expected future payments. (p) Borrowings Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in the consolidated income statement over the period of the borrowings using the effective interest method. Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a prepayment for liquidity services and amortised over the period of the facility to which it relates. Borrowings are removed from the balance sheets when the obligation specified in the contract is discharged, cancelled or expired. The difference between the carrying amount of a financial liability that has been extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognised in the income statement as finance income or finance costs. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting period. 67 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 1 Summary of significant accounting policies (continued) (q) 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 specifically identifiable borrowing costs are capitalised into the cost of the asset. Borrowing costs include interest on short-term and long-term borrowings. Costs incurred in connection with the arrangement of borrowings are deferred and amortised over the effective period of the funding. (r) Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. Provisions are not recognised for future operating losses. Provisions are discounted to the present value of management's best estimate of the expenditure required to settle the present obligation at the end of the reporting period. The discount rate used to determine the present value reflects current market assessments of the time value of money and the risks specific to the liability. The increase in the provision due to the discount unwinding over the passage of time is recognised as a finance cost. Provision for maintenance As part of its obligations under the service concession arrangements, the Group assumes responsibility for the maintenance and repair of installations of the publicly-owned roads it operates. A provision for maintenance has been raised where the Group has a present legal or constructive obligation to maintain and replace components of the underlying physical assets operated by the Group as a result of past events. The Group's obligations under the respective concession deeds arise as a consequence of use of the road during the operating phase. The provision is measured at the present value of management's best estimate of the expenditure required to settle the present obligation at the reporting date. Provisions giving rise to a cash outflow after more than one year are discounted to present value if the impact is material. The increase in the provision due to the discount unwinding over the passage of time is recognised as a finance cost. Provision for distribution Provision is made for the amount of any distribution declared, being appropriately authorised and no longer at the discretion of the entity, on or before the end of the reporting period but not distributed at the end of the reporting period. (s) Employee benefits Short-term obligations Liabilities for wages and salaries, including non-monetary benefits, annual leave and short-term incentives, and long service leave expected to be settled within 12 months after the end of the period, are recognised in respect of employees' services up to the reporting date. They are measured at the amounts expected to be paid when the liabilities are settled. The liability for annual leave and short-term incentives, and long service leave expected to be settled within 12 months of the reporting date is recognised in the provision for employee benefits. All other short-term employee benefit obligations are presented as payables. An expense for non-accumulating sick leave is recognised when the leave is taken and measured at the rates paid or payable. Long-term employee benefit obligations The liability for long service leave which is not expected to be settled within 12 months after the end of the period is recognised in the provision for employee benefits. It is 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 wage and salary levels, experience of employee departures 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. 68 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 1 Summary of significant accounting policies (continued) (s) Employee benefits (continued) Equity-based compensation benefits Equity-based compensation benefits have been provided to some employees. The fair value of units granted under the plans are recognised as an employee benefit expense with a corresponding increase in equity. The fair value is measured at grant date and recognised over the period during which the employees become unconditionally entitled to the units. The fair value of units granted under cash settled share-based compensation plans is recognised as an expense over the vesting period with a corresponding increase in liabilities. The fair value of the liability is remeasured at each reporting date with any changes in fair value recognised in the income statement for the period. The fair value is independently determined using a Black-Scholes option pricing model that takes into account the exercise price, the term, the impact of dilution, the security price at grant date and expected price volatility of the underlying security, the expected dividend yield and the risk free interest rate for the term of the plan. The fair value granted is adjusted to reflect the market vesting conditions, but excludes the impact of any non-market vesting conditions (for example, profitability and growth targets). Non-market vesting conditions are included in assumptions about the number of units that are expected to become exercisable. At each reporting date, the Group revises its estimate of the number of units that are expected become exercisable. The employee benefit expense recognised each reporting period takes into account the most recent estimate. The impact of the revision to original estimates, if any, is recognised in the income statement with a corresponding adjustment to equity. 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 income statement. Termination benefits Termination benefits are payable when employment is terminated before the normal retirement date, or when an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits when it is demonstrably committed to either terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal or to providing termination benefits as a result of an offer made to encourage voluntary redundancy. (t) Contributed equity Stapled securities are classified as equity. Incremental costs directly attributable to the issue of new stapled securities are shown in equity as a deduction, net of tax, from the proceeds. If the Group reacquires its own securities, those securities are deducted from equity. No gain or loss is recognised in the profit or loss and the consideration paid including any directly attributable incremental costs (net of income taxes) is recognised directly in equity. (u) Parent entity financial information The financial prepared on the same basis as the consolidated financial statements, except as set out below. information for the parent entity, Transurban Holdings Limited, disclosed in note 28 has been 69 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 1 Summary of significant accounting policies (continued) (u) Parent entity financial information (continued) Investments in subsidiaries and associates Investments in subsidiaries and associates are accounted for at cost in the financial statements of Transurban Holdings Limited. Dividends received from associates are recognised in the parent entity's profit or loss, rather than being deducted from the carrying amount of these investments. Tax consolidation legislation Transurban Holdings Limited and its wholly-owned Australian controlled entities have implemented the tax consolidation legislation effective 1 July 2005. The head entity, Transurban Holdings Limited, and the controlled entities in the tax consolidated group account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated group is a separate taxpayer within the tax consolidated group. In addition to its own current and deferred tax amounts, Transurban Holdings Limited also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group. Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as amounts receivable from or payable to other entities in the Group. Any difference between the amounts assumed and amounts receivable or payable under the tax funding agreement are recognised as a contribution to (or distribution from) wholly owned tax consolidated entities. (v) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case it is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the balance sheet. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the taxation authority, are presented as operating cash flows. (w) New accounting standards and interpretations Certain new accounting standards and interpretations have been published that are not mandatory for 30 June 2012 reporting periods. The Group's assessment of the impact of these new standards and interpretations is set out below. (i) AASB 9 Financial Instruments, AASB 2009-11 Amendments to Australian Accounting Standards arising from AASB 9 and AASB 2010-7 Amendments to Australian Accounting Standards arising from AASB 9 (December 2010) (effective from 1 January 2013*) AASB 9 Financial Instruments addresses the classification, measurement and derecognition of financial assets and financial liabilities. The standard is not applicable until 1 January 2013* but is available for early adoption. Management are in the process of assessing the impact on financial assets but do not believe this will be significant. There will be no impact on the Group's accounting for financial liabilities, as the new requirements only affect the accounting for financial liabilities that are designated at fair value through profit or loss and the Group does not have any such liabilities. The Group has not yet decided when to adopt AASB 9. 70 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 1 Summary of significant accounting policies (continued) (w) New accounting standards and interpretations (continued) (i) AASB 9 Financial Instruments, AASB 2009-11 Amendments to Australian Accounting Standards arising from AASB 9 and AASB 2010-7 Amendments to Australian Accounting Standards arising from AASB 9 (December 2010) (effective from 1 January 2013) (continued) * In December 2011, the IASB delayed the application date of IFRS 9 to 1 January 2015. The AASB is expected to make an equivalent amendment to AASB 9 shortly. (ii) AASB 10 Consolidated Financial Statements, AASB 11 Joint Arrangements, AASB 12 Disclosure of Interests in Other Entities, revised AASB 127 Separate Financial Statements and AASB 128 Investments in Associates and Joint Ventures and AASB 2011-7 Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements Standards (effective 1 January 2013) In August 2011, the AASB issued a suite of five new and amended standards which address the accounting for joint arrangements, consolidated financial statements and associated disclosures. AASB 10 replaces all of the guidance on control and consolidation in AASB 127 Consolidated and Separate Financial Statements, and Interpretation 112 Consolidation - Special Purpose Entities. The core principle that a consolidated entity presents a parent and its subsidiaries as if they are a single economic entity remains unchanged, as do the mechanics of consolidation. However the standard introduces a single definition of control that applies to all entities. It focuses on the need to have both power and rights or exposure to variable returns before control is present. Power is the current ability to direct the activities that significantly influence returns. Returns must vary and can be positive, negative or both. Management are currently assessing the impact but do not believe it will be significant. AASB 11 introduces a principles based approach to accounting for joint arrangements. The focus is no longer on the legal structure of joint arrangements, but rather on how rights and obligations are shared by the parties to the joint arrangement. AASB 11 also provides guidance for parties that participate in joint arrangements but do not share joint control. This will not impact the Group as it does not have any such arrangements. AASB 12 sets out the required disclosures for entities reporting under the two new standards, AASB 10 and AASB 11, and replaces the disclosure requirements currently found in AASB 127 and AASB 128. Application of this standard by the Group will not affect any of the amounts recognised in the financial statements, but will impact the type of information disclosed in relation to the Group's investments. Amendments to AASB 128 provide clarification that an entity continues to apply the equity method and does not remeasure its retained interest as part of ownership changes where a joint venture becomes an associate, and vice versa. The amendments also introduce a 'partial disposal' concept. The Group is still assessing the impact of these amendments. The Group does not expect to adopt the new standards before their operative date. (iii) AASB 1053 Application of Tiers of Australian Accounting Standards and AASB 2010-2 Amendments to Australian Accounting Standards arising from Reduced Disclosure Requirements (effective from 1 July 2013) On 30 June 2010 the AASB officially introduced a revised differential reporting framework in Australia. Under this framework, a two-tier differential reporting regime applies to all entities that prepare general purpose financial statements. Transurban Holdings Limited is listed on the ASX and is therefore not eligible to adopt the new Australian Accounting Standards - Reduced Disclosure Requirements. The two standards will have no impact on the financial statements of the Group. 71 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 1 Summary of significant accounting policies (continued) (w) New accounting standards and interpretations (continued) (iv) AASB 13 Fair Value Measurement and AASB 2011-8 Amendments to Australian Accounting Standards arising from AASB 13 (effective 1 January 2013) AASB 13 was released in September 2011. It explains how to measure fair value and aims to enhance fair value disclosures. The Group has yet to determine which, if any, of its current measurement techniques will have to change as a result of the new guidance. It is therefore not possible to state the impact, if any, of the new rules on any of the amounts recognised in the financial statements. However, application of the new standard will impact the type of information disclosed in the notes to the consolidated financial statements. The Group does not intend to adopt the new standard before its operative date. (v) AASB 2011-9 Amendments to Australian Accounting Standards - Presentation of Items of Other Comprehensive Income (effective 1 July 2012) In September 2011, the AASB made an amendment to AASB 101 Presentation of Financial Statements which requires entities to separate items presented in other comprehensive income into two groups, based on whether they may be recycled to profit or loss in the future. This will not affect the measurement of any of the items recognised in the balance sheet or the profit or loss in the current period. The Group intends to adopt the new standard from 1 July 2012. (vi) AASB 2011-4 Amendments to Australian Accounting Standards to Remove Individual Key Management Personnel Disclosure Requirements (effective 1 July 2013) In July 2011 the AASB decided to remove the individual key management personnel (KMP) disclosure requirements from AASB 124 Related Party Disclosures, to achieve consistency with the international equivalent standard and remove a duplication of the requirements with the Corporations Act 2001. While this will reduce the disclosures that are currently required in the notes to the financial statements, it will not affect any of the amounts recognised in the financial statements. The amendments apply from 1 July 2013 and cannot be adopted early. The Corporations Act requirements in relation to remuneration reports will remain unchanged for now, but these requirements are currently subject to review and may also be revised in the near future. 72 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 2 Segment information Description of segments It has been determined that the operating segments based on information provided to the CEO and Executive Committee is by geographical region, being Victoria and New South Wales in Australia and the USA. The Group operates in one business sector only, being the development, operation and maintenance of toll roads. The CEO and Executive Committee therefore consider the business from the perspective of locations. The following assets are included in the operating segments: Segment Victoria, Australia Assets CityLink New South Wales, Australia Hills M2 Motorway Lane Cove Tunnel 75.1 per cent interest in the M1 Eastern Distributor Equity investments in the M5 Motorway (50.0 per cent) and Westlink M7 (50.0 per cent) 75.0 per cent interest in Transurban DRIVe. Transurban DRIVe holds 100.0 per cent of Pocahontas 895 and 90.0 per cent of Capital Beltway Express USA The tolling businesses of Roam and Tollaust have also been included in the NSW operating segment as they are managed together with each of the assets and contribute tolling services to all NSW assets. The USA segment does not meet the quantitative thresholds to be reported as an operating segment in accordance with AASB 8. However management have concluded that this segment should be reported as it is closely monitored as an emerging market with development opportunities. The Group's corporate function is not an operating segment under the requirements of AASB 8 as its revenue generating activities are only incidental to the business. Management have aggregated and disclosed the corporate business units as the contribution to the business is closely monitored. The operating segments have been further broken down by asset to assist with external analysis of the financial statements. Segment information - Proportional Income Statement The CEO and Executive Committee assesses the performance of the operating segments based on a measure of underlying proportional EBITDA. EBITDA excludes the impact of interest income and expense which have been presented by segment where applicable. Interest income and expense are allocated across segments where the charges are related specifically to the assets. Otherwise they have been allocated to the Corporate function. The segment information provided to the Executive Committee is presented on a proportional basis. The information for the reportable segments for the year ended 30 June 2012 and 30 June 2011 is detailed in the following tables. 73 TRANSURBAN ANNUAL REPORT 2012 ) 3 2 2 , 9 7 2 ( ) 5 5 3 , 6 8 ( ) 7 0 8 , 1 3 3 ( ) 5 5 9 , 3 ( 1 0 5 , 1 ) 3 5 3 , 9 2 3 ( ) 7 7 2 , 4 5 ( 1 1 2 , 9 ) 7 5 1 , 1 9 ( 4 0 4 , 9 1 0 3 3 , 1 ) 8 9 5 , 8 ( 3 3 5 , 5 1 6 1 2 , 3 9 1 4 7 1 , 1 5 1 2 1 3 , 4 5 1 3 9 , 6 7 2 7 9 , 2 - 9 5 9 , 3 7 0 5 2 , 1 3 ) 4 6 7 , 2 ( 1 7 0 , 0 2 ) 4 5 6 , 4 1 ( 9 6 2 , 7 ) 6 1 2 , 1 ( 4 4 5 , 2 2 ) 9 1 3 , 1 1 ( ) 9 4 0 , 8 2 1 ( ) 3 4 0 , 2 3 ( ) 6 7 8 , 4 5 2 ( ) 3 8 9 ( 1 0 5 , 1 ) 4 9 3 , 5 5 2 ( ) 7 2 0 , 3 2 ( 7 4 4 , 6 ) 6 8 0 , 1 7 ( 0 5 7 , 4 9 9 5 , 8 ) 4 1 8 , 9 ( 7 7 0 , 8 3 7 9 8 , 1 8 1 ) 1 3 1 , 9 1 9 ( 4 9 3 , 9 1 2 0 , 4 4 2 3 8 9 ) 1 0 5 , 1 ( 9 3 5 , 4 4 2 ) 8 2 2 , 4 7 4 ( ) 1 7 9 , 9 2 ( ) 2 6 4 , 0 3 ( ) 4 8 0 , 1 0 1 ( ) 5 5 3 , 8 7 ( ) 3 9 7 , 1 5 ( ) 3 6 5 , 2 8 1 ( ) 8 1 3 , 8 9 6 ( d e t i i l i m L s g n d o H n a b r u s n a r T ) d e u n i t n o c ( 2 1 0 2 e n u J 0 3 s t n e m e t a t s l a i c n a n i f d e t a d i l o s n o c e h t o t s e t o N l a t o T e t a r o p r o C l a t o T r e h t O A S U % 0 . 0 0 1 n a b r u s n a r T n a b r u s n a r T I e V R D I e V R D % 0 . 5 7 l a t i p a C y a w t l e B % 5 . 7 6 s a t n o h a c o P 5 9 8 % 0 . 5 7 W S N l a t o T s e l a W h t u o S w e N a i r o t c i V & m a o R n r e t s a E 1 M e v o C e n a L 2 1 0 2 e n u J 0 3 ) d e u n i t n o c ( t n e m e t a t S e m o c n I l a n o i t r o p o r P - n o i t a m r o f n i t n e m g e S ) d e u n i t n o c ( n o i t a m r o f n i t n e m g e S 2 74 TRANSURBAN ANNUAL REPORT 2012 t s u a l l o T % 0 . 0 0 1 7 M % 0 . 0 5 5 M % 0 . 0 5 r o t u b i r t s D i % 1 . 5 7 l e n n u T % 0 . 0 0 1 2 M s l l i H i k n L y t i C % 0 . 0 0 1 % 0 . 0 0 1 0 0 0 $ ' 3 7 8 , 3 4 9 - 7 0 3 , 3 0 1 0 8 1 , 7 4 0 , 1 9 4 6 , 2 2 9 4 6 , 2 2 0 5 7 , 0 1 5 0 1 5 5 8 , 0 1 - - - 4 8 9 , 3 8 7 9 9 5 , 7 6 2 0 , 3 ) 5 5 9 , 3 ( 4 8 9 , 3 8 7 9 9 5 , 7 6 2 0 , 3 ) 5 5 9 , 3 ( - - - - - 0 5 7 , 0 1 5 0 5 , 1 6 4 - 7 3 2 , 0 0 1 2 3 5 , 0 9 9 9 5 , 9 6 6 6 9 , 9 5 1 7 1 , 1 4 1 8 1 6 , 1 7 4 5 0 1 5 5 8 , 0 1 0 5 7 , 5 3 5 5 2 , 7 9 4 4 2 5 , 3 2 4 2 5 , 3 2 1 1 3 , 1 8 4 5 , 1 0 1 2 0 8 , 5 4 3 3 , 6 9 7 5 1 6 5 7 , 9 6 1 4 6 , 1 7 0 6 , 1 6 5 1 3 , 3 6 8 4 , 4 4 1 3 0 8 , 4 4 1 2 4 , 6 1 5 r e h o t d n a e e F e u n e v e r l l o T e u n e v e r e u n e v e r l a t o T g n y i l r e d n U 1 8 9 , 6 7 5 0 , 9 6 3 6 5 8 , 9 6 5 6 , 8 7 6 7 2 , 2 8 7 2 0 , 9 4 2 2 4 , 5 3 0 2 8 , 3 1 1 2 0 3 , 4 0 4 A D T B E I l a n o i t r o p o r p 1 8 9 , 6 7 5 0 , 9 6 3 6 5 8 , 9 6 5 6 , 8 7 6 7 2 , 2 8 7 2 0 , 9 4 2 2 4 , 5 3 0 2 8 , 3 1 1 2 0 3 , 4 0 4 A D T B E I l a n o i t r o p o r P 1 7 4 , 8 4 1 ) 1 9 0 , 9 2 5 ( 5 2 3 , 3 9 4 0 5 , 1 ) 0 8 5 , 2 7 1 ( ) 9 9 4 , 9 1 ( ) 7 9 0 , 0 8 3 ( ) 0 9 4 , 2 0 3 ( - ) 9 9 6 , 4 1 ( ) 8 4 3 , 4 1 ( ) 0 9 4 , 2 0 3 ( - - - - 1 0 5 , 1 3 - - - ) 9 9 4 , 9 1 ( ) 8 4 3 , 4 1 ( ) 0 9 4 , 2 0 3 ( - - - - - - - - ) 1 4 2 , 6 0 2 ( ) 7 4 2 , 1 ( ) 3 2 9 , 3 3 ( ) 5 6 2 , 3 4 ( ) 0 8 9 , 8 3 ( ) 9 5 5 , 4 2 ( ) 7 6 2 , 4 6 ( ) 9 0 8 , 4 4 1 ( 1 1 4 , 5 4 ) 4 0 5 , 2 6 2 ( ) 6 ( 8 0 6 3 1 3 , 2 1 3 8 ) 3 0 2 , 8 3 1 ( ) 8 3 4 , 0 2 ( 4 6 6 , 9 3 ) 1 8 3 , 8 4 ( 0 6 8 5 3 1 , 1 ) 1 2 3 , 0 2 ( ) 5 5 1 , 5 3 ( 1 3 2 , 8 ) 8 0 5 , 4 7 ( e u n e v e r e s n e p x e t s e r e n t I t s e r e n t I d n a n o i t i a c e r p e D s t e s s a f o t n e m r i a p m I t i f o r p l a n o i t r o p o r P x a t e r o f e b ) s s o l ( t i f e n e b x a t e m o c n I t e n l a n o i t r o p o r P ) s s o l ( t i f o r p ) e s n e p x e ( n o i t a s i t r o m a d e t i i i l m L s g n d o H n a b r u s n a r T ) d e u n i t n o c ( 2 1 0 2 e n u J 0 3 s t n e m e t a t s l a i c n a n i f d e t a d i l o s n o c e h t o t s e t o N l a t o T e t a r o p r o C l a t o T r e h t O A S U % 0 . 0 0 1 n a b r u s n a r T n a b r u s n a r T I e V R D I e V R D % 0 . 5 7 l a t i p a C y a w t l e B % 5 . 7 6 s a t n o h a c o P 5 9 8 % 0 . 5 7 W S N l a t o T s e l a W h t u o S w e N a i r o t c i V & m a o R n r e t s a E 1 M e v o C e n a L 1 1 0 2 e n u J 0 3 ) d e u n i t n o c ( t n e m e t a t S e m o c n I l a n o i t r o p o r P - n o i t a m r o f n i t n e m g e S ) d e u n i t n o c ( n o i t a m r o f n i t n e m g e S 2 75 TRANSURBAN ANNUAL REPORT 2012 t s u a l l o T % 0 . 0 0 1 7 M % 0 . 0 5 5 M % 0 . 0 5 r o t u b i r t s D i % 1 . 5 7 l e n n u T % 0 . 0 0 1 2 M s l l i H i k n L y t i C % 0 . 0 0 1 % 0 . 0 0 1 0 0 0 $ ' 6 3 0 , 1 9 8 - 3 3 9 , 1 8 9 6 9 , 2 7 9 4 5 3 , 7 4 5 3 , 7 8 1 8 , 0 1 9 1 7 3 8 , 0 1 - - - 2 7 5 , 2 3 2 ) 4 2 0 , 4 8 5 ( 0 8 9 , 9 8 4 5 6 , 1 ) 4 5 2 , 8 4 1 ( ) 5 7 7 , 8 1 ( ) 5 8 3 , 2 6 3 ( ) 7 0 8 , 4 ( ) 0 5 7 , 7 ( - - - 4 8 6 , 8 1 7 ) 1 7 8 , 5 2 ( 7 0 2 , 2 ) 4 1 1 , 4 ( 5 2 6 , 8 1 9 0 3 , 7 3 7 ) 6 4 2 , 7 ( 5 2 6 , 8 1 - 7 0 2 , 2 - ) 4 1 1 , 4 ( - - - - - - 8 1 8 , 0 1 7 3 6 , 5 4 4 - 1 9 2 , 5 9 0 3 7 , 3 8 0 7 1 , 9 6 8 1 7 , 1 5 8 2 7 , 5 4 1 1 8 5 , 4 3 4 9 1 7 3 8 , 0 1 4 3 5 , 2 3 1 7 1 , 8 7 4 8 4 3 , 2 2 8 4 3 , 2 2 2 5 2 , 1 3 4 5 , 6 9 5 0 4 , 5 5 3 1 , 9 8 0 0 2 0 7 3 , 9 6 0 1 3 , 1 8 2 0 , 3 5 9 1 0 , 2 7 4 7 , 7 4 1 6 2 0 , 2 4 7 0 6 , 6 7 4 r e h o t d n a e e F e u n e v e r l l o T e u n e v e r e u n e v e r l a t o T g n y i l r e d n U 1 2 3 , 6 9 7 2 , 0 6 3 2 2 5 , 8 8 5 6 , 4 7 1 7 1 , 5 7 2 8 3 , 2 5 7 0 8 , 9 2 9 3 7 , 9 1 1 9 6 0 , 2 8 3 A D T B E I l a n o i t r o p o r p - 1 2 3 , 6 - - - - - - - - s m e t i f f o e n O 9 7 2 , 0 6 3 2 2 5 , 8 8 5 6 , 4 7 1 7 1 , 5 7 2 8 3 , 2 5 7 0 8 , 9 2 9 3 7 , 9 1 1 9 6 0 , 2 8 3 A D T B E I l a n o i t r o p o r P - - 5 9 5 , 1 9 5 ) 5 7 7 , 8 1 ( 5 6 3 , 4 3 1 ) 0 4 7 , 3 3 3 ( ) 2 ( 9 2 6 7 8 9 , 1 0 4 8 3 3 1 , 8 2 1 0 8 6 6 9 0 , 2 ) 4 1 2 , 0 3 1 ( ) 8 0 5 , 0 2 ( ) 9 8 1 , 4 2 1 ( ) 5 1 8 , 7 1 ( ) 2 1 0 , 1 4 ( 3 7 5 , 6 ) 5 5 2 , 3 8 ( e u n e v e r e s n e p x e t s e r e n t I t s e r e n t I ) 0 5 7 , 7 ( ) 9 9 4 , 4 0 2 ( ) 8 1 5 , 1 ( ) 1 0 2 , 4 3 ( ) 6 8 0 , 4 4 ( ) 0 8 9 , 8 3 ( ) 7 6 8 , 1 2 ( ) 7 4 8 , 3 6 ( ) 9 2 3 , 5 4 1 ( d n a n o i t i a c e r p e D n o i t a s i t r o m a 2 7 4 , 3 2 ) 7 2 3 , 0 7 ( ) 4 6 6 , 2 2 ( ) 4 1 1 , 4 ( 5 9 5 , 1 ) 5 4 1 , 0 2 ( ) 5 9 5 , 3 4 ( 1 3 6 , 7 ) 0 7 7 , 7 8 ( 7 1 4 , 1 1 6 4 3 , 7 1 ) 5 9 1 , 9 ( 6 7 9 , 6 1 8 5 0 , 0 6 1 3 5 3 , 4 2 0 3 4 , 4 3 3 2 3 , 6 ) 4 7 7 , 3 ( - 7 9 0 , 0 1 ) 4 2 3 , 5 ( ) 9 7 2 , 2 ( 4 3 5 , 7 1 ) 4 7 2 , 5 1 ( ) 5 8 0 , 9 1 ( ) 7 5 7 ( 7 3 5 , 4 1 ) 6 7 0 , 1 1 ( 5 2 8 , 7 4 ) 7 9 8 , 5 3 ( ) 1 4 3 , 6 1 ( ) 8 8 8 , 7 ( 5 9 5 , 1 ) 8 4 0 , 0 1 ( ) 9 1 9 , 8 4 ( 2 5 3 , 5 ) 6 3 2 , 0 7 ( ) 7 5 8 , 3 ( ) 9 3 7 , 1 ( ) 2 5 9 , 9 ( 3 1 5 , 1 3 2 8 9 , 8 4 1 ) 4 9 7 , 0 2 0 , 1 ( 3 4 5 , 8 2 4 0 5 , 5 8 8 8 , 7 ) 5 9 5 , 1 ( ) 9 8 7 ( ) 2 5 2 , 9 2 4 ( ) 0 0 7 , 7 2 ( ) 7 0 3 , 6 2 ( ) 8 7 2 , 5 8 ( ) 1 3 6 , 7 6 ( ) 6 7 0 , 3 4 ( ) 0 6 2 , 9 7 1 ( ) 9 8 5 , 5 2 6 ( t i f o r p l a n o i t r o p o r P x a t e r o f e b ) s s o l ( t i f e n e b x a t e m o c n I t e n l a n o i t r o p o r P ) s s o l ( t i f o r p ) e s n e p x e ( Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 2 Segment information (continued) Other segment information - Proportional income statement Proportional basis of presenting results The CEO and the Executive Committee receive information for assessing the business on an underlying proportional basis reflecting the contribution of individual assets in the proportion of Transurban's equity ownership. The Group's proportional EBITDA result reflects business performance and permits a more appropriate and meaningful analysis of the Group's underlying performance on a comparative basis. This method of presentation differs from the statutory accounting format and has been reconciled below. EBITDA is earnings before interest, taxation, depreciation and amortisation. Segment revenue Revenue from external customers is through toll and fee revenues earned on toll roads. There are no inter-segment revenues. Segment revenue reconciles to total statutory revenue as follows: Total segment revenue (proportional) Add: Revenue attributable to non-controlling interest Less: Revenue of non-controlled assets Construction revenue recognised in accordance with AASB-I 12 Service Concession Arrangements Business development revenue (offset against business development costs for proportional result) Other Total revenue (note 3) 30 June 2012 $'000 30 June 2011 $'000 1,047,180 972,969 25,022 (208,737) 25,682 (196,515) 265,535 212,659 19,550 5,934 1,154,484 16,255 5,466 1,036,516 Interest revenue Interest revenue is earned through infrastructure bonds, bank interest revenue and term loan note interest received. Interest revenue reconciles to total statutory finance income as follows: Total segment interest revenue (proportional) Add: Interest revenue attributable to non-controlling interest Less: Interest revenue of non-controlled assets Total statutory finance income (note 5) 30 June 2012 $'000 30 June 2011 $'000 148,471 232,572 13,207 (4,648) 157,030 42,672 (4,487) 270,757 76 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 2 Segment information (continued) Other segment information - Proportional income statement (continued) Reconciliation of proportional EBITDA to statutory profit for the year Proportional EBITDA reconciles to statutory net profit as follows: Proportional EBITDA Add: Proportional EBITDA attributable to non-controlling interest Less: Proportional EBITDA of M5 Less: Proportional EBITDA of M7 Less: Proportional EBITDA of Pocahontas Less: Proportional EBITDA of Other Transurban DRIVe Statutory profit before depreciation and amortisation, net finance costs, equity accounted investments and tax Statutory net finance costs Statutory depreciation and amortisation Share of net losses of equity accounted investments Income tax benefit Profit for the year 30 June 2012 $'000 30 June 2011 $'000 783,984 737,309 16,909 (82,276) (78,656) (6,981) 3,955 18,645 (75,171) (74,658) (6,321) 4,114 636,935 603,918 (209,994) (301,641) (137,946) 71,204 58,558 (185,513) (289,435) (20,198) 9,386 118,158 One off items The exclusion of certain items in the Group's results permits a more appropriate and meaningful analysis of the Group's underlying performance on a comparative basis. One off items are: M4 handback provision and reversal of contingent liability recognised on acquisition 30 June 2012 $'000 30 June 2011 $'000 - - 18,625 18,625 77 TRANSURBAN ANNUAL REPORT 2012 d e t i l i i m L s g n d o H n a b r u s n a r T ) d e u n i t n o c ( 2 1 0 2 e n u J 0 3 s t n e m e t a t s l a i c n a n i f d e t a d i l o s n o c e h t o t s e t o N ) d e u n i t n o c ( n o i t a m r o f n i t n e m g e S 2 s t e s s a t n e m g e S - n o i t a m r o f n i t n e m g e S 78 TRANSURBAN ANNUAL REPORT 2012 d e s a b d e t a c o l l a e r a s t e s s a e h T i . s s a b d e t a d i l o s n o c y r o t u t a t s a n o d e t n e s e r p s i s t e s s a f o t c e p s e r n i e e t t i m m o C e v i t u c e x E d n a O E C e h t o t i d e d v o r p n o i t a m r o f n i t n e m g e s e h T : s w o l l o f s a s i 1 1 0 2 e n u J 0 3 d n a 2 1 0 2 e n u J 0 3 d e d n e s d o i r e p e h t r o f l s t n e m g e s e b a t r o p e r e h t r o f n o i t a m r o f n i e h T . t e s s a e h t f o n o i t a c o l l i a c s y h p e h t n o l a t o T e t a r o p r o C A S U s e l a W h t u o S w e N a i r o t c i V 7 1 9 , 1 0 9 , 9 4 2 3 , 1 7 3 0 0 0 $ ' 0 0 0 $ ' 0 9 1 , 5 3 3 - 1 5 1 , 2 0 3 8 2 8 , 1 3 n a b r u s n a r T h t u o S w e N I e V R D 0 0 0 $ ' s e l a W 0 0 0 $ ' & m a o R t s u a l l o T 0 0 0 $ ' l a t o T 7 M 0 0 0 $ ' 5 M 0 0 0 $ ' n r e t s a E 1 M r o t u b i r t s D i 0 0 0 $ ' e n a L e v o C l e n n u T 0 0 0 $ ' 2 M s l l i H 0 0 0 $ ' i k n L y t i C 0 0 0 $ ' 2 1 0 2 e n u J 0 3 - - - 7 5 6 , 8 3 1 , 6 8 0 5 , 4 5 7 6 6 , 2 8 7 5 1 9 , 3 4 3 1 2 2 , 4 9 8 , 1 2 8 5 , 3 2 6 4 6 7 , 9 3 4 , 2 6 3 9 , 1 9 3 , 3 s t e s s a t n e m g e s l a t o T 0 9 1 , 5 3 3 - 4 0 4 , 8 4 2 9 7 8 - - - 0 9 1 , 5 3 3 - - - - - - 5 2 5 , 7 4 2 9 1 9 , 1 2 r e h t o ( s t e s s a t n e r r u c - n o n o t s n o i t i d d A ) x a t d e r r e f e d d n a s t e s s a l i a c n a n i f n a h t t n o i j d n a s e t a c o s s a n i i s t n e m t s e v n I : e d u c n l i s t e s s a t n e m g e s l a t o T i s p h s r e n t r a p e r u t n e v d e t i i l i m L s g n d o H n a b r u s n a r T ) d e u n i t n o c ( 2 1 0 2 e n u J 0 3 s t n e m e t a t s l a i c n a n i f d e t a d i l o s n o c e h t o t s e t o N ) d e u n i t n o c ( s t e s s a t n e m g e S - n o i t a m r o f n i t n e m g e S ) d e u n i t n o c ( n o i t a m r o f n i t n e m g e S 2 79 TRANSURBAN ANNUAL REPORT 2012 l a t o T e t a r o p r o C A S U s e l a W h t u o S w e N a i r o t c i V 0 0 0 $ ' 0 0 0 $ ' n a b r u s n a r T h t u o S w e N I e V R D 0 0 0 $ ' s e l a W 0 0 0 $ ' & m a o R t s u a l l o T 0 0 0 $ ' l a t o T 7 M 0 0 0 $ ' 5 M 0 0 0 $ ' n r e t s a E 1 M r o t u b i r t s D i 0 0 0 $ ' e n a L e v o C l e n n u T 0 0 0 $ ' 2 M s l l i H 0 0 0 $ ' i k n L y t i C 0 0 0 $ ' 1 1 0 2 e n u J 0 3 0 3 5 3 0 4 , , 0 1 5 4 2 , 3 9 5 4 4 9 , 0 4 1 7 6 2 , 3 3 1 , 6 8 0 9 , 6 4 5 2 2 , 4 2 7 0 9 8 , 3 8 3 4 4 4 , 0 1 1 , 2 2 9 1 , 5 4 6 8 0 6 , 2 2 2 , 2 4 7 0 , 6 3 5 , 3 s t e s s a t n e m g e s l a t o T 4 3 8 , 4 2 5 - 4 4 9 , 0 4 1 0 9 8 , 3 8 3 - 5 4 8 , 1 2 9 7 5 3 , 8 3 - 2 2 5 , 8 8 7 6 4 5 , 1 - - - 0 9 8 , 3 8 3 - - - - - 9 9 1 , 8 4 6 7 7 7 , 8 3 1 6 6 9 , 4 9 r e h t o ( s t e s s a t n e r r u c - n o n o t s n o i t i d d A ) x a t d e r r e f e d d n a s t e s s a l i a c n a n i f n a h t t n o i j d n a s e t a c o s s a n i i s t n e m t s e v n I : e d u c n l i s t e s s a t n e m g e s l a t o T i s p h s r e n t r a p e r u t n e v 3 Revenue Toll revenue Fee revenue Other road revenue Total toll, fee and other road revenue Construction revenue Business development revenue Other revenue Total business development and other revenue Total revenue Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) Notes 3(a) 3(a) 3(b) 3(c) 3(d) 30 June 2012 $'000 30 June 2011 $'000 765,431 61,782 18,983 846,196 724,130 56,693 18,394 799,217 286,258 220,015 19,550 2,480 22,030 16,255 1,029 17,284 1,154,484 1,036,516 Toll and fee revenue (a) Toll revenue and associated fees are recognised when the charge is incurred by the user. Other road revenue (b) Other road revenue includes advertising, rental and other associated revenue. Construction revenue (c) Construction revenue is recognised during the construction phase of an intangible asset, and the development of assets for sale to third parties. Business development revenue (d) Business development revenue relates to the provision of development services to third parties. 4 Expenses Profit before income tax includes the following specific expenses: Provision for impairment of trade receivables recognised during the year Rental expenses relating to operating leases Employee benefit expense Defined contribution superannuation expense Share based payment expense 30 June 2012 $'000 30 June 2011 $'000 829 4,157 86,035 4,229 3,131 1,089 4,828 88,262 4,889 4,581 80 TRANSURBAN ANNUAL REPORT 2012 4 Expenses (continued) Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 30 June 2012 $'000 30 June 2011 $'000 Provision for maintenance recognised during the year 18,945 14,748 M4 handback provision and reversal of contingent liability recognised on acquisition - (18,625) Concession fees (road operating cost) are attributable to: Hills M2 Motorway M1 Eastern Distributor Depreciation and amortisation expense Road operating cost Corporate cost 5 Net finance costs Finance income Interest income on infrastructure bonds * Interest income on held to maturity investments Interest income on bank deposits Total finance income Finance costs Interest and finance charges paid/payable Interest charges paid/payable on infrastructure bonds * Unwind of discount on liabilities Net foreign exchange losses Total finance costs Net finance costs (*) - The M1 Eastern Distributor infrastructure bonds matured in August 2011. 30 June 2012 $'000 30 June 2011 $'000 1,476 1,722 3,198 287,073 14,568 301,641 1,280 1,689 2,969 285,008 4,427 289,435 30 June 2012 $'000 30 June 2011 $'000 50,129 91,341 15,560 157,030 (338,286) (16,757) (11,911) (70) (367,024) 168,403 84,565 17,789 270,757 (324,899) (113,546) (17,156) (669) (456,270) (209,994) (185,513) 81 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 6 Income tax benefit Income tax benefit Current tax Deferred tax Under (over) provision in prior years Deferred income tax (benefit) expense included in income tax benefit comprises: (Increase) decrease in deferred tax assets (note 13) (Decrease) increase in deferred tax liabilities (note 13) Numerical reconciliation of income tax benefit to prima facie tax payable Profit (loss) before income tax benefit Tax at the Australian tax rate of 30% (2011 - 30%) Tax effect of amounts which are not deductible (taxable) in calculating taxable income: Trust income not subject to tax Accounting depreciation on non tax depreciable assets Infrastructure bond non-deductible interest Equity accounted results Sundry items Under (over) provision in prior years Income tax benefit Tax expense (income) relating to items of other comprehensive income Cash flow hedges (note 20) Foreign currency translation (note 20) 30 June 2012 $'000 30 June 2011 $'000 54,793 (111,748) (14,249) (71,204) (49,544) (62,204) (111,748) 31,084 (47,973) 7,503 (9,386) (81,669) 33,696 (47,973) 30 June 2012 $'000 30 June 2011 $'000 (12,646) 108,772 (3,794) 32,632 (102,688) 6,349 5,027 41,383 (3,232) (56,955) (14,249) (71,204) (93,123) 5,094 34,064 6,059 (1,615) (16,889) 7,503 (9,386) 83,850 (99,386) (43,823) 192 (43,631) (12,560) (432) (12,992) 82 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 6 Income tax benefit (continued) Tax consolidation legislation The Transurban Group elected to implement tax consolidation legislation for Transurban Holdings Limited and its wholly owned Australian entities with effect from 1 July 2005. The accounting policy in relation to this legislation is set out in note 1(f). The entities in the Transurban Holdings Limited tax consolidated group entered into a tax sharing agreement (TSA) effective from 29 April 2009. The TSA, in the opinion of the Directors, limits the joint and several liability of the wholly-owned entities in the case of a default by the head entity, Transurban Holdings Limited (THL). The entities in the Transurban Holdings Limited tax consolidated group have also entered into a tax funding agreement (TFA) effective from 1 July 2008. Under the TFA the wholly-owned entities fully compensate THL for any current tax payable assumed and are compensated by THL for any current tax receivable and deferred tax assets relating to tax losses. The funding amounts are determined by reference to the amounts recognised in the wholly-owned entities financial statements. The amount receivable/payable under the TFA are calculated as soon as practicable after the end of the financial year for each wholly-owned entity. THL communicates the funding amount to each wholly-owned entity along with the method of calculation and any other information deemed necessary. 7 Current assets - Cash and cash equivalents Cash at bank and in hand All cash balances are interest bearing. Funds not for general use 30 June 2012 $'000 30 June 2011 $'000 318,148 318,148 411,880 411,880 The amount shown in Cash at Bank includes $68.0 million not available for general use at 30 June 2012 (2011: $77.8 million). This comprises amounts required to be held under maintenance and funding reserves, and prepaid tolls, which are restricted from general use. 83 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 8 Current assets - Trade and other receivables Trade receivables Provision for impairment of receivables Infrastructure bond interest receivable Other receivables Prepayments 30 June 2012 $'000 30 June 2011 $'000 36,440 (973) 35,467 - 37,103 5,850 78,420 31,817 (1,185) 30,632 149,370 32,204 5,354 217,560 Provision for impaired trade and other receivables As at 30 June 2012 current trade receivables of the Group with a nominal value of $973,000 (2011: $1,185,000) were considered impaired and accordingly the Group held a provision for impairment of $973,000 (2011: $1,185,000). As at 30 June 2012, trade receivables of $9,783,000 (2011: $2,097,000) were past due but not impaired. The ageing of these receivables is as follows: For the year ended 30 June 2012 Trade and other receivables Current (not past due) less than 30 days overdue more than 30 but less than 60 days overdue more than 60 but less than 90 days overdue more than 90 days overdue For the year ended 30 June 2011 Trade and other receivables Current (not past due) less than 30 days overdue more than 30 but less than 60 days overdue more than 60 but less than 90 days overdue more than 90 days overdue Not Impaired $'000 Impaired $'000 25,684 9,194 491 88 10 35,467 Not Impaired $'000 Impaired $'000 Allowance for Doubtful Debts $'000 265 66 50 54 538 973 265 66 50 54 538 973 Allowance for Doubtful Debts $'000 28,535 1,617 327 52 101 30,632 732 22 114 42 275 1,185 732 22 114 42 275 1,185 The other classes within trade and other receivables do not contain impaired assets and are not past due. Based on the credit history of these other classes, it is expected that these amounts will be received when due. The Group does not hold any collateral in relation to these receivables. 84 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 8 Current assets - Trade and other receivables (continued) Provision for impaired trade and other receivables (continued) Movements in the provision for impairment of receivables are as follows: At 1 July Provision for impairment recognised during the year Receivables written off during the year as uncollectable At 30 June 30 June 2012 $'000 30 June 2011 $'000 1,185 829 (1,041) 973 579 1,089 (483) 1,185 Amounts charged to the provision are generally written off when there is no expectation of recovering additional cash. When customers travel on a road without a prior arrangement in place, they are issued with an invoice. If this invoice is outstanding for a period of time it is sent to a government enforcement authority and the customers are issued an external fine. These authorities use the full extent of the law to recover the amounts and then pass on an amount collected back to the Group. This is recognised in ‘other revenue’. 9 Equity accounted investments Name of company Westlink M7: WSO Co Pty Limited Westlink Motorway Limited WSO Finance Pty Limited Westlink Motorway Partnership Interlink Roads Pty Ltd (M5 Motorway) Transurban DRIVe Holdings LLC (Transurban DRIVe) Ownership interest 30 June 2012 % 30 June 2011 % Carrying amounts 30 June 2012 $'000 30 June 2011 $'000 50 50 50 50 50 75 50 50 50 50 50 75 - - - - - - - - 335,190 383,890 - 335,190 140,944 524,834 Summarised financial information of equity accounted investments Ownership Interest % Assets $'000 Liabilities $'000 Revenues $'000 Profit (loss) $'000 Group's share of: 2012 Westlink M7 M5 Motorway Transurban DRIVe 50 50 75 994,356 654,094 1,344,261 2,992,711 (1,520,435) (318,904) (1,374,961) (3,214,300) 101,548 96,334 10,855 208,737 (71,086) 4,800 (249,269) (315,555) 85 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 9 Equity accounted investments (continued) Summarised financial information of equity accounted investments (continued) 2011 Westlink M7 M5 Motorway Transurban DRIVe Movement in carrying amounts Carrying amount 1 July Investments in associates Share of profits / (losses ) after tax Distributions received Movement in exchange rate Movement in reserves Carrying amount at 30 June Share of profits or losses Profit/(loss) before tax Income tax (expense)/benefit Shares of losses not recognised Balance at 1 July Unrecognised losses for the year Balance at 30 June Share of expenditure commitments Capital commitments Operating commitments Contingent liabilities Share of contingent liabilities incurred jointly with other investors 50 50 75 997,769 682,555 1,376,446 3,056,770 (1,404,116) (298,665) (1,235,502) (2,938,283) 96,544 89,135 10,837 196,516 (70,236) (3,857) (16,341) (90,434) Westlink M7 M5 Motorway Transurban DRIVe Total 30 June 2012 $'000 30 June 2011 $'000 30 June 2012 $'000 30 June 2011 $'000 30 June 2012 $'000 30 June 2011 $'000 30 June 2012 $'000 30 June 2011 $'000 - - - - - - - - - - - 383,890 - 50 428,747 140,944 17,586 - 170,712 524,834 17,636 28,103 599,459 28,103 - - - - 4,750 (53,500) (3,857) (142,696) - (41,000) (16,341) (137,946) (53,500) - (20,198) (41,000) - - - - 24,162 (39,996) (52,957) 11,427 24,162 (39,996) (52,957) 11,427 - 335,190 383,890 - 140,944 335,190 524,834 - - - 19,404 11,417 (191,707) (22,664) (172,303) (11,247) (14,654) 4,750 (15,274) 49,011 (3,857) (142,696) 6,323 34,357 (16,341) (137,946) (8,951) (20,198) 341,496 271,260 71,086 412,582 70,236 341,496 - - - - - - 341,496 271,260 - 106,573 - 106,573 - 177,659 - 519,155 70,236 341,496 - 204,657 204,657 - 133,112 191,045 - 191,045 133,112 604 64,387 - 186,554 604 250,941 323,835 197,499 143,657 391,211 467,492 588,710 324,439 334,702 659,141 - - - - - - - - - - - - - - - - 86 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 9 Equity accounted investments (continued) Westlink M7 Transurban owns a 50 per cent interest in the Westlink Group which holds the concession to design, construct, finance and operate the Westlink M7 Motorway in Sydney for a period of 34 years until February 2037. All were incorporated in Australia. WSO Co Pty Limited is the operator of the Motorway. Westlink Motorway Limited is the nominee manager of the Westlink Motorway Partnership. WSO Finance Pty Limited is the financier of the Motorway. Westlink Motorway Partnership was responsible for the construction of the Motorway. The Motorway opened for operation on 16 December 2005. The Motorway is a fully electronically tolled motorway with distance-based tolling charges. Tolls are escalated or deescalated quarterly by quarterly CPI. Transurban also holds the right to provide tolling and customer management services to the M7. M5 Motorway Transurban holds a 50 per cent ownership interest in the M5 Motorway in Sydney. Tolls are collected on the M5 in both directions, with four toll collection points. The concession for the M5 Motorway extends to December 2026 when all concession assets will be returned to the NSW State Government. The M5 has two tolling categories, cars and similar vehicles and all other vehicles (for example, trucks and buses). Toll increases for the M5 are based on CPI in $0.50 increments. The M5 is a participant in the NSW State Government Cashback Scheme. Motorists with ETC (Electronic Toll Collection) accounts and driving privately registered vehicles on the M5 are able to claim the full amount of tolls paid (excluding GST) from the NSW State Government. 87 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 9 Equity accounted investments (continued) Transurban DRIVe Transurban owns 75 per cent of Transurban DRIVe Holdings LLC (DRIVe). Whilst Transurban ownership represents greater than half of the voting rights of DRIVe, it does not have power to govern its financial, investing and operating policies and accordingly accounts for DRIVe as an associate. A Meeting of Members of DRIVe is required to make decisions in relation to such areas as the legal and financial structure of DRIVe, including distribution policies. 80 per cent or more of the membership interests of those voting is required to pass a decision of the Meeting of Members. Key decisions relating to the operations and financing of DRIVe, such as approval to bid for or dispose of an investment and approval of budgets, are made by the Investment and Management Review Committee (IMRC). IMRC decisions also require an affirmative vote by all current members. DRIVe owns 100 per cent of Pocahontas 895 and 90 per cent of Capital Beltway Express, both in Virginia, USA. Pocahontas 895 is a 99 year concession ending in June 2105. Tolls are escalated according to a prescribed schedule until 2016, and the greater of CPI, real GDP or 2.8 per cent thereafter. Capital Beltway Express is currently in construction phase and is scheduled to open in late 2012, and will have a 75 year concession period. In June 2012, after a detailed review of traffic operating forecasts for Pocahontas 895, it was necessary to reduce the carrying value of the asset based on revised lower revenue forecasts. This resulted in a proportional impairment charge of $302.5 million (see note 2) and an equity accounting charge for the year ended 30 June 2012 of $138.1 million within the Transurban Group. As noted above there are further additional unrecognised losses of $106.6 million within the Transurban Group. 10 Non-current assets - Held to maturity investments Term loan notes M5 debt notes (a) Term loan notes Notes 10(a) 10(b) 30 June 2012 $'000 30 June 2011 $'000 782,667 8,725 791,392 724,225 - 724,225 Term Loan Notes (TLN's) represent Transurban's debt funding contribution to Westlink M7. The fixed maturity date of the TLN's is the earlier of 34 years and the termination of the "Agreement to Lease" between the Roads and Maritime Services (RMS) (formally known as the Roads and Traffic Authority) of New South Wales and Westlink Motorway Limited. The interest rate charged on these notes is 11.93 per cent and any unpaid interest capitalises into additional notes. During the year ended 30 June 2012 the Group capitalised interest of $58.4 million (2011: $46.2 million). (b) M5 debt notes The M5 debt notes are Transurban’s debt funding contribution to the M5 West Widening Project. The fixed maturity date of the notes is 10 years after financial close of the Project. The interest rate charged on these notes is fixed at 5.0 per cent for the first three years following financial close. 88 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 10 Non-current assets - Held to maturity investments (continued) Impairment and risk exposure None of the held to maturity investments are either past due or impaired. All held-to-maturity investments are denominated in Australian currency. As a result, there is no exposure to foreign currency risk. There is also no exposure to price risk as the investments will be held to maturity. 11 Derivative financial instruments Current assets Interest rate swap contracts - cash flow hedges Non-current assets Interest rate swap contracts - cash flow hedges Cross-currency interest rate swap contracts - cash flow hedges Forwards exchange contracts - cash flow hedges Total derivative financial instrument assets Current liabilities Interest rate swap contracts - cash flow hedges Forward exchange contracts - cash flow hedges Non-current liabilities Interest rate swap contracts - cash flow hedges Cross-currency interest rate swap contracts - cash flow hedges 30 June 2012 $'000 30 June 2011 $'000 - - 70 - 67 137 137 1,201 114 1,315 279,422 224,594 504,016 1,065 1,065 15,361 39,877 - 55,238 56,303 754 135,677 136,431 69,404 186,307 255,711 Total derivative financial instrument liabilities 505,331 392,142 Instruments used by the Group instruments in the normal course of business in order to hedge The Group is party to derivative financial exposure to fluctuations in interest and foreign exchange rates in accordance with the Group financial risk management policies (refer to note 38). The instruments used by the Group are as follows: 89 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 11 Derivative financial instruments (continued) Instruments used by the Group (continued) Interest rate swap contracts - cash flow hedges The Group uses interest rate swap contracts for hedging purposes to convert variable rate borrowings to fixed. Variable rate borrowings of the Group currently bear an average interest rate of 5.0 per cent (2011: 6.2 per cent). It is policy to protect part or all of the loans from exposure to increasing interest rates. Accordingly, the Group has entered into interest rate swap contracts under which it receives interest at variable rates and pays interest at fixed rates. Interest rate swap contracts currently in place cover 99 per cent (2011: 99 per cent) of long term variable debt excluding working capital facilities. The average all-in rate after hedging on the hedged portion of the Group's variable rate borrowings is 7.1 per cent (2011: 7.0 per cent). Forward exchange contracts - cash flow hedges In order to protect against exchange rate movements, the Group currently uses forward exchange contracts to hedge a portion of the US Private Placement interest (Nov 06 - Tranche C). The contracts that were in existence in the prior year were settled in November 2011. The Group raised fixed U.S. dollar debt through a US private placement in November 2006. This placement was structured to be capital accretive for five years, with hedging to commence in November 2011. These contract were used to hedge the initial settlement of the cross -currency interest rate swap contracts which commenced in November 2011. The portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised in other comprehensive income. Cross-currency interest rate contracts - cash flow hedges The Group has made several U.S. Private Placements raising fixed rate debt. It is the policy of the Group to protect foreign currency facilities from exposure to unfavourable exchange rate movements. Accordingly, the Group has entered into cross-currency interest rate swap contracts under which it is obliged to receive foreign currency interest at fixed rates and pay AUD interest at floating rates. 90 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 12 Non-current assets - Property, plant and equipment Equipment, fittings and operating systems $'000 284,285 (138,232) 146,053 146,053 44,308 (1,121) (11,560) (132) 177,548 319,675 (142,127) 177,548 177,548 36,616 (1,085) (21,163) 48 191,964 352,392 (160,428) 191,964 At 1 July 2010 Cost Accumulated depreciation Net book amount Year ended 30 June 2011 Opening net book amount Additions Disposals Depreciation charge Movement in foreign exchange rates Closing net book amount At 30 June 2011 Cost Accumulated depreciation Net book amount Year ended 30 June 2012 Opening net book amount Additions Disposals Depreciation charge Movement in foreign exchange rates Closing net book amount At 30 June 2012 Cost Accumulated depreciation Net book amount 91 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 13 Deferred tax assets and liabilities Assets Liabilities Net 30 June 2012 $'000 30 June 2011 $'000 30 June 2012 $'000 30 June 2011 $'000 30 June 2012 $'000 30 June 2011 $'000 1,384 78,777 531,913 8,027 9,460 - 11,478 - 2,218 74,619 459,883 19,494 6,813 - 27,488 - - - - - (992,585) (1,413) (12,621) (6,165) - - - - (1,013,821) (46,119) (13,862) (9,986) 513 125,658 1,599 768,809 (756,258) 12,551 - 112,979 2,261 (336,817) (93,944) - 705,755 (1,443,545) (692,856) 756,258 12,899 (687,287) (327,826) (125,088) - (1,536,702) 692,856 (843,846) 1,384 78,777 531,913 8,027 (983,125) (1,413) (1,143) (6,165) (336,304) 31,714 1,599 (674,736) - (674,736) 2,218 74,619 459,883 19,494 (1,007,008) (46,119) 13,626 (9,986) (327,826) (12,109) 2,261 (830,947) - (830,947) 705,755 553,631 (1,536,702) (1,443,042) (830,947) (889,411) 49,544 12,678 832 768,809 81,669 73,701 (3,246) 62,204 30,953 - 705,755 (1,443,545) (33,696) (60,709) 745 (1,536,702) 111,748 43,631 832 (674,736) 47,973 12,992 (2,501) (830,947) 768,809 768,809 705,755 (1,443,545) 705,755 (1,443,545) (1,536,702) (1,536,702) (674,736) (674,736) (830,947) (830,947) The balance comprises temporary differences attributable to: Accrued expenses Provisions Current and prior year losses Unearned income Fixed Assets/Intangibles Interest receivable Unrealised gain Prepayments Concession fees and promissory notes Cash flow hedges Other Tax assets/(liabilities) Set off of tax Net tax assets/(liabilities) Movements: Opening balance at 1 July Credited/(charged) to the income statement Credited/(charged) to equity Foreign exchange movements Closing balance at 30 June Deferred tax assets/(liabilities) to be recovered after more than 12 months The set off of deferred tax assets and liabilities relates to deferred tax balances for Australian domiciled entities that are levied tax by the Australian Taxation Office, and separately, the deferred tax balances for United States domiciled entities that are levied tax by the Internal Revenue Service. 92 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 14 Non-current assets - Intangible assets Goodwill $'000 CityLink $'000 Hills M2 Motorway $'000 M1 Eastern Distributor $'000 M4 Motorway $'000 Lane Cove Tunnel $'000 Assets under construction $'000 Total $'000 At 1 July 2010 Cost Accumulated amortisation Net book amount Year ended 30 June 2011 Opening net book amount Additions Transfers Amortisation charge Closing net book amount At 30 June 2011 Cost Accumulated amortisation Net book amount 260,288 4,489,001 2,517,866 2,153,780 178,788 - 260,288 (1,302,003) (171,602) (452,836) 3,186,998 2,065,030 1,982,178 (176,314) 2,474 - - - 181,651 9,781,374 - 181,651 (2,102,755) 7,678,619 260,288 - - - 260,288 3,186,998 2,065,030 1,982,178 51,611 - - 139,368 - - (52,050) (64,340) (139,140) 3,238,837 2,000,690 1,930,128 2,474 - - (501) 1,973 - 648,068 - (21,844) 626,224 181,651 177,858 (139,368) - 220,141 7,678,619 877,537 - (277,875) 8,278,281 260,288 4,679,980 2,517,866 2,153,780 178,788 648,068 220,141 10,658,911 - 260,288 (1,441,143) (223,652) (517,176) 3,238,837 2,000,690 1,930,128 (176,815) 1,973 (21,844) 626,224 - 220,141 (2,380,630) 8,278,281 Year ended 30 June 2012 Opening net book amount Additions Other adjustments (note 17) Transfers Amortisation charge Closing net book amount 260,288 - - - - 260,288 3,238,837 2,000,690 1,930,128 - - - - - (89,227) - - 64,180 (139,158) (52,049) (64,427) 3,074,632 1,936,263 1,878,079 1,973 - - - (307) 1,666 626,224 - - - (24,533) 601,691 220,141 265,535 8,278,281 265,535 - (64,180) - 421,496 (89,227) - (280,474) 8,174,115 At 30 June 2012 Cost Accumulated amortisation Net book amount Goodwill 260,288 4,654,933 2,517,866 2,153,780 178,788 648,068 421,496 10,835,219 - 260,288 (1,580,301) (275,701) (581,603) 3,074,632 1,936,263 1,878,079 (177,122) 1,666 (46,377) 601,691 - 421,496 (2,661,104) 8,174,115 Goodwill relates to the Group's Sydney Network and has arisen from the acquisition of Hills Motorway Group, Tollaust Pty Limited and the Sydney Roads Group. Concession assets The CityLink, Hills M2, Eastern Distributor, M4 Motorway and Lane Cove Tunnel Service Concession Arrangements have been accounted for in accordance with AASB-I 12 and therefore the concession assets have been classified as Intangible Assets. 93 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 14 Non-current assets - Intangible assets (continued) Concession assets (continued) CityLink concession asset Transurban holds the Concession for Melbourne’s CityLink tollway which grants the Group the right to design, build, operate and maintain CityLink for the concession period ending on 14 January 2034 (being 34 years following completion of construction). Transurban has the right to collect tolls from CityLink for the duration of the Concession Arrangement and maintains the tollway to ensure continuous availability for public use. Tolls are escalated in accordance with the maximum allowable increases in the Concession Deed, being a quarterly escalation at the greater of quarterly CPI or 1.1065 per cent (equivalent to an annual escalation rate of 4.5 per cent) for the first 15 years then quarterly by CPI, but no greater than annual CPI plus 2.5 per cent. At the end of the concession period, all concession assets are to be returned to the Victorian State Government. During the year $64.2 million of assets under construction were transferred to the CityLink concession asset, representing the completed components of the CityLink Upgrade. The provision for contingent consideration associated with M1 Citylink upgrade (see note 17) was reviewed at 30 June 2012. This resulted in a decrease in the provision and a corresponding adjustment to the intangible asset. Hills M2 concession asset Transurban has the right Transurban to maintain the Motorway. to toll the Hills M2 Motorway until 2046. The Concession Deed also requires Toll increases for the Motorway are based on a maximum toll increase as defined in the Concession Deed, being a quarterly escalation at the greater of quarterly CPI or 1 per cent, subject to integer rounding. At the end of the concession period, all concession assets will be returned to the NSW State Government. M1 Eastern Distributor concession asset Transurban has the right to toll the M1 Eastern Distributor (ED) until 24 July 2048. Toll increases for the ED are based on a maximum toll increase as defined in the Concession Deed, being a quarterly escalation at the greater of a weighted sum of quarterly AWE and quarterly CPI or 1 per cent subject to integer rounding. At the end of the concession period, all concession assets will be returned to the NSW State Government. M4 concession asset Transurban held an investment of 50.61 per cent in the M4 Motorway in Sydney via the concessionaire, Statewide Roads Limited. The M4 Motorway opened in 1992 and was handed back to the NSW State Government on 15 February 2010. The Group continues to operate and maintain the service centres located on the M4 Motorway. Lane Cove Tunnel Transurban has the right to toll the Lane Cove Tunnel until January 2037. Toll increases for the Lane Cove Tunnel are based on a theoretical toll increase as defined in the Concession Deed, being a quarterly escalation of CPI, subject to the nearest whole cent rounding. At the end of the concession period, all concession assets will be returned to the NSW State Government. Assets under construction The Group is currently undertaking upgrade works on CityLink and the Hills M2 Motorway. Construction on the M2 Upgrade commenced in January 2011. These will be transferred to the respective intangible assets upon completion. During the year completed works of $64.2 million were transferred to the CityLink concession asset. 94 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 14 Non-current assets - Intangible assets (continued) Impairment testing of goodwill and other intangible assets Impairment testing The Group tests whether goodwill and other intangible assets have suffered any impairments, in accordance with the accounting policy stated in note 1(i). The recoverable amount of assets and cash-generating units have been determined based on the greater of value-in-use and fair value less cost to sell calculations. These calculations require the use of assumptions regarding traffic flows, discount rates, growth rates and other factors affecting operating activities of cash-generating units. Key assumptions used for calculating the recoverable amount The Group makes assumptions in calculating the recoverable amount of its cash generating units. These include assumptions around expected traffic flows and forecast operational costs. In performing the calculations the Group has applied a discount rate ranging from 8.8 to 11.0 per cent (2011: 8.8 to 11.0 per cent), representing the implied discount rate applicable to the risk profile of the Group's assets, to discount the forecast future attributable cash flows. the Group has also applied rates of growth to underlying operating assumptions to reflect the expected performance of the assets beyond the budget period in accordance with the respective concessions. The operating costs have been escalated in line with a combination of Consumer Price Index (CPI) and Average Weekly Earnings (AWE) forecasts. A long term CPI rate of 2.5 per cent (2011: 2.5 per cent) and AWE of 4.0 per cent (2011: 4.0 per cent) have been used. In determining future cash flows, 15 Current liabilities - Trade and other payables Trade payables and accruals Infrastructure bond interest payable 30 June 2012 $'000 30 June 2011 $'000 110,103 - 110,103 109,821 111,542 221,363 95 TRANSURBAN ANNUAL REPORT 2012 16 Borrowings Current Infrastructure facilities Less: Infrastructure facility cash reserve Capital Markets debt Non-current Working capital facilities Capital Markets debt Term debt U.S. Private Placement Syndicated facility Total borrowings Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) Notes 16(a) 16(a) 16(b) 16(c) 16(b) 16(d) 16(e) 16(f) 30 June 2012 $'000 30 June 2011 $'000 - - - - 1,292,301 (1,292,301) 202,870 202,870 58,355 1,276,478 1,412,849 1,142,963 598,752 4,489,397 37,383 1,037,377 1,286,769 1,074,951 599,337 4,035,817 4,489,397 4,238,687 Description of borrowings - Financing arrangements and credit facilities Credit facilities are provided as part of the overall debt funding structure of the Transurban Group. Each facility is described below. (a) Infrastructure facilities M1 Airport Motorway The infrastructure facility was repaid in August 2011. The facility was certified by the Development Allowance Authority to qualify for concessional tax treatment under the Income Tax Legislation. The bonds were secured by an infrastructure facility cash reserve equal to the amount of the loan which was set off against the loan facility. (b) Capital markets debt These facilities comprise the following: • • • $600.0 million credit wrapped floating rate bonds raised in November 2005 with terms of 10 years ($300.0 million) and 12 years ($300.0 million) with interest currently payable at 4.0 per cent at 30 June 2012. These facilities are fully hedged with all-in rates of 7.4 and 5.0 per cent respectively. $250.0 million non-credit wrapped fixed rate bonds raised in March 2010 with a term of four years. Interest is payable at 7.3 per cent. $200.0 million non-credit wrapped fixed rate bonds raised in June 2011 with a term of five years. Interest is payable at 6.8 per cent. The above facilities have deferred borrowing costs of $10.7 million. These facilities are secured by a first ranking charge over the cash flows of the Group. The Group also established a US $2 billion secured EMTN program in October 2011. Under the program the Group may from time to time issue notes denominated in any currency. The Group issued the following notes under the program during the year: 96 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 16 Borrowings (continued) (b) Capital markets debt (continued) • $239.1 million of Canadian dollar denominated ($250.0m CAD) secured fixed rate medium term notes raised in March 2012 with a term of seven years. Interest is payable at 3.4 per cent. This facility is fully hedged with an all-in rate after hedging of 6.7 per cent. The EMTN facility has deferred borrowing costs of $1.9 million. This facility is secured by a first ranking charge over the cash flows of the Group. (c) Working capital facilities The Group has the following facilities in place: • • • • • $110.0 million facility which is for a term of three years, maturing December 2013. At 30 June 2012, $59.7million of the facility was drawn. $110.0 million facility which is for a term of three years, maturing December 2013. At 30 June 2012, the facility was undrawn. $100.0 million facility which is for a term of three years, maturing April 2013. At 30 June 2012, the facility was undrawn. $100.0 million facility which is for a term of three years, maturing August 2014. At 30 June 2012, the facility was undrawn. $30.0 million facility which is for a term of three years, maturing June 2013. At 30 June 2012, the facility was undrawn. These facilities are secured by a first ranking charge over the cash flows of the Group. The facilities have deferred borrowing costs of $1.3 million. (d) Term debt The term debt facilities are comprised of: • • • $520.0 million facility entered into by AMT Management Limited (as trustee for Airport Motorway Trust). The facility has deferred borrowing costs of $4.4 million. $740.0 million facility entered into by Hills Motorway Management Limited (as trustee for Hills Motorway Trust). The facility has deferred borrowing costs of $6.5 million. $260.0 million facility entered into by LCT-MRE Nominees Pty Limited (as trustee for LCT-MRE Trust). The facility has deferred borrowing costs of $0.9 million. The Airport Motorway facility was refinanced in July 2011 and is fully secured against the respective rights of Airport Motorway Limited and Airport Motorway Trust and their assets. The facility is a $520.0 million non-recourse syndicated facility with terms of three years ($295.0 million) and seven years ($225.0 million). The current floating interest rate applicable to the facility is 3.5 per cent (2011: 4.9 per cent). These facilities are currently 99 per cent hedged to an all-in rate after hedging of 7.0 per cent. The Hills M2 facility was refinanced in November 2010 and is fully secured against the respective rights of Hills Motorway Limited and Hills Motorway Trust and their assets. The facility is a non-recourse syndicated facility totalling $740.0 million. The financing comprised: the refinancing of $465.0 million of existing debt with terms of four years ($400.0 million), and six years ($65.0 million); and a new construction capex facility of $275.0 million with a term of six years. As at 30 June 2012, $179.7 million was drawn under the construction capex facility. The total facility is currently 98.3 per cent hedged with an all-in rate after hedging of 7.1 per cent. 97 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 16 Borrowings (continued) (d) Term debt (continued) The Lane Cove Tunnel facility was established in August 2010 to partially finance the acquisition of the Lane Cove Tunnel and is fully secured against the respective rights of LCT-MRE Pty Limited and LCT-MRE Trust and their assets. This facility is a non-recourse syndicated facility with a term of three years. The current floating rate applicable to the facility is 3.6 per cent (2011: 4.9 per cent). The facility is currently fully hedged to an all-in rate after hedging of 7.0 per cent. (e) U.S. private placement The composition of the three US Private Placements is outlined below: Fixed Interest Rate Dec 04 - Tranche A Dec 04 - Tranche B Dec 04 - Tranche C Aug 05 - Tranche A Aug 05 - Tranche B Aug 05 - Tranche C Nov 06 - Tranche A Nov 06 - Tranche B Nov 06 - Tranche C Nov 06 - Tranche D Floating Interest Rate Dec 04 - Tranche D Total US Private Placement Deferred borrowing costs Total Rate 5.02% 5.17% 5.47% 5.04% 5.19% 5.35% 5.71% 5.86% 5.95% 6.06% 4.1% USD $'000 100,000 38,900 108,600 98,000 125,500 156,500 56,980 181,534 162,220 67,392 1,095,626 AUD $'000 Maturity 98,126 Dec 2014 38,171 Dec 2016 106,564 Dec 2019 96,163 Aug 2015 123,148 Aug 2017 153,567 Aug 2020 55,912 Nov 2016 178,132 Nov 2018 159,179 Nov 2021 66,129 Nov 2026 1,075,091 72,000 Dec 2019 72,000 1,147,091 (4,128) 1,142,963 Note that the Dec 04 - Tranche D facility is fully hedged with an all in rate after hedging of 6.7 per cent. These facilities are secured by a first ranking charge over the cash flows of the Group. Hedge of net investment in foreign entity Transurban's investment in Transurban DRIVe Holdings LLC acts as a natural hedge against exposure to foreign currency movements in a portion of the US Private Placement (Nov 06 - Tranche C). Exchange differences arising on the revaluation of the USD debt are recognised in profit or loss in the separate financial In the consolidated financial report, such exchange report of Transurban Finance Company Pty Limited. differences are recognised initially in a separate component of equity and will be recognised in the profit or loss on disposal of the net foreign investment. As at 30 June 2012, the Group has deferred $45.4 million in gains (2011: $53.2 million). (f) Syndicated facility These facilities, established in August 2007 and December 2011, comprise syndicated bank debt issued by Transurban Finance Company Pty Limited. At 30 June 2012, the following amounts were drawn: 98 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 16 Borrowings (continued) (f) Syndicated facility (continued) • • • • $215.0 million which is for a term of circa three years, maturing February 2015. $160.0 million which is for a term of circa five years, maturing February 2017. $100.0 million which is for a term of seven years, maturing August 2014. $125.0 million which is for a term of ten years, maturing August 2017. Applicable interest rates ranging between 5.0 and 6.4 per cent. These facilities are fully hedged with an all-in rate after hedging of 8.0 per cent. These facilities have deferred borrowing costs of $1.2 million and are secured by a first ranking charge over the cash flows of the Group. Letters of credit and corporate credit facilities The Group has a $50 million letter of credit facility which is for a term of 3 years, maturing December 2013. As at 30 June 2012, letters of credit to the value of $42.1 million have been issued which are currently undrawn and therefore no liability has been recorded. A $6.6 million general credit facility is in place covering corporate requirements including letters of credit, credit card facilities, online banking and an overdraft facility. As at 30 June 2012, $5.3 million of bank guarantees have been issued which are currently undrawn and therefore no liabilities have been recorded. The 365 day facility matures June 2013. Set-off of assets and liabilities In the prior year, a legal right of set-off was in place in respect of the specific cash deposit of $1,292.3 million representing collateralisation of the M1 Airport Motorway Infrastructure Facility. Covenants The Group's debt has the following Interest Coverage Ratio (ICR) covenants: • • CityLink - ICR greater than 1.1 times Group - ICR greater than 1.25 times In addition, the Group has a market capitalisation based clause where gearing must not exceed 60 per cent. Based on the balance sheet as at 30 June 2012, the Group's security price would need to close below $2.15 per Security for 20 consecutive business days to trigger this clause. In addition, the non-recourse debt at M1 Eastern Distributor and Hills M2 Motorway has the following covenants: • • • M1 Eastern Distributor - ICR greater than 1.2 times Hills M2 Motorway - ICR greater than 1.2 times Lane Cove Tunnel - ICR greater than 1.15 times 99 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) Notes 17(a) 17(b) 17(c) 17(c) 17(d) 17(a) 17(d) 17(e) 30 June 2012 $'000 30 June 2011 $'000 18,119 1,560 218,798 28,065 26,943 293,485 5,602 175,782 12,371 193,755 20,118 2,101 202,146 29,347 42,874 296,586 2,226 158,749 101,598 262,573 487,240 559,159 17 Provisions Current Employee benefits Onerous lease provision Distribution to security holders Distribution to non-controlling interests in subsidiaries Maintenance provision Non-current Employee benefits Maintenance provision Provision for contingent consideration Total provisions Movements in provisions Movements in each class of provision during the financial year, other than employee benefits, are set out below: Current Non-current Onerous lease provision $'000 Distribution to security holders $'000 Distributions to non-controlling interest in subsidiaries $'000 Current maintenance provision $'000 Non-current maintenance provision $'000 Provision for contingent consideration $'000 2,101 202,146 29,347 42,874 158,749 101,598 - - (634) 93 - - 1,560 429,203 - (412,551) - - - 218,798 13,036 - (14,318) - - - 28,065 18,945 - (29,940) - - (4,936) 26,943 - - - - 12,097 4,936 175,782 - (89,227) - - - - 12,371 Consolidated - 2012 Balance at 1 July Additional provision recognised Unutilised amounts Amounts paid/utilised Movements in foreign exchange rates Unwinding of discount Transfer Balance at 30 June (a) Employee benefits Employee benefits relate to the provision for annual leave, bonuses and long service leave. (b) Onerous lease provision An onerous lease is recognised when the Group has lease commitments on property no longer used. 100 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 17 Provisions (continued) (c) Distribution to security holders and non-controlling interests These distributions are provided for once approved by the board and are announced to equity holders. (d) Maintenance provision A maintenance provision is recognised for the present value of the Group's obligations to maintain the tolling assets as required under the Service Concession Arrangements. (e) Provision for contingent consideration As part of the M1 CityLink Upgrade project agreement with the Victorian State Government, Transurban agreed to share any increased toll revenue resulting from the upgrade once the agreed investment and future operating costs for the new Southern Link Upgrade section are recovered. The payment will represent 50 per cent of the present value of this increased revenue. Actual toll revenue for the third full financial year post construction completion is extrapolated to the end of the CityLink concession to determine the payment amount. A provision and corresponding intangible asset have been recognised for the potential obligation to pay the State. 18 Other liabilities Current Prepaid tolls Unearned income Other Non-current Concession and promissory notes Lease incentive Other Total other liabilities (a) Prepaid tolls Notes 18(a) 18(b) 18(c) 30 June 2012 $'000 30 June 2011 $'000 59,976 12,694 581 73,251 51,072 1,984 617 53,673 59,046 29,995 581 89,622 49,510 2,565 579 52,654 126,924 142,276 Prepaid tolls represent amounts received from customers and held on deposit until the charge is incurred by the user. (b) Unearned income Unearned income represents amounts received in advance and will be recognised when the income is earned. 101 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 18 Other liabilities (continued) (c) Concession and promissory notes M1 Eastern Distributor The Eastern Distributor Project Deed between Airport Motorway Limited, Airport Motorway Trust and the Roads and Maritime Services (RMS) provides for annual concession fees of $15.0 million during the construction phase and for the first 24 years after construction completion of the M1 Eastern Distributor. Until a certain threshold return is achieved, payments of concession fees due under the Project Deed will be satisfied by means of the issue of non-interest bearing Concession Notes. Concession Notes are recognised 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 motorway, the present value of the expected future repayments is determined using a discount rate of 12 per cent which recognises their subordinate nature. The face value of Concession Notes on issue at 30 June 2012 is $225 million (2011: $210.0 million). The net present value at 30 June 2012 of the redemption payments relating to these Concession Notes is $30.7 million (2011: $29.8 million). M2 Motorway The Hills Motorway Trust has entered into leases with the Roads and Maritime Services of New South Wales (RMS). 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 RMS. Promissory Notes are recognised 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 2012 is $136.9 million (2011: $126.5 million). The net present value at 30 June 2012 of the redemption payments relating to these Promissory Notes is $20.3 million (2011: $19.7 million). 102 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 30 June 2012 $'000 30 June 2011 $'000 7,847,912 7,847,912 7,772,117 7,772,117 30 June 2012 Number '000 30 June 2011 Number '000 1,458,321 1,458,321 1,443,193 1,443,193 19 Contributed equity Share capital Fully paid stapled securities Fully paid stapled securities Stapled securities The number of stapled securities on issue is 1,458,321,154 (2011: 1,443,543,731). The difference in the prior year of 351,075 relates to treasury securities. Stapled securities entitle the holder to participate in distributions and on winding up of the Transurban Group in proportion to the number of and amounts paid on the securities held. On a show of hands every holder of stapled securities present at a meeting in person or by proxy, is entitled to one vote. Capital risk management The Group is subject to a gearing ratio covenant imposed by senior secured lenders. The Group monitors capital on the basis of the gearing ratio to ensure compliance with the covenant. There have been no breaches of the covenant. For further information refer to note 16. The Group's objectives when managing capital is to safeguard its ability to continue as a going concern, so that it can continue to provide returns to security holders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may adjust the amount of distributions paid to security holders, return capital to security holders, issue new securities or sell assets to reduce debt. 103 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 19 Contributed equity (continued) Movements in ordinary share capital: Opening balance at 1 July 2010 Distribution reinvestment plan Purchase, disposal and vesting of treasury securities Transfer vesting portion of LTI from share-based payment reserve Purchase of Performance Rights Plan units Less: Amounts attributable to Transurban International Limited Closing balance at 30 June 2011 Opening balance at 1 July 2011 Distribution reinvestment plan Disposal and vesting of treasury securities Transfer vesting portion of LTI from share-based payment reserve Purchase of Performance Awards Plan units Less: Amounts attributable to Transurban International Limited Closing balance at 30 June 2012 Notes 19(a) 19(b) 19(b) 19(b) 19(c) 19(a) 19(b) 19(b) 19(b) 19(c) Number of units $'000 Consolidated $'000 1,414,295 28,876 22 7,656,383 124,550 103 - - 440 (675) - 1,443,193 (8,684) 7,772,117 1,443,193 14,162 351 7,772,117 76,001 1,640 615 - 4,051 (2,496) - 1,458,321 (3,401) 7,847,912 (a) Distribution reinvestment plan The Transurban Group has established a distribution reinvestment plan under which holders of stapled securities may elect to have all or part of their distribution entitlements satisfied by the issue of new stapled securities rather than by cash. (b) Treasury securities Stapled securities were issued to executives under share based payment plans. The securities were held by the executive but vested in the executive in accordance with the terms of the plans. The acquired securities could not be transferred or sold prior to vesting date. On forfeit, the securities were sold on market. 104 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 19 Contributed equity (continued) (c) Non-controlling interest - Transurban International Limited THL has been identified as the parent entity of the post-date of transition stapling arrangement of THL, THT and TIL. AASB Interpretation 1002 requires the equity of TIL to be classified as a non-controlling interest. 20 Reserves and accumulated losses Reserves Cash flow hedges Share-based payments Foreign currency translation Transactions with non-controlling interests Movements: Cash flow hedges Balance 1 July Revaluation - gross Deferred tax (note 13) Transfer to net profit Amount attributable to non-controlling interest Movement in associate's reserve Movement in associate's reserve attributable to non-controlling interest Balance 30 June Share-based payments Balance 1 July Employee share plan expense Transfer vesting portion of LTI to contributed equity Transfer non-vesting portion of LTI to retained earnings Balance 30 June Foreign currency translation Balance 1 July Deferred tax (note 13) Currency translation differences arising during the year Currency translation differences arising during the year attributable to non-controlling interest Balance 30 June 30 June 2012 $'000 30 June 2011 $'000 (129,119) 8,200 (12,294) (5,127) (138,340) 34,560 10,188 (13,160) (5,127) 26,461 30 June 2012 $'000 30 June 2011 $'000 34,560 (219,648) 43,823 5,048 7,098 (39,996) 39,996 (129,119) 10,188 3,131 (4,966) (153) 8,200 (13,160) (192) 13,172 (12,114) (12,294) 63,602 (45,578) 12,560 4,375 (399) 11,427 (11,427) 34,560 6,128 4,581 (440) (81) 10,188 (12,009) 432 (8,045) 6,462 (13,160) 105 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 20 Reserves and accumulated losses (continued) Reserves (continued) Transactions with non-controlling interests Balance 1 July Balance 30 June Accumulated losses Movements in (accumulated losses) were as follows: 30 June 2012 $'000 30 June 2011 $'000 (5,127) (5,127) (5,127) (5,127) 30 June 2012 $'000 30 June 2011 $'000 Balance 1 July Profit (loss) attributable to ordinary equity holders of the stapled group Distributions to ordinary security holders Transfer of loss attributable to non-controlling interest - Transurban International Limited Transfer non-vesting portion of LTI from share-based payment reserve Balance 30 June (4,085,426) 54,905 (429,203) 227,526 153 (4,232,045) (3,836,959) 112,467 (389,463) 28,448 81 (4,085,426) Nature and purpose of reserves Cash flow hedges The cash flow hedges reserve is used to record gains or losses on a hedging instrument in a cash flow hedge that are recognised in other comprehensive income, as described in note 1(l). Amounts are reclassified to profit or loss when the associated hedged transaction affects profit or loss. Share-based payments The share-based payments reserve is used to recognise the fair value of long-term incentives issued but not exercised. Foreign currency translation Exchange differences arising on translation of foreign controlled entities are recognised in other comprehensive income as described in note 1(d) and accumulated in this reserve within equity. Transactions with non-controlling interests The transactions with non-controlling interests reserve was created as a result of the acquisition of an additional 3.75 per cent of the Airport Motorway Group during a prior year as the Group uses the economic entity approach to transactions with non-controlling interests. 106 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 21 Distributions Distribution payable Final distribution for 2012 financial year payable and recognised as a liability: 15.0 cents (2011: 14.0 cents) per fully paid Stapled Security payable 14 August 2012 Fully franked (2011: 0% franked) based on tax paid @ 30% - 3.5 cents (2011: 0.0 cents) per fully paid Stapled Security Unfranked final distribution - 11.5 cents (2011: 14.0 cents) per fully paid Stapled Security Distributions paid during the year Final (unfranked) distribution for 2011 financial year of 14.0 cents (2010: 12.0 cents) per fully paid Stapled Security paid 11 August 2011 Interim distribution for 2012 financial year of 14.5 cents (2011: 13.0 cents) per fully paid Stapled Security paid 14 February 2012 Fully franked (2011: 0% franked) based on tax paid @ 30% - 3.5 cents (2011: 0.0 cents) per fully paid Stapled Security Unfranked interim distribution - 11.0 cents (2011: 13.0 cents) per fully paid Stapled Security Total distributions paid during the year Distributions paid in cash or satisfied by the issue of Stapled Securities under the distribution reinvestment plan during the year ended 30 June 2012 and 2011 Paid in cash Satisfied by issue of Stapled Securities Funds available (from)/for future distribution reinvestment plans 30 June 2012 $'000 30 June 2011 $'000 51,041 167,707 218,748 - 202,096 202,096 202,096 202,096 169,760 169,760 50,801 159,654 210,455 - 187,367 187,367 412,551 357,127 336,549 76,001 1 412,551 232,577 124,557 (7) 357,127 107 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 21 Distributions (continued) Distribution policy and free cash calculation The Group's distribution policy is to align distributions with free cash from operations. The Group calculates free cash as follows: Cash flows from operating activities Less Westlink M7 Term Loan Note interest received Add back payments for maintenance of intangibles Less cash flows from operating activities - M1 Eastern Distributor and M4 Controlled cash Add dividends and distributions received M1 Eastern Distributor M4 Statewide Roads M5 Interlink Westlink M7 Term Loan Note interest Less allowance for maintenance of capital expenditure for CityLink, Hills M2 and Lane Cove Tunnel, and e-Tag expenditure Free cash One-off items Contribution from M4 Underlying free cash Weighted average securities on issue (millions) Underlying free cash per security (cents) - weighted average securities Free cash per security (cents) - weighted average securities Securities on issue (millions) Underlying free cash per security (cents) - securities on issue Free cash per security (cents) - securities on issue 30 June 2012 $'000 30 June 2011 $'000 373,243 (30,866) 27,731 370,108 (45,406) 324,702 43,183 354 53,500 30,866 (19,208) 433,397 374,691 (36,991) 18,429 356,129 (53,069) 303,060 32,368 4,877 41,000 36,991 (23,035) 395,261 - 433,397 (4,877) 390,384 1,453 1,438 29.8 29.8 27.1 27.5 1,458 1,444 29.7 29.7 27.0 27.4 108 TRANSURBAN ANNUAL REPORT 2012 21 Distributions (continued) Franking credits Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 30 June 2012 $'000 30 June 2011 $'000 Franking credits available for subsequent financial years based on a tax rate of 30% (2011 - 30%) 319,886 282,254 22 Remuneration of auditors During the year the following fees were paid or payable for services provided by the auditor of the parent entity and its related practices: Amounts received or due and receivable by PricewaterhouseCoopers Audit and other assurance services Audit and review of financial reports Other assurance services Total remuneration for PricewaterhouseCoopers Total auditors' remuneration 30 June 2012 $ 30 June 2011 $ 1,100,000 189,300 1,289,300 1,091,000 69,887 1,160,887 1,289,300 1,160,887 109 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 23 Contingencies Contingent liabilities The Group and parent entity had contingent liabilities at 30 June 2012 in respect of: Equity guarantee the Transurban Group, holds a concession Transurban DRIVe Holdings LLC (DRIVe), a related party of agreement with The Commonwealth of Virginia to construct and operate High Occupancy Toll (HOT) lanes on the Capital Beltway (Capital Beltway project), a ring road that runs around Washington DC. The project is currently in the construction phase. Construction is expected to be complete in late 2012 and the tolling concession will operate for 75 years. On 20 December 2007 (and as amended on 12 June 2008) the Transurban Group, through the entities in the triple staple, being Transurban Holdings Limited, Transurban International Limited and Transurban Infrastructure Management Limited (as responsible entity of the Transurban Holding Trust), entered into an agreement with Capital Beltway Express LLC (Capital Beltway Express), a subsidiary of DRIVe, the Virginia Department of Transportation, Goldman Sachs Capital Markets L.P., Depfa Bank plc and Wells Fargo Bank N.A to provide an Equity Funding Guarantee (the Guarantee) over all of DRIVe's equity obligations associated with funding the equity contributions to the Capital Beltway project. in the The Transurban Group owns 75 per cent of consolidated financial statements using the equity method of accounting. DRIVe holds 90 per cent of the equity in Capital Beltway Express and, from time to time, is required to make equity contributions to Capital Beltway Express to fund the equity component of the Capital Beltway project costs. The total equity contribution DRIVe is obliged to make to Capital Beltway Express is US$313,825,757, of which US$182,857,326 has been paid at balance sheet date. the equity of DRIVe and recognises this investment In accordance with the DRIVe Holdings LLC Agreement, should a DRIVe member default on any capital calls, the Transurban Group has the right to acquire their share of DRIVe at a 50 per cent discount to its fair value. As such in the instance of the Guarantee being called, the Transurban Group may exercise its right to acquire the interest in DRIVe at a discounted value. Contingent assets DRIVe capital sum As a part of the establishment of Transurban DRIVe, DRIVe Holdings LLC agreed to make a "capital sum" compensation payment to Transurban for contributing to DRIVe the right to negotiate the Capital Beltway and I-95. The fee is payable to Transurban if the pre-financing/pre-tax net present value of Capital Beltway or I-95 is positive as at financial close, when calculated three years after the completion of construction. Receipt of the capital sum is contingent on the projects achieving positive net present value at the strike date, and as such this amount has not been recognised on the balance sheet. Due to uncertainty associated with the amount and timing of the potential receipt, an asset has not been recognised. 24 Intra-group Guarantees As at 30 June 2012, the Transurban Group comprises Transurban Holdings Limited, Transurban Holding Trust and Transurban International Limited, traded and quoted on the ASX as one triple stapled security. Under the stapling arrangement, each entity directly and/or indirectly supports each entity and its controlled entities within the Group on a continual basis. 110 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 25 Commitments Capital commitments Capital expenditure contracted for at the reporting date but not recognised as liabilities is as follows: Property, plant and equipment payable: Within one year Later than one year but not later than five years Operating commitments payable: Within one year Later than one year but not later than five years Later than five years Intangible assets payable: Within one year Later than one year but not later than five years Lease commitments Commitments in relation to leases contracted for at the reporting date but not recognised as liabilities, payable: Within one year Later than one year but not later than five years Later than five years Sub-lease payments 30 June 2012 $'000 30 June 2011 $'000 3,457 - 3,457 38,590 75,912 312,573 427,075 155,361 14,213 169,574 14,214 2,414 16,628 60,631 95,326 347,776 503,733 283,597 109,442 393,039 30 June 2012 $'000 30 June 2011 $'000 4,059 12,812 496 17,367 3,973 15,247 1,874 21,094 Future minimum lease payments expected to be received in relation to non-cancellable sub-leases of operating leases 428 428 812 812 111 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 25 Commitments (continued) Lease commitments (continued) Promissory Notes The Responsible Entity, on behalf of the Hills Motorway Trust, has entered into an agreement with the Roads and Maritime Services of New South Wales (RMS). Annual liabilities under this agreement 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 this agreement can be made at the discretion of the Responsible Entity, by means of the issue of non-interest bearing promissory notes to the RMS. For further information refer to note 18. Concession Notes The Eastern Distributor Project Deed between Airport Motorway Limited, Airport Motorway Trust and the RMS provides for annual concession fees of $15.0 million during the construction phase and for the first 24 years after the construction completion date of the Eastern Distributor. Other operating leases The Group leases various offices under non-cancellable operating leases expiring within one to eleven years. The leases have varying terms, escalating clauses and renewal rights. On renewal, the terms of the leases are renegotiated. 26 Related party transactions Transactions with associates The following transactions occurred with related parties: Revenue from services Operating electronic tolling system for Westlink M7 Business development fees Interest earned Term Loan Notes M5 debt notes 30 June 2012 $ 30 June 2011 $ 8,451,418 19,550,291 28,001,709 11,768,736 16,254,993 28,023,729 91,328,563 11,952 91,340,515 84,565,108 - 84,565,108 112 TRANSURBAN ANNUAL REPORT 2012 26 Related party transactions (continued) Loans to/from associates Term loan notes Beginning of the year Net interest capitalised End of the year M5 debt notes Beginning of the year Amount paid End of the year Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 30 June 2012 $ 30 June 2011 $ 724,225,296 58,441,751 782,667,047 678,044,167 46,181,129 724,225,296 - 8,724,600 8,724,600 - - - No provision for doubtful debts has been raised in relation to any outstanding balances, and no expense has been recognised in respect of bad or doubtful debts from related parties. Transactions with Director related parties Refer to note 36 for Director related party transactions. Term loan notes The Term Loan Notes (TLN) earn interest at a fixed rate of 11.93 per cent until the earlier of 34 years and the termination of the Agreement to Lease between the RMS and Westlink Motorway Limited. Any unpaid interest is capitalised and deemed to subscribe for further loan notes with an aggregate principal amount equal to that unpaid interest. The TLN are classified as a held-to-maturity receivable. It is not classified as an investment for equity accounting purposes, and therefore has not been affected by equity accounting losses from the associate. M5 debt notes The M5 debt notes are Transurban’s debt funding contribution to the M5 West Widening Project. The fixed maturity date of the notes is 10 years after financial close of the Project. The interest rate charged on these notes is fixed at 5.0 per cent for the first three years following financial close. 113 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 27 Subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in note 1(b): Name of entity CityLink Trust CityLink Melbourne Limited City Link Extension Pty Limited Transurban Infrastructure Management Limited Transurban Limited Transurban Collateral Security Pty Limited Transurban Finance Trust Transurban Finance Company Pty Limited Transurban Nominees Pty Limited Transurban Nominees 2 Pty Limited Transurban WSO Pty Limited Transurban AL Trust Transurban CARS Trust Transurban WSO Trust Roam Tolling Pty Limited Transurban Retail Pty Limited Transurban (USA) Holdings No.1 Pty Limited Transurban (USA) Holdings No.2 Pty Limited Transurban (USA) Holdings No.3 Pty Limited Transurban Asset Management Pty Limited Transurban Operations Pty Limited Transurban Investments Pty Limited The Hills Motorway Limited Hills Motorway Management Limited Hills Motorway Construction Company Pty Limited Hills Motorway Underwriting No.1 Pty Limited Hills Motorway Trust LMI WSO Holding No.2 Pty Limited Abigroup WSO Holding No.2 Pty Limited Abigroup Westlink Partner Holding No.4 Pty Limited Abigroup Westlink Partner No.4 Pty Limited Abigroup WSO Holding No.4 Pty Limited Abigroup Westlink Partner Holding No.2 Pty Limited Abigroup Westlink Partner No.2 Pty Limited LMI Westlink Partner Holding No.4 Pty Limited LMI Westlink Partner No.4 Pty Limited LMI WSO Holding No.4 Pty Limited LMI Westlink Partner Holding No.2 Pty Limited LMI Westlink Partner No.2 Pty Limited Tollaust Pty Limited Transurban (USA) Inc. Transurban (USA) Holdings Inc. Transurban (USA) Operations Inc. Transurban (895) General Partnership T (895) Finance Trust Transurban International Holdings Limited Transurban DRIVe Management LLC Country of incorporation Class of shares Equity holding 2012 % 2011 % Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia USA USA USA USA Australia Australia * USA Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 114 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 27 Subsidiaries (continued) Name of entity Country of incorporation Class of shares Sydney Roads Limited Sydney Roads Trust Sydney Roads Management Limited Airport Motorway Trust Airport Motorway Holdings Pty Limited Airport Motorway Limited Airport Motorway Construction Company Pty Limited AMT Management Limited M5 Holdings Funding Trust M5 Holdings Pty Limited M4 Holdings No.1 Pty Limited Devome Pty Limited Statewide Roads Limited SWR Services Pty Limited SWR Engineers Pty Limited Statewide Roads (M4) Pty Limited SWR Operations Pty Limited SWR Properties Pty Limited Statewide Roads (M2) Pty Limited SWR Constructors Pty Limited LCT-MRE Pty Limited LCT-MRE Nominees Pty Limited LCT-MRE Trust LCT-MRE Holdings Trust LCT-MRE Holdings Pty Limited LCT-MRE No.1 Pty Limited Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Equity holding 2012 % 2011 % 100 100 100 75.1 75.1 75.1 75.1 100 100 100 100 75 50.61 50.61 50.61 50.61 50.61 50.61 50.61 50.61 100 100 100 100 100 100 100 100 100 75.1 75.1 75.1 75.1 100 100 100 100 75 50.61 50.61 50.61 50.61 50.61 50.61 50.61 50.61 100 100 100 100 100 100 * Transurban International Holdings Limited changed registered domicile from Bermuda to Australia on 5 January 2012. 115 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 28 Parent entity financial information Summary financial information The individual financial statements for the parent entity show the following aggregate amounts: Balance sheet Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets Shareholders' equity Contributed equity Reserves Retained earnings Profit / (loss) for the year Total comprehensive profit / (loss) Guarantees entered into by the parent entity 30 June 2012 $'000 30 June 2011 $'000 350,222 187,020 2,359,945 2,374,953 2,710,167 2,561,973 154,357 149,308 1,906,487 1,754,621 2,060,844 1,903,929 649,323 (1,947,969) 658,044 (1,974,132) 607,190 2,152 39,981 649,323 583,896 5,026 69,122 658,044 72,591 (65,774) 72,591 (65,774) There are cross guarantees given by Transurban Holdings Limited, Transurban Limited, Tollaust Pty Limited, Roam Tolling Pty Limited, Sydney Roads Limited, Sydney Roads Management Limited, and M5 Holdings Pty Limited as described in note 29. Contingent liabilities of the parent entity For details of contingent liabilities of the parent entity, refer to note 23. 116 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 29 Deed of cross guarantee Transurban Holdings Limited, Transurban Limited, Tollaust Pty Limited, Roam Tolling Pty Limited, Sydney Roads Limited, Sydney Roads Management Limited and M5 Holdings Pty Limited are party to a deed of cross guarantee under which each company guarantees the debts of the others. By entering into the deed, the wholly-owned entities have been relieved from the requirement to prepare a financial report and Directors’ report under Class Order 98/1418 (as amended) issued by the Australian Securities and Investments Commission. Consolidated income statement, consolidated statement of comprehensive income and summary of movements in consolidated retained earnings The above companies represent a 'closed group' for the purposes of the Class Order, and as there are no other parties to the deed of cross guarantee that are controlled by Transurban Holdings Limited, they also represent the 'extended closed group'. Set out below is a consolidated income statement and a summary of movements in consolidated retained earnings for the years ended 30 June 2012 and 30 June 2011 for the parties to the deed of the cross guarantee. Income statement Revenue Operating costs Depreciation and amortisation expense Net finance costs Loss before income tax Income tax benefit Loss for the year Statement of comprehensive income Profit (loss) for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year 30 June 2012 $'000 30 June 2011 $'000 115,999 (101,266) (15,223) (114,248) (114,738) 34,660 (80,078) 98,352 (110,842) (5,808) (79,182) (97,480) 37,955 (59,525) (80,078) - (80,078) (59,525) - (59,525) Summary of movements in consolidated retained earnings Retained earnings at the beginning of the financial year Profit (loss) for the year Transfer of non-vesting portion of LTI from share-based payment reserve Dividends provided for or paid Retained earnings at the end of the financial year (138,264) (80,078) 109 (101,842) (320,075) (78,743) (59,525) 4 - (138,264) 117 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 29 Deed of cross guarantee (continued) Consolidated balance sheet Set out below is a consolidated balance sheet as at 30 June 2012 and 30 June 2011 for the parties to the deed of cross guarantee. Current assets Cash and cash equivalents Trade and other receivables Total current assets Non-current assets Other financial assets Property, plant and equipment Deferred tax assets Total non-current assets Total assets Current liabilities Trade and other payables Provisions Total current liabilities Non-current liabilities Payables Deferred tax liabilities Provisions Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Retained earnings Total equity 30 June 2012 $'000 30 June 2011 $'000 33,421 387,894 421,315 94,770 339,137 433,907 1,520,031 177,176 536,066 2,233,273 1,541,621 173,778 468,981 2,184,380 2,654,588 2,618,287 1,540,926 63,815 1,604,741 1,519,914 16,111 1,536,025 719,961 33,032 7,586 760,579 593,115 36,263 2,226 631,604 2,365,320 2,167,629 289,268 450,658 607,190 2,153 (320,075) 289,268 583,896 5,026 (138,264) 450,658 Under the stapling arrangement, each entity directly and/or indirectly supports each entity and its controlled entities within the Transurban Group on a continual basis. Where necessary, prior year comparatives have been reclassified for comparative purposes. 118 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 30 Events occurring after the reporting period On 1 August 2012, the Group announced that financial close had been reached with the Commonwealth of Virginia to build and operate the 95 Express Lanes in northern Virginia, USA. The Group also announced that the 95 Express Lanes investment will be the final new toll road project undertaken by Transurban's co-investment vehicle, DRIVe. Transurban will continue to manage the assets owned by DRIVe. There are no other unusual matters or circumstances that have arisen since the end of the financial year that have significantly affected or may significantly affect the operations of the Group, the results of those operations or the state of affairs of the Group in subsequent financial years. 31 Reconciliation of profit after income tax to net cash inflow from operating activities Profit for the year Depreciation and amortisation Non-cash share-based payments expense Non-cash finance costs Share of net losses of equity accounted investments Change in operating assets and liabilities: Increase in concession and promissory note liability (Decrease) increase in operating creditors and accruals Decrease (increase) decrease in debtors Capitalised held to maturity investment interest Increase (decrease) in other operating provisions Increase (Decrease) in maintenance provision Movement in deferred taxes (Decrease) in provision for income taxes payable Net cash inflow (outflow) from operating activities 32 Non-cash investing and financing activities Distributions satisfied by the issue of stapled securities under the distribution reinvestment plan 30 June 2012 $'000 30 June 2011 $'000 58,558 301,641 3,131 40,658 137,946 1,562 (138,147) 143,732 (60,192) 836 1,102 (112,388) (5,196) 373,243 118,158 289,435 4,581 44,966 20,198 7,664 15,308 (13,815) (46,181) (5,261) (10,385) (45,904) (4,073) 374,691 30 June 2012 $'000 30 June 2011 $'000 76,001 76,001 124,557 124,557 119 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 33 Earnings per stapled security Basic earnings per share Earnings per security attributable to the ordinary equity holders of the stapled group Diluted earnings per share Earnings per security attributable to the ordinary equity holders of the stapled group Reconciliation of earnings used in calculating earnings per security Basic and diluted earnings per security Profit for the year Profit attributable to non-controlling interests Profit attributable to ordinary equity holders of the stapled group used in calculating earnings per security Weighted average number of securities used as denominator 30 June 2012 Cents 30 June 2011 Cents 3.8 3.8 7.8 7.8 30 June 2012 Cents 30 June 2011 Cents 3.8 3.8 7.8 7.8 30 June 2012 $'000 30 June 2011 $'000 58,558 (3,653) 118,158 (5,691) 54,905 112,467 30 June 2012 Number 30 June 2011 Number Weighted average number of securities used as the denominator in calculating basic and diluted earnings per security 1,452,932,838 1,437,820,619 120 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 33 Earnings per stapled security (continued) Weighted average number of securities used as denominator (continued) Basic earnings per stapled security Basic earnings per stapled security is calculated by dividing the profit (loss) attributable to members of the stapled security excluding any non-controlling interest and costs of servicing equity other than distributions, by the weighted average number of securities outstanding during the financial year. Diluted earnings per stapled security Diluted earnings per stapled security adjusts the figures used in the determination of basic earnings per stapled security to take into account the after income tax effect of interest and other financing costs associated with dilutive potential stapled securities and the weighted average number of additional stapled securities that would have been outstanding assuming the conversion of all dilutive potential stapled securities. 34 Net tangible asset backing 30 June 2012 $ 30 June 2011 $ Net tangible asset backing per stapled security* 2.21 2.59 (*) - Net tangible assets used as the basis for this calculation include the concessions and permits relating to the operational assets of the Group. Assets of this type are characterised as intangibles under Australian Accounting Standards. 35 Share-based payments Performance Awards Plan Under the Performance Awards Plan (PAP), eligible executives receive a grant of Performance Awards which entitles participants to receive securities at no cost subject to the achievement of performance conditions. The Board has discretion as to the form of the award at the end of the performance period and may grant cash payments of equivalent value at vesting. No dividends or distributions on securities are payable to participants prior to vesting. Dual performance measures (Free Cash Flow (FCF) (from 1 July 2011) or earnings before interest, tax, depreciation and amortisation (EBITDA) measure (pre 1 July 2011) and relative total security holder return (TSR) apply to Performance Awards, each representing 50 per cent of the award. The use of dual measures balances the need to both improve the underlying performance of the business over the long term as well as appropriate returns relative to the market. Performance Awards were granted with a three year vesting period. For the plan granted 11 December 2009 and future grants, the awards are tested at the end of the three year vesting period. However, for the 1 November 2008 grant, the awards were tested at the end of each year. If the performance measures were satisfied for the year, one third of the awards were preserved until the end of the three year period. At the end of the three years a cumulative test of the performance measures was applied to any unvested awards. 121 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 35 Share-based payments (continued) Performance Awards Plan (continued) Grant date Vesting / Expiry date Fair value at grant date ($) FCF EBITDA TSR Balance at start of the year Number Granted during the year Number Vested during the year Number Forfeited during the year Number Balance at end of the year Number 2012 1 Nov 2008 11 Dec 2009 1 Nov 2010 23 Dec 2010 26 Sep 2011 11 Nov 2011 Total 1 Nov 2011 11 Dec 2012 1 Nov 2013 1 Nov 2013 30 Jun 2014 30 Jun 2014 3.30 3.33 3.23 3.33 3.37 3.27 4.27 4.97 4.62 4.97 N/A N/A N/A N/A N/A N/A 4.63 4.81 1,260,113 1,776,583 1,401,575 684,683 - - 5,122,954 - - - - 837,990 715,024 (1,193,516) - - - - - 1,553,014 (1,193,516) (66,597) (150,589) (200,498) - (176,058) - (593,742) - 1,625,994 1,201,077 684,683 661,932 715,024 4,888,710 Weighted average exercise price $4.00 $4.02 $3.79 $3.99 $4.06 Grant date Vesting / Expiry date Fair value at grant date ($) FCF EBITDA TSR Balance at start of the year Number Granted during the year Number Vested during the year Number Forfeited during the year Number Balance at end of the year Number 2011 1 Nov 2008 11 Dec 2009 1 Nov 2010 23 Dec 2010 Total 1 Nov 2011 11 Dec 2012 1 Nov 2013 1 Nov 2013 3.30 3.33 3.23 3.33 4.27 4.97 4.62 4.97 N/A N/A N/A N/A 1,277,630 1,990,913 - - 3,268,543 - - 1,658,614 684,683 2,343,297 - - - - - (17,517) (214,330) (257,039) - (488,886) 1,260,113 1,776,583 1,401,575 684,683 5,122,954 Weighted average exercise price $4.01 $3.99 $- $4.02 $4.00 Executive Equity Plan Equity awards were granted under the Executive Equity Plan (EEP) based on executives’ performance and were designed to encourage retention of executives while focusing on business excellence. Individuals who are high performers and in business critical roles were nominated for awards for their past contribution and expected future performance. Board approval was required to grant EEP awards to nominated executives. Under the EEP, eligible executives received a grant of stapled securities in the Transurban Group (”securities”) at no cost that are subject to disposal restrictions for three years from the grant date. Participants are entitled to distributions paid on their Securities during the restriction period. If the executive ceases employment with Transurban during the restriction period, their Securities will be forfeited unless the Board decides otherwise. Awards were last made under the EEP on 1 November 2008. The table below provides details of the awards granted. Grant date 2012 1 Nov 2008 Total Vesting / Expiry date Exercise price Balance at start of the year Number Granted during the year Number Vested during the year Number Forfeited during the year Number Balance at end of the year Number 1 Nov 2011 $4.27 433,722 433,722 - - (433,722) (433,722) - - - - Weighted average exercise price $4.27 $- $4.27 $- $- 122 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 35 Share-based payments (continued) Executive Equity Plan (continued) Grant date 2011 1 Nov 2008 Total Weighted average exercise price Performance Rights Plan Vesting / Expiry date Exercise price Balance at start of the year Number Granted during the year Number Vested during the year Number Forfeited during the year Number Balance at end of the year Number 1 Nov 2011 $4.27 548,650 548,650 $4.27 - - $- (72,334) (72,334) (42,594) (42,594) 433,722 433,722 $4.27 $4.27 $4.27 The Performance Rights Plan (PRP) enabled eligible executives to receive a grant of Performance Rights that entitled participants to receive stapled securities in the Transurban Group (Securities) at no cost at the end of a three year performance period, subject to the achievement of performance conditions. No dividends or distributions on Securities were payable to participants prior to vesting. The Plan has two performance measures, EBITDA and relative TSR against the S&P/ASX 100 Industrials, each applied to 50 per cent of the PRP award. For US participants of the plan, they will be awarded a cash amount instead of stapled securities at the end of the three year performance period, subject to performance conditions. There is only one testing date at the end of the performance hurdles at the vesting date. Awards were last made under the PRP in November 2007. This award matured on 1 November 2010. 84.44% of awards subject the constituents of the S&P/ASX 100. None of the awards subject to the statutory EBITDA growth or DRIVe management fee growth conditions vested as the prescribed performance conditions were not met. to the TSR performance condition vested based on Transurban's ranking against Australian based plan Grant date 2011 1 Nov 2007 Total Weighted average exercise price Overseas based plan Vesting / Expiry date Fair value at grant date ($) TSR EBITDA Balance at start of the year Number Granted during the year Number Vested during the year Number Lapsed during the year Number Balance at end of the year Number 1 Nov 2010 3.50 5.96 331,594 331,594 $4.73 - - $- (143,060) (143,060) (188,534) (188,534) $4.73 $4.73 - - $- Grant date 2011 1 Nov 2007 Total Vesting / Expiry date Fair value at grant date ($) TSR DRIVe mgt fee Balance at start of the year Granted during the year Vested during the year Lapsed during the year Balance at end of the year Number Number Number Number Number 1 Nov 2010 3.50 5.96 247,561 247,561 $4.26 - - $- (107,007) (107,007) (140,554) (140,554) $4.26 $4.26 - - $- Weighted average exercise price 123 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 35 Share-based payments (continued) Assessed fair value The assessed fair value at grant date of the plans above has been independently determined in accordance with AASB 2. The TSR component of the Performance Awards has been valued applying a Monte-Carlo simulation (of a geometric Brownian motion process, as used in the Black-Scholes framework) to model Transurban's future security price and TSR performance against the comparator group performance at vesting date. The valuation model takes into account the term of the award, the security price at grant date and expected price volatility of the underlying security, the expected dividend yield and the risk free interest rate for the term of the award. The Free Cash component of performance awards has been valued using the Black-Scholes framework. The model valuation takes into account the term of the award, the security price at grant date, the expected dividend yield and the risk free interest rate for the term of the award. Employee security scheme The Transurban Employee Security Ownership Plan (the Plan) provides employees with an opportunity to be a part owner of Transurban and partner in its continued success. All Australian based permanent employees are eligible to participate in either the Investment Tax Exempt Plan or the Investment Tax Deferred Plan. Under the plans, Transurban provides participants with a matching component toward the acquisition of the stapled securities. For the period 1 July 2011 to 30 June 2012, the cost of company matches was $114,459 (2011: $89,885) for the Investment Tax Exempt Plan and $391,708 (2011: $304,375) for the Investment Tax Deferred Plan. The third element under the Plan is the Incentive Plan. Subject to Board approval and the performance of the Group, eligible employees may receive a certain number of Transurban securities at no cost to them. In February 2012, each participant was allocated 100 stapled securities at a value of $5.67 per security. Stapled securities provided under the Plan were acquired on the open market. Eligible US based participants received an equivalent cash award. 30 June 2012 Number 30 June 2011 Number Shares purchased on the market under the plan and provided to participating employees 42,200 42,200 Expenses arising from share-based payments Total expenses arising from share-based payment employee benefit expense was $3.1 million (2011: $4.6 million). transactions recognised during the period as part of 124 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 36 Key management personnel disclosures Directors The following persons were Directors of THL, TIML and/or TIL, as noted below, during the financial year and/or up until the date of this report: Executive Directors Christopher Lynch (resigned 16 July 2012) (THL, TIML and TIL) Scott Charlton (appointed 16 July 2012) (THL, TIML and TIL) Non-executive Directors Lindsay Maxsted (Chairman of THL, TIML and TIL) Neil Chatfield (THL and TIML, and TIL from 5 January 2012) Geoffrey Cosgriff (resigned 6 December 2011) (THL and TIML) Jeremy Davis (resigned 6 December 2011) (THL and TIML) Robert Edgar (THL and TIML, and TIL from 5 January 2012) Samantha Mostyn (THL and TIML, and TIL from 5 January 2012) Robert Officer (THL and TIML, and TIL from 5 January 2012) Christine O'Reilly (appointed 12 April 2012) (THL, TIML and TIL) Rodney Slater (THL and TIML, and TIL from 5 January 2012) Ian Smith (appointed 1 January 2012) (THL and TIML, and TIL from 5 January 2012) Jennifer Eve (resigned 5 January 2012) (TIL) James Keyes (resigned 5 January 2012) (TIL) Other key management personnel The following persons also had authority and responsibility for planning, directing and controlling the activities of the Group, directly or indirectly, during the financial year: K Daley A Head S Hogg * T Honan * M Kulper E Mildwater President, International Development Group General Manager, New South Wales Chief Financial Officer Chief Financial Officer President, Transurban North America Group General Manager, Victoria (*) - On 2 May 2012, Tom Honan resigned as Chief Financial Officer, and Samantha Hogg was appointed as Chief Financial Officer (previously she was Group General Manager, Corporate Services). Key management personnel compensation The remuneration amounts below represent the entire amounts paid by the Transurban Group. 30 June 2012 $ 30 June 2011 $ 12,452,823 489,289 942,256 115,725 - 4,870,066 18,870,159 14,169,807 - 471,700 87,049 1,360,993 4,135,431 20,224,980 Short-term employee benefits Deferred STIs Post-employment benefits Long-term benefits Termination benefits Share-based payments 125 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 36 Key management personnel disclosures (continued) Key management personnel compensation (continued) Detailed remuneration disclosures are made in the Directors' report. The relevant information can be found in the remuneration report in the Directors' report. Equity instrument disclosures relating to key management personnel Share-based payments Details of conditions of the long term incentives, can be found in the remuneration report in the Directors' report. long-term incentives provided as remuneration and securities issued, together with terms and Performance Awards Plan 2012 Balance at start of the year Granted during the year as remuneration Matured and paid during the year Other changes during the year Balance at end of the year Matured and payable at the end of the year 1,785,615 Directors of the Group C Lynch Other key management personnel of the Group K Daley A Head S Hogg T Honan M Kulper E Mildwater 223,297 181,525 136,569 545,513 401,033 186,359 715,024 128,294 107,766 101,320 171,058 159,286 107,766 (458,156) (25,565) 2,016,918 (63,602) (44,054) (22,027) (220,267) (137,736) (27,534) (3,549) (2,458) (1,229) (496,304) (7,686) (1,536) 284,440 242,779 214,633 - 414,897 265,055 - - - - - - - 2011 Balance at start of the year Granted during the year as remuneration Matured and paid during the year Other changes during the year Balance at end of the year Matured and payable at the end of the year 1,100,932 Directors of the Group C Lynch Other key management personnel of the Group B Bourke K Daley M Fletcher A Head S Hogg T Honan M Kulper E Mildwater 194,515 178,427 82,362 105,859 70,734 380,926 307,378 95,836 684,683 13,233 123,441 5,761 90,523 65,835 164,587 170,433 90,523 - - 1,785,615 (39,204) (33,173) (4,704) (6,273) - - (32,416) - (168,544) (45,398) (83,419) (8,584) - - (44,362) - - 223,297 - 181,525 136,569 545,513 401,033 186,359 - - - - - - - - - 126 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 36 Key management personnel disclosures (continued) Equity instrument disclosures relating to key management personnel (continued) Stapled security holdings The numbers of Stapled Securities held during the financial year by each Director of THL and other key management personnel of the Group, including their personally-related parties, are set out below. 2012 Directors of the Group L Maxsted N Chatfield G Cosgriff * J Davis * R Edgar S Mostyn R Officer C O'Reilly R Slater I Smith J Eve J Keyes C Lynch S Charlton Other key management personnel of the Group K Daley A Head S Hogg T Honan * M Kulper E Mildwater Balance at start of the year Other changes during the year Balance at end of the year 30,000 20,910 152,236 158,188 18,627 - 19,089 - - - - - 255,401 - 384,678 21,112 15,616 94,820 103,944 27,098 - 10,000 (152,236) (158,188) 5,106 10,300 1,026 - - 70,000 - - 458,162 - - (18,071) (14,063) (94,820) (23,944) 28,968 30,000 30,910 - - 23,733 10,300 20,115 - - 70,000 - - 713,563 - 384,678 3,041 1,553 - 80,000 56,066 * These individuals are not Key Management Personnel at 30 June 2012, therefore their closing balance has been reduced to zero through "other changes during the year" in the table above. 127 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 36 Key management personnel disclosures (continued) Equity instrument disclosures relating to key management personnel (continued) Stapled security holdings (continued) 2011 Directors of the Group L Maxsted D Ryan N Chatfield G Cosgriff J Davis R Edgar S Mostyn R Officer R Slater J Eve J Keyes C Lynch Other key management personnel of the Group B Bourke K Daley M Fletcher A Head S Hogg T Honan M Kulper E Mildwater Balance at start of the year Other changes during the year Balance at end of the year 12,000 66,486 20,910 144,423 158,188 11,836 - 19,089 - - - 254,966 460,251 384,678 34,491 23,842 15,516 93,574 103,944 25,196 18,000 (66,486) - 7,813 6,791 - - - - - 435 (460,251) - (34,491) (2,730) 100 1,246 - 1,902 30,000 - 20,910 152,236 158,188 18,627 - 19,089 - - - 255,401 - 384,678 - 21,112 15,616 94,820 103,944 27,098 Executive Equity Plan (EEP) 2012 Balance at start of the year Granted during the year as remuneration Matured and paid during the year Other changes during the year Balance at end of the year Matured and payable at the end of the year 79,647 Directors of the Group C Lynch Other key management personnel of the Group K Daley A Head S Hogg T Honan M Kulper E Mildwater 19,146 19,146 15,316 85,474 23,944 19,146 - - - - - - - (79,647) (19,146) (19,146) (15,316) (85,474) (23,944) (19,146) - - - - - - - - - - - - - - - - - - - - - 128 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 36 Key management personnel disclosures (continued) Equity instrument disclosures relating to key management personnel (continued) Executive Equity Plan (EEP) (continued) 2011 Balance at start of the year Granted during the year as remuneration Matured and paid during the year Other changes during the year Balance at end of the year Matured and payable at the end of the year 79,647 Directors of the Group C Lynch Other key management personnel of the Group B Bourke K Daley M Fletcher A Head S Hogg T Honan M Kulper E Mildwater 19,146 19,146 19,146 19,146 15,316 85,474 23,944 19,146 - - - - - - - - - - (19,146) - (19,146) - - - - - - - - - - - - - - 79,647 - 19,146 - 19,146 15,316 85,474 23,944 19,146 - - - - - - - - - Performance Rights Plan 2011 Other key management personnel of the Group B Bourke K Daley M Fletcher A Head M Kulper Balance at start of the year Granted during the year as remuneration Matured and paid during the year Other changes during the year Balance at end of the year Matured and payable at the end of the year 92,857 78,571 11,142 14,857 76,778 - - - - - (39,204) (33,173) (4,704) (6,273) (32,416) (53,653) (45,398) (6,438) (8,584) (44,362) - - - - - - - - - - Other transactions with Directors and key management personnel Mr Rodney Slater is a Partner in the public policy practice group of Patton Boggs. Transurban used Patton Boggs during the year for various lobbying activities in the US. This relationship is based on normal commercial terms. Mr Lindsay Maxsted is a Non-executive Director of Westpac Banking Corporation. Westpac provides transactional banking and loan facilities to Transurban. This relationship is based on normal commercial terms. Mr Neil Chatfield is a Non-executive Director of Seek Limited who provides employment advising services to Transurban. This relationship is based on normal commercial terms. Mr Chatfield is also Chairman of, and Ms Sam Mostyn is a Non-executive Director of, Virgin Australia Holdings Limited. Transurban uses air travel services provided by Virgin Australia. This relationship is based on normal commercial terms. 129 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 37 Critical accounting estimates and judgements Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that may have a financial impact on the Group and that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Income taxes The Group is subject to income taxes in Australia and USA. Significant judgement is required in determining the provision for income taxes. There are many transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain. The Group recognises liabilities for anticipated tax audit issues based on whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred tax assets and liabilities in the period in which such determination is made. The Group has recognised deferred tax assets relating to carried forward tax losses to the extent there are sufficient taxable temporary differences relating to the same taxation authority against which the unused tax losses can be utilised. However, the utilisation of tax losses also depends on the ability of the Group to satisfy certain tests at the time the losses are recouped. In the USA tax losses generally expire after a 20 year period. Management has reviewed the potential future taxable profits and has therefore recognised deferred tax assets in relation to tax losses. Useful lives of plant and equipment The Group determines the estimated useful lives and related depreciation for its plant and equipment. This estimate is based on expected useful lives of technology. It could change significantly as a result of technical innovations. The Group will lives are less than previously increase the depreciation charge where useful estimated lives, or will write-off or writedown technically obsolete or non-strategic assets. The Group depreciates the assets associated with the various toll road infrastructure over the life of the respective concession arrangements. Estimated impairment of intangible assets and cash generating units The Group tests whether goodwill, other intangible assets and cash generating units have suffered any impairment, in accordance with the accounting policy stated in note 1(i). The recoverable amount of each cash generating unit has been determined based on the greater of value-in-use and fair value less costs to sell calculations. These calculations require the use of assumptions regarding traffic flows, discount rates, growth rates and other factors affecting operating activities of the cash generating units. 130 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 37 Critical accounting estimates and judgements (continued) Valuation of Promissory Notes and Concession Notes The Group holds non-interest bearing long term debt, represented by promissory notes and concession notes, that are included in the financial statements at the present value of expected future payments. The calculations to discount these notes to their present value are based on the estimated timing and profile of the repayments. Assumptions are made in determining the timing and profile, based on expected available equity cash flows of the Group's cash generating units. A discount rate is used to value the promissory notes and concession notes to their present value, which is determined through reference to other facilities in the market with similar characteristics. Fair value of derivatives and other financial instruments instruments that are not traded in an active market is determined using valuation The fair value of financial techniques. The Group uses its judgement to select a variety of methods and makes assumptions that are mainly based on market conditions existing at each balance sheet date. Provision for future major maintenance expenditure The Group records a provision for its present obligation to maintain the Motorways held under Concession Deeds. The provision is included in the financial statements at the present value of expected future payments. The calculations to discount these amounts to their present value are based on the estimated timing and profile of expenditure occurring on the roads. A discount rate is used to value the maintenance expenditure provision at its present value, which is determined through reference to the nature of the provision and the risks associated with the expenditure. 38 Financial risk management The Group’s activities expose it to a variety of financial risks: market risk (including currency risk and interest rate risk), credit risk and liquidity risk. The financial risk management function is carried out centrally by the Transurban Group Treasury team (Treasury) under policies approved by the Board. Treasury work closely with the Group’s operating units to actively identify and monitor all financial risks, and put hedging in place where appropriate. The Board are informed on a regular basis of any material exposures to financial risks. The Group’s hedging strategies are detailed below, and include the use of derivative financial instruments. The Group's policies allow derivative transactions to be undertaken only for the purpose of reducing risk, and do not permit speculative trading. Treasury continuously monitor risk exposures over time through review of cash flows, price movements, market analysis and ongoing communication within the Group. When measuring financial risk, Treasury consider positive and negative exposures, existing hedges and the ability to offset exposures where possible. Market risk Foreign exchange risk The Group operates internationally and is exposed to foreign exchange risk when future commercial transactions and recognised assets and liabilities are denominated in a currency that is not the entity’s functional currency. Foreign currency exposures are viewed as either investment exposures or operating exposures. Exposures from investment in foreign assets are generally managed using foreign currency debt. All known material operating exposures out to 12 months are hedged, using hedging instruments, offsetting exposures or drawing on foreign currency funds. 131 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 38 Financial risk management (continued) Market risk (continued) Foreign exchange risk (continued) The Group's exposure to foreign currency risk at the reporting date, denominated in the currency in which the rise arises, was as follows: Cash and cash equivalents Net investment in foreign operation Borrowings Cross-currency interest rate swaps Trade creditors Net exposure 30 June 2012 30 June 2011 USD $'000 CAD $'000 USD $'000 CAD $'000 9,371 245,226 (1,156,439) 933,406 (6,123) 25,441 6 - (250,000) 250,000 - 6 7,068 209,083 (1,124,261) 933,406 (5,115) 20,181 - - - - - - Exposure to other foreign exchange movements is not material. Sensitivity Based on the financial instruments held at end of the period, had the Australian dollar strengthened/weakened by 10 cents against the U.S. dollar with all other variables held constant, the Group’s post-tax profit for the year would have been $199,000 lower (2011: $108,000 lower) or $243,000 higher (2011: $131,000 higher), as a result of foreign exchange gains/losses on translation of US dollar denominated financial instruments as detailed in the above table. The Group’s post-tax profit is more sensitive to movements in the Australian dollar/US dollar exchange rate in the current year due to an increase in US dollar cash holdings. Had the Australian dollar strengthened by 10 cents against the U.S. dollar with all other variables held constant, the Group's equity would have been $26,801,000 lower (2011: $24,286,000 lower). Had the Australian dollar weakened by 10 cents against the U.S. dollar with all other variables held constant, the Group's equity would have been $35,819,000 higher (2011: $29,009,000 higher). The Group revalues its U.S. dollar borrowings each period using market spot rates and, where a qualifying hedge is in place, defers these movements in equity. The volatility in equity is caused mainly by fair value movements of the cross currency interest rate swaps, which are affected by changes in forward Australian dollar/U.S. dollar foreign exchange rates. Based on the financial instruments held at 30 June 2012, had the Australian dollar strengthened/weakened by 10 cents against the Canadian dollar with all other variables held constant, the Group’s post-tax profit for the year would have been unchanged, as a result of foreign exchange gains/losses on translation of Canadian dollar denominated financial instruments as detailed in the above table. Had the Australian dollar strengthened by 10 cents against the Canadian dollar with all other variables held constant, the Group's equity would have been $3,734,000 lower. Had the Australian dollar weakened by 10 cents against the Canadian dollar with all other variables held constant, the Group's equity would have been $5,158,000 higher. The Group revalues its foreign currency denominated borrowings each period using market spot rates and, where a qualifying hedge is in place, defers these movements in equity. The volatility in equity is caused mainly by fair value movements of the cross currency interest rate swaps, which are affected by changes in forward Australian dollar/foreign currency exchange rates. Price risk The Group is not exposed to price risk. 132 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 38 Financial risk management (continued) Market risk (continued) Cash flow interest rate risk The Group’s main exposure to interest rate risk arises from long-term borrowings. Treasury manages interest rate risk by entering into fixed rate debt facilities or using interest rate swaps to convert floating rate debt. Generally, the Group raises long term borrowings at floating rates and swaps them into fixed rates that are lower than those available if the Group borrowed at fixed rates directly. The Group’s policy is to hedge interest rate exposure at a minimum in compliance with the covenant requirements of funding facilities and up to 100 per cent. Covenant requirements vary by debt facility, and require a minimum of between 50 per cent and 80 per cent of interest rate exposure to be hedged. At 30 June 2012, 97 per cent (2011: 98 per cent) of the Group’s interest rate exposure on variable rate borrowings was hedged. As at the reporting date, the Group had the following variable rate borrowings and interest rate swap contracts outstanding: 30 June 2012 30 June 2011 Weighted average interest rate % Balance $'000 Weighted average interest rate % Cash and cash equivalents Floating rate borrowings Interest rate swaps (notional principal amount) Net exposure to cash flow interest rate risk 4.2% 5.0% 3.9% (318,148) 2,756,394 (2,680,500) (242,254) 5.3% 6.2% 5.0% An analysis by maturities is provided in Liquidity risk below. Balance $'000 (411,880) 2,680,609 (2,619,400) (350,671) Sensitivity At 30 June 2012, if interest rates had changed by +/-100 basis points from the year-end rates with all other variables held constant, post-tax profit for the year would have been $2,423,000 higher/lower (2011: $3,507,000 higher/lower). Profit is less sensitive to movements in interest rates in 2012 than 2011, due mainly to a decrease in cash holdings. Credit risk The Group has no significant concentrations of credit risk from operating activities, and has policies in place to ensure that transactions are made with commercial customers with an appropriate credit history. However as an operator of large infrastructure assets, the Group is exposed to credit risk with its financial counterparties through undertaking financial transactions intrinsic to its business. These include funds held on deposit, cash investments and the market value of derivative transactions. Treasury assesses the credit strength of potential financial counterparties using objective ratings provided by multiple independent rating agencies. Board approved limit allocation rules ensure higher limits are granted to higher rated counterparties. The Group also seeks to mitigate its total credit exposure to counterparties by only dealing with credit worthy counterparties, limiting the exposure to any one counterparty, minimising the size of the exposure where possible through netting offsetting exposures, diversifying exposures across counterparties, closely monitoring changes in total credit exposures and changes in credit status, and taking mitigating action when necessary. The Group’s investment in the Westlink Motorway is through Term Loan Notes (see note 10 for details). The return on these Notes is ultimately dependent on the performance of the Motorway. The Group continually monitors the performance and expected cash flows of the Motorway. 133 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 38 Financial risk management (continued) Liquidity risk The Group maintains sufficient cash and undrawn facilities to maintain short term flexibility and enable the Group to meet financial commitments in a timely manner. Treasury assesses liquidity over the short term (up to 12 months) and medium term (one to five years) by maintaining accurate forecasts of operating expenses, committed capital expenditure and payments to security holders. Long term liquidity requirements are reviewed as part of the annual strategic planning process. Short term liquidity is managed by maintaining a strategic liquidity reserve. This reserve is based on the Group’s forecast annual operating costs and certain risk exposure scenarios as maintained by the Group’s strategic risk register, and is maintained as cash and undrawn facilities. The reserve is maintained on a rolling 12 month basis. Medium term liquidity forecasting is maintained on a rolling five year horizon. Financing arrangements The Group had access to the following undrawn borrowing facilities at the end of the reporting period: Floating rate - Expiring within one year - Expiring beyond one year 30 June 2012 $'000 30 June 2011 $'000 130,000 268,212 398,212 - 418,002 418,002 The facilities are committed for the term of the facility and cannot be withdrawn by the lenders without notice. Maturities of financial liabilities The tables below analyse the Group's financial liabilities, net and gross settled derivative financial instruments into relevant maturity groupings based on their contractual maturities. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances as the impact of discounting is not significant. For interest rate swaps the cash flows have been estimated using forward interest rates applicable at the end of the reporting period. 134 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 38 Financial risk management (continued) Liquidity risk (continued) Contractual maturities of financial liabilities At 30 June 2012 Non-derivatives Non-interest bearing Variable rate Fixed rate Total non-derivatives Derivatives Net settled (interest rate swaps) Net settled (cross-currency interest rate swaps/fx forwards) Total derivatives At 30 June 2011 Non-derivatives Non-interest bearing Variable rate Fixed rate Total non-derivatives Derivatives Net settled (interest rate swaps) Net settled (cross-currency interest rate swaps/fx forwards) Total derivatives 1 year or less $'000 Over 1 to 2 years $'000 Over 2 to 3 years $'000 Over 3 to 4 years $'000 Over 4 to 5 years $'000 Over 5 years $'000 Total contractual cash flows $'000 Carrying amount (assets)/ liabilities $'000 309,898 123,679 100,689 - - 431,043 1,088,528 219,581 352,609 - 359,111 409,350 - 449,192 195,455 364,402 750,145 1,491,626 674,300 3,201,698 2,769,310 361,587 2,756,393 1,733,004 534,266 783,652 1,308,109 768,461 644,647 2,606,173 6,645,308 4,850,984 82,976 80,993 60,146 39,382 28,586 20,800 312,883 280,552 19,742 102,718 16,817 97,810 47,602 107,748 39,932 79,314 41,806 70,392 94,703 115,503 260,602 573,485 224,642 505,194 1 year or less $'000 Over 1 to 2 years $'000 Over 2 to 3 years $'000 Over 3 to 4 years $'000 Over 4 to 5 years $'000 Over 5 years $'000 Total contractual cash flows $'000 Carrying amount (assets)/ liabilities $'000 414,832 232,994 216,453 - 736,382 93,118 - 431,833 340,347 - 877,284 212,108 - 367,368 397,707 338,957 733,374 1,372,316 753,789 3,379,235 2,632,049 464,921 2,680,609 1,558,077 864,279 829,500 772,180 1,089,392 765,075 2,444,647 6,765,073 4,703,607 31,272 24,702 12,313 4,652 (2,500) (8,675) 61,764 53,732 19,935 51,207 27,172 51,874 28,275 40,588 57,068 61,720 44,475 41,975 198,418 189,743 375,343 437,107 282,107 335,839 Fair value measurements The carrying value of approximates fair value. financial assets and financial liabilities brought to account at balance sheet date 135 TRANSURBAN ANNUAL REPORT 2012 Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2012 (continued) 38 Financial risk management (continued) Fair value measurements (continued) The fair value of measurement or for disclosure purposes. these financial assets and financial liabilities must be estimated for recognition and The Group has adopted the amendment to AASB 7 Financial Instruments: Disclosures which requires disclosure of fair value measurements by level of the following fair value measurement hierarchy: (a) quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1) (b) inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) (level 2), and inputs for the asset or liability that are not based on observable market data (unobservable inputs) (level 3). (c) The following table presents the Group's assets and liabilities measured and recognised at fair value at 30 June 2012 and 30 June 2011: 30 June 2012 Assets Derivatives used for hedging Total assets Liabilities Derivatives used for hedging Total liabilities 30 June 2011 Assets Derivatives used for hedging Total assets Liabilities Derivatives used for hedging Total liabilities Level 1 $'000 Level 2 $'000 Level 3 $'000 Total $'000 Level 1 $'000 - - - - - - - - 137 137 505,331 505,331 Level 2 $'000 Level 3 $'000 56,303 56,303 392,142 392,142 - - - - - - - - 137 137 505,331 505,331 Total $'000 56,303 56,303 392,142 392,142 The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at the end of each reporting period. The fair value of both cross-currency interest rate swaps and interest rate swaps is calculated as the present value of the estimated future cash flows. The fair value of forward exchange contracts is determined using forward exchange market rates at the end of the reporting period. All these instruments are included in level 2. 136 TRANSURBAN ANNUAL REPORT 2012 In the Directors' opinion: Transurban Holdings Limited Directors' declaration 30 June 2012 (a) (b) (c) the financial statements and notes set out on pages 51 to 136 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 giving a true and fair view of the Group's financial position as at 30 June 2012 and of its performance for the year ended on that date, and (ii) there are reasonable grounds to believe that the Group will be able to pay its debts as and when they become due and payable, and at the date of this declaration, there are reasonable grounds to believe that the members of the Extended Closed Group identified in note 29 will be able to meet any obligations or liabilities to which they are, or may become, subject by virtue of the deed of cross guarantee described in note 29. Note 1(a) confirms that the financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. The Directors have been given the declarations by the Chief Executive Officer and Chief Financial Officer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with separate resolutions of the Directors of Transurban Holdings Limited, Transurban Infrastructure Management Limited and Transurban International Limited. Lindsay Maxsted Director Scott Charlton Director Melbourne 7 August 2012 137 TRANSURBAN ANNUAL REPORT 2012 138 TRANSURBAN ANNUAL REPORT 2012 139 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust and Controlled Entities ARSN 098 807 419 Annual report for the year ended 30 June 2012 140 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust ARSN 098 807 419 Annual report - 30 June 2012 Directors' report Auditor's Independence Declaration Financial statements Directors' declaration Independent auditor's report to the members Page 142 146 147 222 223 141 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Directors' report 30 June 2012 Directors' report The Directors of Transurban Infrastructure Management Limited ("the Company"), the responsible entity of Transurban Holding Trust, present their report on the consolidated entity, consisting of Transurban Holding Trust ("the Trust") and the entities it controls (collectively "the Group"), for the year ended 30 June 2012. The Trust forms part of the triple staple that is Transurban. A Stapled Security comprises one share in Transurban Holdings Limited, one share in Transurban International Limited and one unit in the Trust. None of the components of the Stapled Security can be traded separately. Responsible entity The Trust is registered as a managed investment scheme under Chapter 5C of the Corporations Act 2001 and, as a result, requires a responsible entity. The Company is the responsible entity of the Trust and is responsible for performing all functions that are required under the Corporations Act 2001 of a responsible entity. Directors With the exception of the changes noted below, the following persons were Directors of the Company during the whole of the financial year and up to the date of this report: Non-executive Directors Lindsay Maxsted Neil Chatfield Geoffrey Cosgriff (resigned 6 December 2011) Jeremy Davis (resigned 6 December 2011) Robert Edgar Samantha Mostyn Robert Officer Christine O'Reilly (appointed 12 April 2012) Rodney Slater Ian Smith (appointed 1 January 2012) Executive Directors Christopher Lynch (resigned 16 July 2012) Scott Charlton (appointed 16 July 2012) Results The consolidated net profit for the Group was $350,600,000 (2011: profit of $318,384,000). The profit attributable to ordinary unit holders of Transurban Holding Trust was $337,662,000 (2011: profit of $306,024,000). Principal activities The principal activities of the Group during the year were the leasing of assets and the provision of funding to the Transurban Group. 142 TRANSURBAN ANNUAL REPORT 2012 Distributions - Transurban Holding Trust Distributions paid to members during the financial year were as follows: Distributions proposed Final distribution payable and recognised as a liability: 11.5 cents (2011: 14.0 cents) per fully paid Stapled Security payable 14 August 2012 Transurban Holding Trust Directors' report 30 June 2012 (continued) 30 June 2012 $'000 30 June 2011 $'000 167,707 167,707 202,096 202,096 Distributions paid during the year Final distribution for 2011 financial year of 14.0 cents (2010: 12.0 cents) per fully paid Stapled Security paid 11 August 2011 Interim distribution for 2012 financial year of 11.0 cents (2011: 13.0 cents) per fully paid Stapled Security paid 14 February 2012 Total distributions paid during the year 202,096 169,760 159,654 361,750 187,367 357,127 Distributions paid in cash or satisfied by the issue of Stapled Securities under the distribution reinvestment plan during the years ended 30 June 2012 and 30 June 2011 Paid in cash Satisfied by issue of Stapled Securities Funds available for future distribution reinvestment plans 294,958 66,791 1 361,750 232,577 124,557 (7) 357,127 The distributions are unfranked and have a minimal tax deferred component. Review of operations Total revenue for the Group increased 23.1 per cent to $507.7 million. The profit for the year was $350.6 million. Hills M2 (Sydney) upgrade Toll revenue for the year ended 30 June 2012 for the Hills M2 decreased by 3.1 per cent to $141.2 million. As expected average daily trips decreased by 5.1 per cent, reflecting the construction impact of the Hills M2 Upgrade. As at 30 June 2012 the upgrade was over 70 per cent complete with the first stage, the Windsor Road ramps, opened for traffic on the 25 July 2012. The project completion is scheduled for mid 2013 and remains consistent with Transurban’s expectations. On 30 January 2012, Hills M2 and M1 Eastern Distributor successfully implemented full electronic tolling with minimal impact on traffic. The move to cashless tolling will result in improved travel times for customers across the corridor and operational efficiencies. Other corporate activities Chief Executive Officer (CEO) On 30 January, Transurban announced Mr Chris Lynch’s intention to resign as CEO and as a Director effective from July 2012 after a four year tenure. After a comprehensive Board selection process, Transurban announced on 3 April 2012 the appointment of Mr Scott Charlton as new CEO effective from July 2012. Financing activities Transurban continued to have success in financing activities in the year ended 30 June 2012. In July 2011, $520.0 million of non-recourse project on the M1 Eastern Distributor was refinanced. 143 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Directors' report 30 June 2012 (continued) Review of operations (continued) Significant changes in the state of affairs There have been no significant changes in the state of affairs of the Group during the year. Matters subsequent to the end of the financial year At the date of this report the Directors are not aware of any other circumstances that have arisen since 30 June 2012 that have significantly affected, or may significantly affect, the Group's operations in future financial years, the results of those operations in future financial years, or the Group's state of affairs in future financial years. 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 of the responsible entity believe it would be likely to result in unreasonable prejudice to the Group. Environmental regulation The Group is subject to environmental regulations under Australian Commonwealth and State laws and certain applicable laws in the USA. The Group maintains a comprehensive environmental management plan to monitor the performance of the Motorways, and any external parties responsible for operating any of the Group’s Motorways, and takes remedial steps where necessary. There were no significant breaches reported during the financial year on the Group’s assets. Indemnification and insurance Each officer (including each director) of the Group is indemnified, to the maximum extent permitted by law, against any liabilities incurred as an officer of the Group pursuant to agreements with the Group. Each officer is also indemnified against reasonable costs (whether legal or otherwise) incurred in relation to relevant proceedings in which the officer is involved because the officer is or was an officer. The Group has arranged to pay a premium for a Directors and officers liability insurance policy to indemnify Directors and officers in accordance with the terms and conditions of the policy. This policy is subject to a confidentiality clause which prohibits disclosure of the nature of the liability covered, the name of the insurer, the limit of liability and the premium paid for this policy. Fees paid to and interest held in the Trust by the responsible entity or its associates Fees paid to the responsible entity out of Trust property during the year are disclosed in note 28. No fees were paid to the Directors of the responsible entity during the year out of Trust property. Interests in the Group issued during the financial year Balance at 1 July Units issued during the year Balance at 30 June Value of assets Value of Group assets at 30 June 30 June 2012 Number '000 30 June 2011 Number '000 1,443,193 15,128 1,458,321 1,414,295 28,898 1,443,193 2012 $'000 2011 $'000 10,660,841 10,425,042 The value of the Group's assets is derived using the basis of accounting set out in Note 1 to the financial statements. Units under option There are 4,888,710 units of the Trust under share based payment schemes. 1,553,014 units were granted in the current year. 1,627,238 units were issued on the exercise of the relevant schemes. 144 TRANSURBAN ANNUAL REPORT 2012 Directors' interests The Directors of the responsible entity have disclosed relevant interests in Stapled Securities as follows: Transurban Holding Trust Directors' report 30 June 2012 (continued) Number of stapled securities Non-executive Directors Lindsay Maxsted Neil Chatfield Geoffrey Cosgriff (resigned 6 December 2011) Jeremy Davis AM (resigned 6 December 2011) Robert Edgar Samantha Mostyn Robert Officer Christine O'Reilly (appointed 12 April 2012) Rodney Slater Ian Smith (appointed 1 January 2012) Executive Directors Christopher Lynch (resigned 16 July 2012) Scott Charlton (appointed 16 July 2012) 30,000 30,910 - - 23,733 10,300 20,115 - - 70,000 713,563 - Auditor's independence declaration A copy of the auditor's independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 146. Rounding of amounts The Group is of a kind referred to in Class Order 98/100, 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, or in certain cases, to the nearest dollar. Auditor PricewaterhouseCoopers continues in office in accordance with section 327 of the Corporations Act 2001. This report is made in accordance with a resolution of Directors. Lindsay Maxsted Director Scott Charlton Director Melbourne 7 August 2012 145 TRANSURBAN ANNUAL REPORT 2012 146 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust ARSN 098 807 419 Annual report - 30 June 2012 Contents Financial statements Consolidated income statement Consolidated statement of comprehensive income Consolidated balance sheet Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements Directors' declaration Independent auditor's report to the members Page 148 149 150 151 152 153 222 223 This financial report covers Transurban Holding Trust and its subsidiaries. The financial report is presented in the Australian currency. Transurban Holding Trust is a Trust registered and domiciled in Australia. Its registered office and principal place of business is: Transurban Holding Trust Level 3 505 Little Collins Street Melbourne VIC 3000 The financial report was authorised for issue by the Directors on 7 August 2012. The Directors have the power to amend and reissue the financial report. 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 147 TRANSURBAN ANNUAL REPORT 2012 Revenue Other income Administration costs Promissory notes Construction costs Profit before depreciation and amortisation, net finance costs, equity accounted investments and income taxes Depreciation and amortisation expense Finance income Finance costs Net finance income Share of net profits (losses) of equity accounted investments Profit before income tax Income tax expense Profit for the year Profit is attributable to: Owners of Transurban Holding Trust Non-controlling interests Transurban Holding Trust Consolidated income statement For the year ended 30 June 2012 Notes 4 5 6 7 12 8 30 June 2012 $'000 30 June 2011 $'000 484,530 412,341 25,333 24,115 (4,155) (1,476) (224,296) (229,927) (3,949) (1,280) (160,751) (165,980) 279,936 270,476 (108,604) (106,745) 520,620 (338,778) 181,842 494,421 (337,062) 157,359 - - 353,174 321,090 (2,574) 350,600 (2,706) 318,384 337,662 12,938 350,600 306,024 12,360 318,384 Cents Cents Earnings per unit for profit attributable to the ordinary unit holders: Basic earnings per unit Diluted earnings per unit 34 34 23.2 23.2 21.3 21.3 The above consolidated income statement should be read in conjunction with the accompanying notes. 148 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Consolidated statement of comprehensive income For the year ended 30 June 2012 30 June 2012 $'000 30 June 2011 $'000 350,600 318,384 (71,286) (71,286) (4,263) (4,263) 279,314 314,121 273,473 5,841 279,314 301,362 12,759 314,121 Profit for the year Other comprehensive income Changes in the fair value of cash flow hedges, net of tax Other comprehensive income for the year net of tax Total comprehensive income for the year Total comprehensive income for the year is attributable to: Owners of Transurban Holding Trust Non-controlling interest The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. 149 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Consolidated balance sheet As at 30 June 2012 30 June 2012 $'000 30 June 2011 $'000 Notes 9 10 14 11 13 14 15 16 17 14 19 20 18 14 20 21 22 22 3,545 248,970 - 252,515 11,036 212,642 913 224,591 6,398,365 782,667 70 2,700 3,224,524 10,408,326 6,364,880 724,225 750 1,764 3,108,832 10,200,451 10,660,841 10,425,042 224,838 76 1,784 195,821 20,549 443,068 192,540 754 235 231,493 33,287 458,309 4,710,361 85,039 20,326 4,815,726 4,522,642 14,666 19,720 4,557,028 5,258,794 5,015,337 5,402,047 5,409,705 7,240,721 (70,142) (1,804,650) 36,118 5,402,047 7,188,221 (6,839) (1,814,990) 43,313 5,409,705 ASSETS Current assets Cash and cash equivalents Trade and other receivables Derivative financial instruments Total current assets Non-current assets Receivables Term loan notes Derivative financial instruments Deferred tax assets Intangible assets Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables Derivative financial instruments Current tax liabilities Provisions Other liabilities Total current liabilities Non-current liabilities Borrowings Derivative financial instruments Other liabilities Total non-current liabilities Total liabilities Net assets UNIT HOLDERS' FUNDS Issued units Reserves Accumulated losses Non-controlling interests Total unit holders' funds The above consolidated balance sheet should be read in conjunction with the accompanying notes. 150 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Consolidated statement of changes in equity For the year ended 30 June 2012 Attributable to members of Transurban Holding Trust Notes Issued units $'000 Reserves $'000 Accumulated losses $'000 Non- controlling interests $'000 Total unit holders' funds $'000 Balance at 1 July 2010 7,103,500 (3,985) (1,731,625) 42,971 5,410,861 Comprehensive income Profit for the year Other comprehensive income Total comprehensive income Transactions with owners in their capacity as owners: Treasury units Distribution reinvestment plan Changes in value of share-based payments reserve Distributions provided for or paid Distributions paid to non-controlling interests 21 21 22 22 - - - - (4,662) (4,662) 306,024 - 306,024 12,360 399 12,759 318,384 (4,263) 314,121 68 84,691 (38) - - 84,721 - - 1,808 - - 1,808 - - - - 68 84,691 74 (389,463) - (389,389) - - (12,417) (12,417) 1,844 (389,463) (12,417) (315,277) Balance at 30 June 2011 7,188,221 (6,839) (1,814,990) 43,313 5,409,705 Balance at 1 July 2011 7,188,221 (6,839) (1,814,990) 43,313 5,409,705 Comprehensive income Profit (loss) for the year Other comprehensive income Total comprehensive income Transactions with owners in their capacity as owners: Treasury units Distribution reinvestment plan Changes in value of share-based payments reserve Distributions provided for or paid Distributions paid to non-controlling interests 21 21 22 22 - - - - (64,189) (64,189) 337,662 - 337,662 12,938 (7,097) 5,841 350,600 (71,286) 279,314 413 51,682 405 - - 52,500 - - 886 - - 886 - - - - 413 51,682 44 (327,366) - (327,322) - - (13,036) (13,036) 1,335 (327,366) (13,036) (286,972) Balance at 30 June 2012 7,240,721 (70,142) (1,804,650) 36,118 5,402,047 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 151 TRANSURBAN ANNUAL REPORT 2012 Cash flows from operating activities Receipts from customers (inclusive of GST) Payments to suppliers (inclusive of GST) Interest received Interest paid Income taxes paid Net cash inflow from operating activities Cash flows from investing activities Payments for intangible assets Net cash outflow from investing activities Cash flows from financing activities Proceeds from sale of treasury units, net of costs Proceeds from borrowings, net of costs Repayment of borrowings Loans to/from related parties Repayment of loans to/from related parties Distributions paid to Transurban Group's security holders Distributions paid to non-controlling interests in subsidiaries Net cash inflow from financing activities Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Cash and cash equivalents at end of the year Transurban Holding Trust Consolidated statement of cash flows For the year ended 30 June 2012 30 June 2012 $'000 30 June 2011 $'000 Notes 269,623 (29,242) 129,982 (292,292) (3,094) 74,977 239,395 (6,857) 122,005 (275,088) (4,654) 74,801 (217,546) (217,546) (480,741) (480,741) - 630,715 (515,000) (335,969) 664,608 (294,958) (14,318) 135,078 67 775,803 (465,000) (240,547) 585,786 (232,577) (10,733) 412,799 (7,491) 6,859 11,036 3,545 4,177 11,036 32 23 9 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. 152 TRANSURBAN ANNUAL REPORT 2012 Contents of the notes to the consolidated financial statements Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 Summary of significant accounting policies Trust formation and termination Segment information Revenue Other income Expenses Net finance income Income tax expense Current assets - Cash and cash equivalents Current assets - Trade and other receivables Non-current assets - Receivables Equity accounted investments Non-current assets - Term loan notes Derivative financial instruments Deferred tax assets and liabilities Non-current assets - Intangible assets Current liabilities - Trade and other payables Borrowings Current liabilities - Provisions Other liabilities Issued units Reserves and accumulated losses Distributions Remuneration of auditors Contingencies Intra-group guarantees Commitments Related party transactions Subsidiaries Parent entity financial information Events occurring after balance sheet date Reconciliation of profit after income tax to net cash inflow from operating activities Non-cash investing and financing activities Earnings per unit Share-based payments Critical accounting estimates and judgements Financial risk management Key management personnel disclosures Page 154 163 163 164 164 164 165 166 166 167 167 168 169 170 171 172 173 173 175 175 176 177 179 179 179 180 180 181 182 183 183 184 184 184 185 188 189 195 153 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 1 Summary of significant accounting policies The principal accounting policies adopted in the preparation of the consolidated financial report are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The financial report includes the consolidated entity consisting of Transurban Holding Trust and its subsidiaries (the Group). (a) Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board, Urgent Issues Group Interpretations and the Corporations Act 2001. The Group’s current liabilities exceed its current assets by $190.6 million as at 30 June 2012. The financial report has been prepared on a going concern basis, which contemplates the continuity of normal operations, as the Group is trading profitably and has continually been able to refinance maturing debt. In addition, at 30 June 2012 the Transurban Group has available a total of $398.2 million of unused working capital facilities. Where necessary, comparatives have been reclassified for consistency with current year disclosures. Compliance with International Financial Reporting Standards (IFRS) The consolidated financial statements of Transurban Holding Trust also comply with IFRS as issued by the International Accounting Standards Board. Early adoption of standards The Group has not elected to adopt any new accounting standards early. Historical cost convention These financial statements have been prepared under the historical cost convention, as modified by the revaluation of other financial assets and liabilities (including derivative financial instruments). Rounding of amounts The Group is of a kind referred to in Class order 98/100, 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, or in certain cases, the nearest dollar. (b) Principles of consolidation Subsidiaries Subsidiaries are all those entities over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one-half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. The consolidated financial statements 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 except as otherwise indicated. The acquisition method of accounting is used to account for business combinations by the Group (refer to note 1(g)). Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated income statement, statement of comprehensive income, balance sheet and statement of changes in equity respectively. 154 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 1 Summary of significant accounting policies (continued) (b) Principles of consolidation (continued) Subsidiaries (continued) Investments in subsidiaries are accounted for at cost in the individual financial statements of Transurban Holding Trust. Associates and joint ventures Associates are all entities over which the Group has significant influence but not control. Interests in joint ventures are where the Group jointly controls an entity with another party (refer to note 12). Investments in associates are accounted for using the equity method of accounting, after initially being recognised at cost. The Group's share of its associates' and joint ventures' post-acquisition profits or losses is recognised in the income statement, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. W hen the Group’s share of losses in an associate or joint venture equals or exceeds its interest in the associate or joint venture, the Trust does not recognise further losses. Dividends received from associates and joint ventures reduce the carrying amount of the investment. Accounting policies of associates and joint ventures have been changed where necessary to ensure consistency with the policies adopted by the Group. Changes in ownership interests The Group treats transactions with non-controlling interests that do not result in a loss of control as transactions with equity owners of the Group. A change in ownership interest results in an adjustment between the carrying amounts of the controlling and non-controlling interests to reflect their relative interests in the subsidiary. Any difference between the amount of the adjustment to non-controlling interests and any consideration paid or received is recognised in a separate reserve within equity. (c) Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the Chief Executive Officer (the chief operating decision maker) and the Executive Committee, who report to the Chief Executive Officer (CEO). (d) Revenue recognition Revenue is measured at the fair value of the consideration received or receivable. Revenue is recognised for the major business activities as follows: • Rental revenue - Rental revenue is recognised as earned in accordance with the lease contract. • Interest income - Interest income is recognised on a time proportionate basis using the effective interest method. • Distribution revenue - Distribution revenue is recognised when the Trust’s right to receive payment is established. • Construction revenue - During the construction phase of service concession infrastructure assets, the Group records an intangible asset representing the right to charge users of the infrastructure and recognises revenue from the construction of the infrastructure. Revenue and expenses associated with construction contracts are recognised in accordance with the percentage of completion method. 155 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 1 Summary of significant accounting policies (continued) (e) Income tax Pursuant to the provisions of the Income Tax Legislation, Trusts are not liable to income tax provided that its taxable income (including assessable realised capital gains) is fully distributed to unit holders. Income tax is brought to account in the financial statements to the extent it relates to companies in the Group. The income tax expense or benefit for the period is the tax payable or benefit on the current period’s taxable income based on the applicable income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the Trust's subsidiaries and associates operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the end of the reporting period and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in foreign operations where the company is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Current and deferred tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. (f) Leases Leases in which a significant portion of the risk and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight line basis over the period of the lease. Lease incentives are recognised as a reduction of the rental expense over the lease term on a straight line basis. (g) Business combinations The acquisition method of accounting is used to account for all business combinations, including business combinations involving entities or businesses under common control, regardless of whether equity instruments or other assets are acquired. The consideration transferred for the acquisition of a subsidiary comprises the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Trust. The consideration transferred also includes the fair value of any contingent consideration arrangement and the fair value of any pre-existing equity interest in the subsidiary. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are, with limited exceptions, measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the Trust recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest's proportionate share of the acquiree’s net identifiable assets. 156 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 1 Summary of significant accounting policies (continued) (g) Business combinations (continued) The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition date fair value of any previous equity interest in the acquiree over the fair value of the Trust's share of the net identifiable assets acquired is recorded as goodwill. If those amounts are less than the fair value of the net identifiable assets of the subsidiary acquired and the measurement of all amounts has been reviewed, the difference is recognised directly in profit or loss as a bargain purchase. Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the entity's incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions. Contingent consideration is classified either as equity or a financial liability. Amounts classified as a financial liability are subsequently remeasured to fair value with changes in fair value recognised in profit or loss. (h) Impairment of assets At each reporting date, the Group assesses whether there is any indication that an asset may be impaired. Where an indicator of impairment exists, the Group makes an estimate of the recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount the asset is considered impaired and is written down to its recoverable amount. Recoverable amount is the greater of fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. (i) Cash and cash equivalents For statement of cash flow presentation purposes, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of and which are subject to an insignificant risk of changes in value, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet. (j) Investments and other financial assets Classification The Group classifies its investments and other financial assets in the following categories: financial assets at fair value through profit or loss, loans and receivables and held-to-maturity investments. The classification depends on the purpose for which the investments were acquired. The classification of the Group's investments are determined at initial recognition and re-evaluated at each reporting date. Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short-term. Derivatives are classified as held for trading unless they are designated as hedges. Assets in this category are classified as current assets. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for those with maturities greater than 12 months after the reporting date which are classified as non-current assets. Loans and receivables are included in trade and other receivables (current) (note 10) and in receivables (non-current) (note 11) in the balance sheet. 157 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 1 Summary of significant accounting policies (continued) (j) Investments and other financial assets (continued) Loans and receivables (continued) Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less allowance for impairment. Trade receivables are due for settlement no more than 30 days from the date of revenue recognition. Collectability of trade debtors is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off by reducing the carrying amount directly. An impairment allowance account (provision for impairment of trade receivables) is used when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the impairment allowance is the difference between the asset’s carrying amount and the present value of estimated future cash flows. The amount of the impairment allowance is recognised in the income statement. Held-to-maturity investments (term loan notes) Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group's management has the positive intention and ability to hold to maturity. If the Group were to sell other than an insignificant amount of held-to-maturity financial assets, the whole category would be tainted and reclassified as available-for-sale. Held-to-maturity financial assets are included in non-current assets, except for those with maturities less than 12 months from the reporting date, which are classified as current assets. Recognition and derecognition Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognised at fair value and transaction costs are expensed in the income statements. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership. When securities classified as available-for-sale are sold, the accumulated fair value adjustments recognised in other comprehensive income are reclassified to profit or loss as gains and losses from investment securities. Subsequent measurement Loans and receivables and held-to-maturity investments are carried at amortised cost using the effective interest method. Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Gains or losses arising from changes in the fair value of the 'financial assets at fair value through profit or loss' category are presented in profit or loss within other income or other expenses in the period in which they arise. Dividend income from financial assets at fair value through profit or loss is recognised in profit or loss as part of revenue from continuing operations when the Trust's right to receive payments is established. Impairment The Group assesses at each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. In the case of equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of a security below its cost is considered as an indicator that the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in the income statement - is reclassified from equity and recognised in the income statement as a reclassification adjustment. Impairment losses recognised in the income statement on equity instruments classified as available-for-sale are not reversed through the income statement. 158 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 1 Summary of significant accounting policies (continued) (k) Derivatives and hedging activities Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at the end of each reporting period. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as either: • • hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value hedges), or hedges of a particular risk associated with the cash flows of recognised assets and liabilities and highly probable forecast transactions (cash flow hedges). At the inception of the hedging transaction, the Group documents the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions have been and will continue to be highly effective in offsetting changes in fair values or cash flows of hedged items. The fair values of various derivative financial instruments used for hedging purposes are disclosed in note 14. Movements in the hedging reserve in shareholder's equity are shown in note 22. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item is more than 12 months; it is classified as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. Trading derivatives are classified as a current asset or liability. Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in the hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. Amounts accumulated in equity are recycled in the income statement in the periods when the hedged item will affect profit or loss. The gain or loss relating to the effective portion of interest rate swaps hedging variable rate borrowings is recognised in the income statement. When a hedging instrument expires or is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in profit or loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately reclassified to the income statement. Derivatives that do not qualify for hedge accounting Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any derivative instrument that does not qualify for hedge accounting are recognised immediately in the income statement. (l) Intangible assets Concession Assets Concession Assets represent the Group's right to operate roads under Service Concession Arrangements. Concession Assets constructed by the Group are recorded at the fair value of consideration received or receivable for the construction services delivered. Concession Assets acquired by the Group are recorded at the fair value of the assets at the date of acquisition. All Concession Assets are classified as intangible assets and are amortised over the term of the right to operate the asset on a straight line basis. For details of concession agreement dates refer to note 16. Where work is in progress, it is classified as assets under construction. 159 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 1 Summary of significant accounting policies (continued) (m) Financial liabilities Trade and other payables Trade and other payables represent liabilities for goods and services provided to the Group prior to the end of the financial year and which are unpaid. The amounts are unsecured and are usually paid within 30 days of recognition. Concession and promissory notes The Group has non-interest bearing long term debt, represented by Concession and Promissory Notes, payable to the government, measured at the net present value of expected future payments. (n) Borrowings Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any differences between the proceeds (net of transaction costs) and the redemption amount is recognised in the income statement over the period of the borrowings using an effective interest method. Borrowings are removed from the balance sheet when the obligation specified in the contract is discharged, cancelled or expired. The difference between the carrying amount of a financial liability that has been extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognised in profit or loss as other income or finance costs. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting period. (o) Borrowing costs Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in the consolidated income statement over the period of the borrowings using the effective interest method. Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a prepayment for liquidity services and amortised over the period of the facility to which it relates. Costs incurred in connection with the arrangement of borrowings are deferred and amortised over the effective period of the funding. (p) Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. Provisions are not recognised for future operating losses. Provisions are discounted to the present value of management's best estimate of the expenditure required to settle the present obligation at the reporting date. The discount rate used to determine the present value reflects current market assessments of the time value of money and the risks specific to the liability. The increase in the provision due to the discount unwinding over the passage of time is recognised as a finance cost. Provision for distribution Provision is made for the amount of any distribution declared, being appropriately authorised and no longer at the discretion of the entity, on or before the end of the reporting period but not distributed at the end of the reporting period. (q) Contributed equity Units in the Trust are classified as equity. 160 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 1 Summary of significant accounting policies (continued) (q) Contributed equity (continued) Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. If the Group reacquires its own units, those units are deducted from equity. No gain or loss is recognised in the profit or loss and the consideration paid including any directly attributable incremental costs (net of income taxes) is recognised directly in equity. (r) Parent entity financial information The financial information for the parent entity, Transurban Holding Trust, disclosed in note 30 has been prepared on the same basis as the consolidated financial statements, except as set out below. Investments in subsidiaries, associates and joint venture entities Investments in subsidiaries, associates and joint venture entities are accounted for at cost in the financial statements of Transurban Holding Trust. Dividends received from associates are recognised in the parent entity's profit or loss, rather than being deducted from the carrying amount of these investments. (s) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case it is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the consolidated balance sheet. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the taxation authority, are presented as operating cash flows. (t) New accounting standards and interpretations Certain new accounting standards and interpretations have been published that are not mandatory for 30 June 2012 reporting periods. The Group's assessment of the impact of these new standards and interpretations is set out below. (i) AASB 9 Financial Instruments, AASB 2009-11 Amendments to Australian Accounting Standards arising from AASB 9 and AASB 2010-7 Amendments to Australian Accounting Standards arising from AASB 9 (December 2010) (effective from 1 January 2013*) AASB 9 Financial Instruments addresses the classification, measurement and derecognition of financial assets and financial liabilities. The standard is not applicable until 1 January 2013* but is available for early adoption. Management are in the process of assessing the impact on financial assets but do not believe this will be significant. There will be no impact on the Group's accounting for financial liabilities, as the new requirements only affect the accounting for financial liabilities that are designated at fair value through profit or loss and the Trust does not have any such liabilities. The Group has not yet decided when to adopt AASB 9. * In December 2011, the IASB delayed the application date of IFRS 9 to 1 January 2015. The AASB is expected to make an equivalent amendment to AASB 9 shortly. (ii) AASB 10 Consolidated Financial Statements, AASB 11 Joint Arrangements, AASB 12 Disclosure of Interests in Other Entities, revised AASB 127 Separate Financial Statements and AASB 128 Investments in Associates and Joint Ventures and AASB 2011-7 Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements Standards (effective 1 January 2013) In August 2011, the AASB issued a suite of five new and amended standards which address the accounting for joint arrangements, consolidated financial statements and associated disclosures. 161 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 1 Summary of significant accounting policies (continued) (t) New accounting standards and interpretations (continued) (ii) AASB 10 Consolidated Financial Statements, AASB 11 Joint Arrangements, AASB 12 Disclosure of Interests in Other Entities, revised AASB 127 Separate Financial Statements and AASB 128 Investments in Associates and Joint Ventures and AASB 2011-7 Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements Standards (effective 1 January 2013) AASB 10 replaces all of the guidance on control and consolidation in AASB 127 Consolidated and Separate Financial Statements, and Interpretation 112 Consolidation - Special Purpose Entities. The core principle that a consolidated entity presents a parent and its subsidiaries as if they are a single economic entity remains unchanged, as do the mechanics of consolidation. However the standard introduces a single definition of control that applies to all entities. It focuses on the need to have both power and rights or exposure to variable returns before control is present. Power is the current ability to direct the activities that significantly influence returns. Returns must vary and can be positive, negative or both. Management are currently assessing the impact but do not believe it will be significant. AASB 11 introduces a principles based approach to accounting for joint arrangements. The focus is no longer on the legal structure of joint arrangements, but rather on how rights and obligations are shared by the parties to the joint arrangement. AASB 11 also provides guidance for parties that participate in joint arrangements but do not share joint control. This will not impact the Group as it does not have any such arrangements. AASB 12 sets out the required disclosures for entities reporting under the two new standards, AASB 10 and AASB 11, and replaces the disclosure requirements currently found in AASB 127 and AASB 128. Application of this standard by the Group will not affect any of the amounts recognised in the financial statements, but will impact the type of information disclosed in relation to the Group's investments. Amendments to AASB 128 provide clarification that an entity continues to apply the equity method and does not remeasure its retained interest as part of ownership changes where a joint venture becomes an associate, and vice versa. The amendments also introduce a 'partial disposal' concept. The Group is still assessing the impact of these amendments. The Group does not expect to adopt the new standards before their operative date. (iii) AASB 1053 Application of Tiers of Australian Accounting Standards and AASB 2010-2 Amendments to Australian Accounting Standards arising from Reduced Disclosure Requirements (effective from 1 July 2013) On 30 June 2010 the AASB officially introduced a revised differential reporting framework in Australia. Under this framework, a two-tier differential reporting regime applies to all entities that prepare general purpose financial statements. Transurban Holding Trust is listed on the ASX and is therefore not eligible to adopt the new Australian Accounting Standards - Reduced Disclosure Requirements. The two standards will have no impact on the financial statements of the Group. (iv) AASB 13 Fair Value Measurement and AASB 2011-8 Amendments to Australian Accounting Standards arising from AASB 13 (effective 1 January 2013) AASB 13 was released in September 2011. It explains how to measure fair value and aims to enhance fair value disclosures. The Group has yet to determine which, if any, of its current measurement techniques will have to change as a result of the new guidance. It is therefore not possible to state the impact, if any, of the new rules on any of the amounts recognised in the financial statements. However, application of the new standard will impact the type of information disclosed in the notes to the consolidated financial statements. The Group does not intend to adopt the new standard before its operative date. (v) AASB 2011-9 Amendments to Australian Accounting Standards - Presentation of Items of Other Comprehensive Income (effective 1 July 2012) In September 2011, the AASB made an amendment to AASB 101 Presentation of Financial Statements which requires entities to separate items presented in other comprehensive income into two groups, based on whether they may be recycled to profit or loss in the future. This will not affect the measurement of any of the items recognised in the balance sheet or the profit or loss in the current period. The Group intends to adopt the new standard from 1 July 2012. 162 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 1 Summary of significant accounting policies (continued) (t) New accounting standards and interpretations (continued) (vi) AASB 2011-4 Amendments to Australian Accounting Standards to Remove Individual Key Management Personnel Disclosure Requirements (effective 1 July 2013) In July 2011 the AASB decided to remove the individual key management personnel (KMP) disclosure requirements from AASB 124 Related Party Disclosures, to achieve consistency with the international equivalent standard and remove a duplication of the requirements with the Corporations Act 2001. While this will reduce the disclosures that are currently required in the notes to the financial statements, it will not affect any of the amounts recognised in the financial statements. The amendments apply from 1 July 2013 and cannot be adopted early. The Corporations Act requirements in relation to remuneration reports will remain unchanged for now, but these requirements are currently subject to review and may also be revised in the near future. 2 Trust formation and termination 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. 3 Segment information Business segment Management has determined that Transurban Holding Trust has one operating segment, based on the review and management of the consolidated Group. Transurban Holding Trust operations involve the leasing of assets and the provision of funding to the Transurban Group or associates of the Transurban Group. All revenues and expenses are directly attributable to these activities. The management structure and internal reporting of the Trust are based on this operating segment. 163 TRANSURBAN ANNUAL REPORT 2012 4 Revenue Rental income Construction revenue Other revenue Total revenue Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) Notes 4(a) 4(b) 30 June 2012 $'000 30 June 2011 $'000 260,060 224,296 174 484,530 251,385 160,751 205 412,341 Rental income (a) Rental income is derived from property held by the Group and is recognised in the income statement in accordance with the lease contract. (b) Construction revenue is recognised during the construction phase of an intangible asset. Construction revenue 5 Other income Concession notes (a) Concession notes Notes 5(a) 30 June 2012 $'000 30 June 2011 $'000 25,333 25,333 24,115 24,115 Income from concession notes relates to the CityLink concession notes, following agreements reached with the State of Victoria and Vic Roads. Under the agreements, the Group paid a total of $765 million to reassign all current and future concession notes incurred under the provisions of the Melbourne CityLink Concession Deed to Transurban Holding Trust. The Group recognises income as additional notes are issued by CityLink Melbourne Limited semi-annually. 6 Expenses 30 June 2012 $'000 30 June 2011 $'000 Profit before income tax includes the following specific expenses: Depreciation and amortisation expense - operating cost 108,604 106,745 164 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 30 June 2012 $'000 30 June 2011 $'000 Notes 462,093 494 4,272 1,052 52,709 520,620 443,674 488 - - 50,259 494,421 7(a) (338,778) - - (338,778) (327,069) (8,385) (1,608) (337,062) 181,842 157,359 7 Net finance income Finance income Interest income from related parties Other interest income Net foreign exchange gains Net movement in promissory note payable Re-measurement of concession notes receivable Total finance income Finance costs Interest and finance charges paid/payable Net foreign exchange losses Net movement in promissory note payable Total finance costs Net finance income (a) Re-measurement of concession notes Re-measurement of concession notes represent the discount unwinding over the passage of time on these notes and the change in the payment profile of the concession notes. 165 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 8 Income tax expense Income tax expense Current tax Deferred tax (Over)/Under provided in prior years Deferred income tax (revenue) included in income tax expense comprises: (Increase) decrease in deferred tax assets (note 15) (Decrease) increase in deferred tax liabilities (note 15) Numerical reconciliation of income tax expense to prima facie tax payable Profit before income tax expense Tax at the Australian tax rate of 30% (2011 - 30%) Tax effect of amounts which are not deductible (taxable) in calculating taxable income: Trust income not subject to tax (Over)/Under provided in prior years Income tax expense 9 Current assets - Cash and cash equivalents Cash at bank and in hand All cash balances are interest bearing. 30 June 2012 $'000 30 June 2011 $'000 3,534 (936) (24) 2,574 (1,042) 106 (936) 3,480 (776) 2 2,706 (860) 84 (776) 30 June 2012 $'000 30 June 2011 $'000 353,174 105,952 321,090 96,327 (103,354) 2,598 (93,623) 2,704 (24) 2,574 2 2,706 (355,748) (323,796) 30 June 2012 $'000 30 June 2011 $'000 3,545 3,545 11,036 11,036 166 TRANSURBAN ANNUAL REPORT 2012 10 Current assets - Trade and other receivables Loans to related parties Prepayments Other receivables Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) Notes 10(a) 10(b) 30 June 2012 $'000 30 June 2011 $'000 245,699 1,534 1,737 248,970 210,633 1,352 657 212,642 No class within trade and other receivables contain impaired or past due assets. Based on the credit history, it is expected these amounts will be received when due. The Group does not hold any collateral in relation to these receivables. (a) Loans to related parties Loans to related parties predominantly represent interest and finance charges on funds loaned from Transurban Finance Company, distributions receivable from its subsidiaries and accrued interest from a related party. There is no allowance for doubtful debts as the counterparties are related parties. (b) Prepayments Prepayments relate to expenses that have been paid but not yet incurred as at 30 June 2012. 11 Non-current assets - Receivables Concession notes Loans to related parties Notes 11(a) 11(b) 30 June 2012 $'000 30 June 2011 $'000 632,383 5,765,982 6,398,365 554,341 5,810,539 6,364,880 None of the non-current receivables are impaired or past due but not impaired. (a) Concession notes The Group reached agreements with the State of Victoria and Vic Roads, under which the Group paid $765 million to the State to reassign all current and future concession notes incurred under the provisions of the Melbourne CityLink Concession Deed to Transurban Holding Trust. (b) Loans to related parties Loans to related parties represents amounts advanced to other members of the Transurban Group. There is no allowance for doubtful debts as the counterparties are related parties. 167 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 12 Equity accounted investments Ownership interest Carrying amount 30 June 2012 % 30 June 2011 % 30 June 2012 $'000 30 June 2011 $'000 Westlink M7: Westlink Motorway Limited WSO Finance Pty Limited Westlink Motorway Partnership 50 50 50 50 50 50 - - - - - - - - Each of the above is a member of the Westlink Motorway Group, established to invest in, construct and operate the Westlink M7 Motorway in Sydney for a period of 34 years until February 2037. All were incorporated in Australia. Westlink Motorway Limited is the nominee manager of the Westlink Motorway Partnership. WSO Finance Pty Limited is the financier of the Motorway. Westlink Motorway Partnership was responsible for the construction of the Motorway. The Motorway opened for operation on 16 December 2005. Summarised financial information of equity accounted investments 2012 Westlink M7 2011 Westlink M7 Ownership Interest % Assets $'000 Group's share of: Liabilities $'000 Revenues $'000 Loss $'000 50 50 726,107 726,107 (970,838) (970,838) 60,350 60,350 (22,044) (22,044) 702,292 702,292 (876,307) (876,307) 57,316 57,316 (26,128) (26,128) 168 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 12 Equity accounted investments (continued) Movements in carrying amounts Balance 1 July Share of losses after income tax Additional investment acquired Balance at 30 June Share of profits or losses Loss before income tax Losses not recognised Balance at 1 July Unrecognised losses for the year Share of equity accounted investments' expenditure commitments As at the reporting date, there are no expenditure commitments. Contingent liabilities of equity accounted investments As at the reporting date, there are no contingent liabilities. 13 Non-current assets - Term loan notes Term loan notes 30 June 2012 $'000 30 June 2011 $'000 - - - - - - - - - - - - 126,568 22,044 148,612 100,440 26,128 126,568 30 June 2012 $'000 30 June 2011 $'000 782,667 782,667 724,225 724,225 Term Loan Notes (TLN's) represent Transurban’s debt funding contribution to the Westlink M7 Motorway. The fixed maturity date of the TLN's is the earlier of 34 years and the termination of the “Agreement to Lease” between the Roads and Maritime Services (formerly known as the Roads and Traffic Authority) of New South Wales and Westlink Motorway Limited. The interest rate charged on these notes is 11.93 per cent and any unpaid interest capitalises into additional notes. During the year ended 30 June 2012 the Group capitalised interest of $58.4 million (2011: $46.2 million). The TLN's are accounted for as held-to-maturity investments. Impairment and risk exposure None of the TLN's are either past due or impaired. All TLN's are denominated in Australian currency. As a result, there is no exposure to foreign currency risk. There is also no exposure to price risk as the investments will be held to maturity. 169 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 30 June 2012 $'000 30 June 2011 $'000 - - 70 70 70 76 76 913 913 750 750 1,663 754 754 85,039 85,039 14,666 14,666 85,115 15,420 14 Derivative financial instruments Current assets Interest rate swap contracts - cash flow hedges Total current derivative financial instrument assets Non-current assets Interest rate swap contracts - cash flow hedges Total non-current derivative financial instruments Total derivative financial instrument assets Current liabilities Interest rate swap contracts - cash flow hedges Total current derivative financial instrument liabilities Non-current liabilities Interest rate swap contracts - cash flow hedges Total non-current derivative financial instrument liabilities Total derivative financial instrument liabilities Instruments used by the Group The Group is party to derivative financial instruments in the normal course of business in order to hedge exposure to fluctuations in interest and foreign exchange rates in accordance with the Group financial risk management policies (refer to note 37). Interest rate swap contracts - cash flow hedges The Group uses interest rate swap contracts for hedging purposes to convert variable rate borrowings to fixed interest. Variable rate borrowings of the Group currently bear an average interest rate of 5.3 per cent (2011: 7.2 per cent). It is policy to protect part or all of the loans from exposure to increasing interest rates. Accordingly, the Group has entered into interest rate swap contracts under which it receives interest at variable rates and pays interest at fixed rates. Swaps taken out by the Group currently cover 99 per cent (2011: 98 per cent) of long term variable debt. The average all-in rate after hedging on the hedged portion of the Group's variable rate borrowings is 7.1 per cent (2011: 7.5 per cent). 170 TRANSURBAN ANNUAL REPORT 2012 15 Deferred tax assets and liabilities The balance comprises temporary difference attribulate to: Current year and prior year losses Receivables Tax assets/(liabilities) Set off of tax Net tax assets/(liabilities) Movements: Opening balance at 1 July Credited/(charged) to the income statement Balance at 30 June Deferred tax assets/liabilities to be recovered after more than 12 months Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) Assets Liabilities Net 30 June 2012 $'000 30 June 2011 $'000 30 June 2012 $'000 30 June 2011 $'000 30 June 2012 $'000 30 June 2011 $'000 4,113 - 4,113 (1,413) 2,700 3,072 - 3,072 (1,308) 1,764 - (1,413) (1,413) 1,413 - - (1,308) (1,308) 1,308 - 4,113 (1,413) 2,700 - 2,700 3,072 (1,308) 1,764 - 1,764 3,072 1,042 4,114 2,212 860 3,072 (1,308) (106) (1,414) (1,224) (84) (1,308) 1,764 936 2,700 988 776 1,764 4,114 4,114 3,072 3,072 (1,413) (1,413) (1,308) (1,308) 2,700 2,700 1,764 1,764 The set off of deferred tax assets and liabilities relates to deferred tax balances for Australian domiciled entities that are levied tax by the Australian Taxation Office. 171 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 16 Non-current assets - Intangible assets CityLink $'000 Hills M2 Motorway $'000 Lane Cove Tunnel $'000 Asset under construction $'000 Total $'000 1,207,442 (254,163) 953,279 2,116,141 (362,884) 1,753,257 - - - - - - 3,323,583 (617,047) 2,706,536 953,279 - (40,475) 912,804 1,753,257 - (54,530) 1,698,727 - 348,290 (11,740) 336,550 - 160,751 - 160,751 2,706,536 509,041 (106,745) 3,108,832 1,207,442 (294,638) 912,804 2,116,141 (417,414) 1,698,727 348,290 (11,740) 336,550 160,751 - 160,751 3,832,624 (723,792) 3,108,832 912,804 - (40,475) 872,329 1,698,727 - (54,945) 1,643,782 336,550 - (13,184) 323,366 160,751 224,296 - 385,047 3,108,832 224,296 (108,604) 3,224,524 1,207,442 (335,113) 872,329 2,116,141 (472,359) 1,643,782 348,290 (24,924) 323,366 385,047 - 385,047 4,056,920 (832,396) 3,224,524 At 1 July 2010 Cost Accumulated amortisation Net book amount Year ended 30 June 2011 Opening net book amount Additions Amortisation charge Closing net book amount At 30 June 2011 Cost Accumulated amortisation Net book amount Year ended 30 June 2012 Opening net book amount Additions Amortisation charge Closing net book amount At 30 June 2012 Cost Accumulated amortisation Net book amount Concession Assets The CityLink, Hills M2 and Lane Cove Tunnel Service Concession Arrangements have been accounted for in accordance with AASB-I 12 and therefore the concession assets have been classified as Intangible Assets. CityLink concession asset Transurban holds the Concession for Melbourne’s CityLink tollway which grants the Group the right to design, build, operate and maintain CityLink for the Concession period, ending 14 January 2034, being 34 years following completion of construction. Transurban has the right to collect tolls from CityLink for the duration of the Concession Arrangement and maintains the tollway to ensure continuous availability for public use. Tolls are escalated in accordance with the maximum allowable increases in the Concession Deed, being a quarterly escalation at the greater of quarterly CPI or 1.1065 per cent (equivalent to an annual escalation rate of 4.5 per cent) for the first 15 years then quarterly by CPI, but no greater than annual CPI plus 2.5 per cent. At the end of the Concession period, all concession assets are to be returned to the Victorian State Government. Hills M2 concession asset Transurban has the right to toll the Hills M2 Motorway until 2046. The Concession Deed also requires Transurban to maintain the Motorway. 172 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 16 Non-current assets - Intangible assets (continued) Concession Assets (continued) Hills M2 concession asset (continued) Toll increases for the Motorway are based on a maximum toll increase as defined in the Concession Deed, being a quarterly escalation at the greater of quarterly CPI or 1 per cent, subject to integer rounding. At the end of the concession period, all concession assets will be returned to the NSW State Government. Lane Cove Tunnel Transurban has the right to toll the Lane Cove Tunnel until January 2037. Toll increases for the Lane Cove Tunnel are based on a theoretical toll increase as defined in the Concession Deed, being a quarterly escalation of CPI, subject to the nearest whole cent rounding. At the end of the concession period, all concession assets will be returned to the NSW State Government. Assets under construction The Group is currently undertaking an upgrade of the Hills M2 Motorway. Construction on the M2 upgrade commenced in January 2011. This will be transferred to the intangible asset upon completion. Impairment testing The Group tests whether intangible assets have suffered any impairments, in accordance with the accounting policy stated in note 1(h). The recoverable amount of assets and cash-generating units have been determined based on the greater of value-in-use and fair value less cost to sell calculations. These calculations require the use of assumptions regarding traffic flows, discount rates, growth rates and other factors affecting operating activities of cash-generating units. Key assumptions used in calculating the recoverable amount The Group makes assumptions in calculating the recoverable amount of its cash generating units. These include assumptions around expected traffic flows and forecast operational costs. In performing the calculations the Group has applied a discount rate ranging from 8.8 to 11.0 per cent (2011: ranging from 8.8 to 11.0 per cent), representing the implied discount rate applicable to the risk profile of the Group's assets, to discount the forecast future attributable cash flows. In determining future cash flows, the Group has also applied rates of growth to underlying operating assumptions to reflect the expected performance of the assets beyond the budget period in accordance with the respective concessions. The operating costs have been escalated in line with a combination of CPI and Average Weekly Earnings (AWE) forecasts. A long term CPI rate of 2.5 per cent (2011: 2.5 per cent) and AWE of 4.0 per cent (2011: 4.0 per cent) have been used. 17 Current liabilities - Trade and other payables 30 June 2012 $'000 30 June 2011 $'000 24,042 200,796 224,838 18,613 173,927 192,540 Notes 18(a) 18(b) 30 June 2012 $'000 30 June 2011 $'000 1,412,849 3,297,512 4,710,361 1,286,769 3,235,873 4,522,642 Trade payables and accruals Related party payables 18 Borrowings Term debt Loans from related parties 173 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 18 Borrowings (continued) (a) Term debt The term debt facilities are comprised of: • • • $520.0 million facility entered into by AMT Management Limited (as trustee for Airport Motorway Trust). The facility has deferred borrowing costs of $4.4 million. $740.0 million facility entered into by Hills Motorway Management Limited (as trustee for Hills Motorway Trust). The facility has deferred borrowing costs of $6.5 million. $260.0 million facility entered into by LCT-MRE Nominees Pty Limited (as trustee for LCT-MRE Trust). The facility has deferred borrowing costs of $0.9 million. The Airport Motorway facility was refinanced in July 2011 and is fully secured against the respective rights of Airport Motorway Limited and Airport Motorway Trust and their assets. The facility is a $520.0 million non-recourse syndicated facility with terms of three years ($295.0 million) and seven years ($225.0 million). The current floating interest rate applicable to the facility is 3.5 per cent (2011: 4.9 per cent). These facilities are currently 99 per cent hedged to an all-in rate after hedging of 7.0 per cent. The Hills M2 facility was refinanced in November 2010 and is fully secured against the respective rights of Hills Motorway Limited and Hills Motorway Trust and their assets. The facility is a non-recourse syndicated facility totaling $740.0 million. The financing comprised: the refinancing of $465.0 million of existing debt with terms of four years ($400.0 million), and six years ($65.0 million); and a new construction capex facility of $275.0 million with a term of six years. As at 30 June 2012, $179.7 million was drawn under the construction capex facility. The total facility is currently 98 per cent hedged with an all-in rate after hedging of 7.1 per cent. The Lane Cove Tunnel facility was established in August 2010 to partially finance the acquisition of the Lane Cove Tunnel and is fully secured against the respective rights of LCT-MRE Pty Limited and LCT-MRE Trust and their assets. This facility is a non-recourse syndicated facility with a term of three years. The current floating rate applicable to the facility is 3.6 per cent (2011: 4.9 per cent). The facility is currently fully hedged to an all-in rate after hedging of 7.0 per cent. (b) Loans from related parties The Group receives funding from a related party, Transurban Finance Company Pty Limited, which is used to finance its activities. Covenants The Transurban Group's debt has the following Interest Coverage Ratio ("ICR") covenants: • CityLink - ICR greater than 1.1 times • Group - ICR greater than 1.25 times In addition, the Transurban Group has a market capitalisation clause where gearing must not exceed 60 per cent. Based on the balance sheet at 30 June 2012, the Transurban Group's Security price would need to close below $2.15 per Security for 20 consecutive business days to trigger this clause. In addition, the non-recourse debt at M1 Eastern Distributor and Hills M2 Motorway has the following covenants: • M1 Eastern Distributor - ICR greater than 1.2 times • Hills M2 Motorway - ICR greater than 1.2 times • Lane Cove Tunnel - ICR greater than 1.15 times 174 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 19 Current liabilities - Provisions Distribution to security holders Distribution to non-controlling interests in subsidiaries Notes 19(a) 19(a) 30 June 2012 $'000 30 June 2011 $'000 167,756 28,065 195,821 202,146 29,347 231,493 (a) Distributions to security holders and non-controlling interests These distributions are provided for once approved by the Board and are announced to equity holders. Movements in provisions Movements in each class of provision during the financial year are set out below: 2012 Carrying amount at 1 July Provision recognised Amounts paid/utilised during the year Carrying amount at 30 June 20 Other liabilities Current Unearned income (related parties) Non-current Promissory notes Total other liabilities (a) Unearned income Distribution to non- controlling interests in subsidiaries $'000 Distribution to security holders $'000 202,146 327,366 (361,756) 167,756 29,347 13,036 (14,318) 28,065 Notes 20(a) 20(b) 30 June 2012 $'000 30 June 2011 $'000 20,549 20,549 20,326 20,326 33,287 33,287 19,720 19,720 40,875 53,007 Unearned income related to rental income received in advance from a related party. 175 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 20 Other liabilities (continued) (b) Promissory notes The Hills Motorway Trust has entered into leases with Roads and Maritime Service (RMS). Annual lease liabilities under these leases total $7.0 million, indexed annually to CPI 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 RMS. Promissory notes are recognised 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 (2011: 12 per cent) which recognises their subordinated nature. The face value of Promissory notes on issue at 30 June 2012 is $136.9 million (2011: $126.5 million). The net present value at 30 June 2012 of the redemption payments relating to these Promissory notes is $20.3 million (2011: $19.7 million). 21 Issued units The issued units of the Trust are a component of a parcel of stapled securities, each parcel comprising one share in Transurban Holdings Limited, one unit in Transurban Holding Trust and one share in Transurban International Limited. The individual securities comprising a parcel of stapled securities cannot be traded separately. Issued units 30 June 2012 Number '000 30 June 2011 Number '000 30 June 2012 $'000 30 June 2011 $'000 Ordinary units fully paid 1,458,321 1,458,321 1,443,193 1,443,193 7,240,721 7,240,721 7,188,221 7,188,221 Units in trust The number of units on issue is 1,458,321,154 (2011: 1,443,543,731). The difference of nil (2011: 351,075) relates to treasury securities. Units entitle the holder to participate in distributions and the winding up of Transurban Holding Trust in proportion to the number of and amounts paid on the units held. On a show of hands every holder of units present at a meeting in person or by proxy is entitled to one vote. All units issued form part of the Transurban Group stapled securities issued. The amounts above represent the value apportioned to Transurban Holding Trust, with the remaining value apportioned to Transurban Holdings Limited and Transurban International Limited. Capital risk management The Transurban Group is subject to a gearing ratio covenant imposed by senior secured lenders. The Group monitors capital on the basis of the gearing ratio to ensure compliance with the covenant. There have been no breaches of the covenant. For further information refer to note 18. The Group's objectives when managing capital are to safeguard its ability to continue as a going concern, so that they can continue to provide returns to security holders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. 176 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 21 Issued units (continued) Capital risk management (continued) In order to maintain or adjust the capital structure, the Group may adjust the amounts of distributions paid to security holders, return capital to security holders, issue new securities or sell assets to reduce debt. Movements in issued units Opening balance at 1 July 2010 Distribution reinvestment plan Purchase, disposal and vesting of treasury securities Transfer vesting portion of LTI from share-based payment reserve Purchase of Performance Rights Plan units Closing balance at 30 June 2011 Opening balance at 1 July 2011 Distribution reinvestment plan Disposal and vesting of treasury securities Transfer vesting portion of LTI from share-based payment reserve Purchase of Performance Awards Plan units Closing balance at 30 June 2012 Notes 21(a) 21(b) 21(a) 21(b) Number of units '000 Consolidated $'000 1,414,295 28,876 22 - - 1,443,193 1,443,193 14,162 351 615 - 1,458,321 7,103,500 84,691 68 420 (458) 7,188,221 7,188,221 51,682 413 1,022 (617) 7,240,721 (a) Distribution reinvestment plan The Transurban Group has established a distribution reinvestment plan under which holders of Stapled Securities may elect to have all or part of their distribution entitlements satisfied by the issue of new stapled securities rather than by cash. (b) Treasury units Stapled Securities (including units in the Trust) were issued to executives under share-based payment plans. The stapled securities are held by the executive but will only vest in the executive in accordance with the terms of the plans. The acquired securities cannot be transferred or sold prior to vesting date. On forfeit the securities are sold on market. 22 Reserves and accumulated losses Reserves Cash flow hedges Share-based payments 30 June 2012 $'000 30 June 2011 $'000 (76,190) 6,048 (70,142) (12,001) 5,162 (6,839) 177 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 22 Reserves and accumulated losses (continued) Reserves (continued) Movements: Cash flow hedges Balance 1 July Revaluation - gross (note 14) Transfer to net profit attributable to non-controlling interests Balance 30 June Share-based payments Balance 1 July Employee share plan expense Transfer vesting portion of LTI to issued units Transfer non-vesting portion of LTI from retained earnings Balance 30 June Accumulated losses Movements in accumulated losses were as follows: Balance 1 July Profit for the year attributable to owners of Transurban Holding Trust Distributions Transfer non-vesting portion of LTI to share based payments reserve Balance 30 June Nature and purpose of other reserves 30 June 2012 $'000 30 June 2011 $'000 (12,001) (71,286) 7,097 (76,190) 5,162 2,365 (1,435) (44) 6,048 (7,339) (4,263) (399) (12,001) 3,354 2,302 (420) (74) 5,162 2012 $'000 2011 $'000 (1,814,990) 337,662 (327,366) 44 (1,804,650) (1,731,625) 306,024 (389,463) 74 (1,814,990) Cash flow hedges The cash flow hedges reserve is used to record gains or losses on a hedging instrument in a cash flow hedge that are recognised in other comprehensive income, as described in note 1(k). Amounts are reclassified to profit or loss when the associated hedged transaction affects profit or loss. Share-based payments The share-based payments reserve is used to recognise the fair value of long-term incentives issued but not exercised. 178 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 23 Distributions Distributions payable Final distribution payable and recognised as a liability: 11.5 cents (2011: 14.0 cents) per fully paid Stapled Security payable 14 August 2012 30 June 2012 $'000 30 June 2011 $'000 167,707 167,707 202,096 202,096 Distributions paid during the year Final distribution for 2011 financial year of 14.0 cents (2010: 12.0 cents) per fully paid Stapled Security paid 11 August 2011 Interim distribution for 2012 financial year of 11.0 cents (2011: 13.0 cents) per fully paid Stapled Security paid 14 February 2012 Total distributions paid during the year 202,096 169,760 159,654 361,750 187,367 357,127 Distributions paid in cash or satisfied by the issue of Stapled Securities under the distribution reinvestment plan during the years ended 30 June 2012 and 30 June 2011 Paid in cash Satisfied by issue of Stapled Securities (a) Funds available for future distribution reinvestment plans 294,958 66,791 1 361,750 232,577 124,557 (7) 357,127 (a) The value of stapled securities represents the total value of securities issued, however, this value is apportioned between Transurban Holdings Limited ($18.7 million), Transurban Holding Trust ($45.4 million) and Transurban International Limited ($2.7 million). 24 Remuneration of auditors The audit fee for the current and prior year has been borne and paid by a related party, Transurban Limited. 25 Contingencies The Group and parent entity had contingent liabilities at 30 June 2012 in respect of: Equity guarantee Transurban DRIVe Holdings LLC (DRIVe), a related party of the Transurban Group, holds a concession agreement with The Commonwealth of Virginia to construct and operate High Occupancy Toll (HOT) lanes on the Capital Beltway (Capital Beltway project), a ring road that runs around Washington DC. The project is currently in the construction phase. Construction is expected to be complete in late 2012 and the tolling concession will operate for 75 years. 179 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 25 Contingencies (continued) Equity guarantee (continued) On 20 December 2007 (and as amended on 12 June 2008) the Transurban Group, through the entities in the triple staple, being Transurban Holdings Limited, Transurban International Limited and Transurban Infrastructure Management Limited (as responsible entity of the Transurban Holding Trust), entered into an agreement with Capital Beltway Express LLC (Capital Beltway Express), a subsidiary of DRIVe, the Virginia Department of Transportation, Goldman Sachs Capital Markets L.P., Depfa Bank plc and Wells Fargo Bank N.A. to provide an Equity Funding Guarantee (the Guarantee) over all of DRIVe’s equity obligations associated with funding the equity contributions to the Capital Beltway project. The Transurban Group owns 75 per cent of the equity of DRIVe and recognises this investment in the consolidated financial statements using the equity method of accounting. DRIVe holds 90 per cent of the equity in Capital Beltway Express and, from time to time, is required to make equity contributions to Capital Beltway Express to fund the equity component of the Capital Beltway project costs. The total equity contribution DRIVe is obliged to make to Capital Beltway Express is US$313,825,757, of which US$182,857,326 had been paid at balance sheet date. In accordance with the DRIVe Holdings LLC Agreement, should a DRIVe member default on any capital calls, the Transurban Group has the right to acquire their share of DRIVe at a 50 per cent discount to its fair value. As such in the instance of the Guarantee being called, the Transurban Group may exercise its right to the interest in DRIVe at a discounted value. 26 Intra-group guarantees As at 30 June 2012, the Transurban Group comprises Transurban Holdings Limited, Transurban Holding Trust and Transurban International Limited, traded and quoted on the ASX as one triple stapled security. Under the stapling arrangement, each entity directly and/or indirectly supports each entity and its controlled entities within the group on a continual basis. 27 Commitments Capital commitments Capital expenditure contracted for at the reporting date but not recognised as liabilities is as follows: Intangible assets Payable: Within one year Later than one year but not later than five years Promissory notes 30 June 2012 $'000 30 June 2011 $'000 139,195 12,792 151,987 242,997 98,498 341,495 The Responsible Entity, on behalf of the Hills Motorway Trust, has entered into an agreement with the RMS. Annual liabilities under this agreement total $7.0 million indexed annually to the CPI over the estimated period that the Hills M2 Motorway will be used. Until such time as a threshold return is achieved, payments under this agreement can be made at the discretion of the Responsible Entity, by means of the issue of non-interest bearing promissory notes to the RMS. For further information refer to note 20. 180 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 28 Related party transactions Other related parties All of the directors of Transurban Infrastructure Management Limited are also directors of Transurban Holdings Limited (THL) and Transurban International Limited (TIL). The following services are provided by the Group to THL and TIL and/or their subsidiaries: • • Financial support through interest bearing and non-interest bearing loans; and/or The rental of land. Financial support is received from Transurban Finance Company Pty Ltd in the form of an interest bearing loan. The Group pays interest and related finance charges for such loan. Transurban Infrastructure Management Limited is the Responsible Entity of Transurban Holding Trust, CityLink Trust and CARS Trust and receives Responsible Entity and Management Fees. The following transactions occurred with related parties: Amounts recognised as revenue Rental income Interest income Term loan note interest revenue Amounts recognised as expenses Interest and other related charges paid Responsible Entity fees Aggregate amounts of related party receivables at balance date Current receivables Term loan notes (loan to associate) Non-current receivables Aggregate amounts of related party payables at balance date Current payables Non-current payables 30 June 2012 $ 30 June 2011 $ 260,060,073 370,765,907 91,328,563 722,154,543 251,384,307 359,109,721 84,565,108 695,059,136 252,330,549 2,791,895 255,122,444 227,015,493 2,714,245 229,729,738 245,698,961 782,667,047 5,765,981,717 6,794,347,725 210,633,245 724,225,027 5,810,538,998 6,745,397,270 200,795,653 3,297,511,859 3,498,307,512 173,927,225 3,235,872,868 3,409,800,093 Loans to/from related parties No provision for doubtful debts has been raised in relation to any outstanding balances, and no expense has been recognised in respect of bad or doubtful debts from related parties. 181 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 28 Related party transactions (continued) Loans to associate The “loan to associate” is via Term Loan Notes (“TLN”). The TLN represent the Group’s funding contribution to the Westlink Motorway Partnership and earn interest at a fixed rate of 11.93 per cent until the earlier of 34 years and the termination of the “Agreement to Lease” between the Roads and Maritime Services of New South W ales and Westlink Motorway Limited. Any unpaid interest is capitalised and deemed to subscribe for further loan notes with an aggregate principal amount equal to that unpaid interest. The TLN have not been affected by equity accounting losses from the associate. Terms and conditions of transactions with related parties other than key management personnel or entities All transactions were made on normal terms and conditions and at market rates. 29 Subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in note 1(b): Name of entity incorporation Class of shares Equity holding Country of The Citylink Trust Transurban Finance Trust Transurban AL Trust Transurban CARS Trust Transurban WSO Trust Hills Motorway Trust T (895) Finance Trust Abigroup Westlink Partner Holding No.4 Pty Ltd Abigroup Westlink Partner No.4 Pty Ltd LMI Westlink Partner Holding No.4 Pty Ltd LMI Westlink Partner No.4 Pty Ltd Abigroup Westlink Partner Holding No.2 Pty Ltd Abigroup Westlink Partner No.2 Pty Limited LMI Westlink Partner Holding No.2 Pty Limited LMI Westlink Partner No.2 Pty Limited Sydney Roads Trust Airport Motorway Trust LCT - MRE Trust LCT - MRE Holding Trust Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary The proportion of ownership interest is equal to the proportion of voting power held. 2012 % 2011 % 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 75.10 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 75.10 100 100 182 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 30 Parent entity financial information Summary financial information The individual financial statements for the parent entity show the following aggregate amounts: Balance sheet Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Unit holders' funds Issued units Reserves Accumulated losses Profit for the year Total comprehensive income Contingent liabilities of the parent entity For details of contingent liabilities of the parent entity, refer to note 25. 31 Events occurring after balance sheet date 30 June 2012 $'000 30 June 2011 $'000 683,578 512,008 7,697,413 7,460,573 8,380,991 7,972,581 304,959 308,721 2,244,702 1,984,012 2,549,661 2,292,733 (17,493,990) (17,039,544) 7,240,721 6,048 (1,415,439) 5,831,330 7,188,221 5,162 (1,513,535) 5,679,848 425,419 465,577 425,419 465,577 Apart from the refinancing of the debt as disclosed in note 18(a), there are no other unusual matters or circumstances that have arisen since the end of the financial year that have significantly affected or may significantly affect the operations of the Group, the results of those operations or the state of affairs of the Group in subsequent financial years. 183 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 32 Reconciliation of profit after income tax to net cash inflow from operating activities Profit for the year Depreciation and amortisation Capitalised term loan note interest Non-cash concession notes income Non-cash finance costs Change in operating assets and liabilities: (Increase) in receivables and prepayments (Increase) in operating related party balances Movement in current tax liabilities and deferred taxes Increase in payables Increase (decrease) in unearned income Increase in Promissory Note liability Net cash inflow from operating activities 33 Non-cash investing and financing activities 30 June 2012 $'000 30 June 2011 $'000 350,600 108,604 (58,442) (78,042) 14,997 (1,262) (255,388) 613 5,429 (12,738) 606 74,977 318,384 106,745 (46,181) (74,374) 44,996 (845) (310,760) (505) 979 33,287 3,075 74,801 30 June 2012 $'000 30 June 2011 $'000 Distributions satisfied by the issue of units under the distribution reinvestment plan 51,682 84,691 34 Earnings per unit Basic earnings per unit 30 June 2012 Cents 30 June 2011 Cents Earnings attributable to the ordinary unit holder Total basic earnings per unit attributable to the ordinary equity holders of the Trust 23.2 23.2 21.3 21.3 Diluted earnings per unit 30 June 2012 Cents 30 June 2011 Cents Earnings attributable to the ordinary unit holder Total diluted earnings per unit attributable to the ordinary equity holders of the Trust 23.2 23.2 21.3 21.3 184 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 34 Earnings per unit (continued) Reconciliation of earnings used in calculating earnings per unit Basic and diluted earnings per unit Profit for the year Profit attributable to non-controlling interests Profit attributable to ordinary unit holders of the trust and used in calculating basic and diluted earnings per unit Weighted average number of units used as the denominator 30 June 2012 $'000 30 June 2011 $'000 350,600 (12,938) 318,384 (12,360) 337,662 306,024 30 June 2012 Number 30 June 2011 Number Weighted average number of units used as the denominator in calculating basic and diluted earnings per unit 1,452,932,838 1,437,820,619 Basic earnings per unit Basic earnings per unit is determined by dividing the profit attributable to unit holders excluding any non-controlling interest and costs of servicing equity other than distributions, by the weighted average number of units outstanding during the financial year. 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 after income tax effect of interest and other financing costs associated with dilutive potential units and the weighted average number of units that would have been outstanding assuming the conversion of all dilutive potential units. 35 Share-based payments Performance Awards plan Under the Performance Awards Plan (PAP), eligible executives receive a grant of Performance Awards which entitles participants to receive securities at no cost subject to the achievement of performance conditions. The Board has discretion as to the form of the award at the end of the performance period and may grant cash payments of equivalent value at vesting. No dividends or distributions on securities are payable to participants prior to vesting. Dual performance measures (Free Cash Flow (FCF) (from 1 July 2011) or earnings before interest, tax, depreciation and amortisation (EBITDA) measure (pre 1 July 2011) and relative total security holder return (TSR) apply to Performance Awards, each representing 50 per cent of the award. The use of dual measures balances the need to both improve the underlying performance of the business over the long term as well as appropriate returns relative to the market. Performance Awards were granted with a three year vesting period. For the plan granted 11 December 2009 and future grants, the awards are tested at the end of the three year vesting period. However, for the 1 November 2008 grant, the awards were tested at the end of each year. If the performance measures were satisfied for the year, one third of the awards were preserved until the end of the three year period. At the end of the three years a cumulative test of the performance measures was applied to any unvested awards. 185 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 35 Share-based payments (continued) Performance Awards plan (continued) Grant date Vesting / Expiry date Fair value at grant date ($) FCF EBITDA TSR Balance at start of the year Number Granted during the year Number Vested during the year Number Forfeited during the year Number Balance at end of the year Number 2012 1 Nov 2008 11 Dec 2009 1 Nov 2010 23 Dec 2010 25 Sep 2011 11 Nov 2011 Total 1 Nov 2011 11 Dec 2012 1 Nov 2013 1 Nov 2013 30 Jun 2014 30 Jun 2014 3.30 3.33 3.23 3.33 3.37 3.27 4.27 4.97 4.62 4.97 N/A N/A N/A N/A N/A N/A 4.63 4.81 1,260,113 1,776,583 1,401,575 684,683 - - (1,193,516) - - - - - - - - 837,990 - 715,024 5,122,954 1,553,014 (1,193,516) (66,597) (150,589) (200,498) - (176,058) - (593,742) - 1,625,994 1,201,077 684,683 661,932 715,024 4,888,710 Weighted average exercise price $4.00 $4.02 $3.79 $3.99 $4.06 Grant date Vesting / Expiry date Fair value at grant date ($) FCF EBITDA TSR Balance at start of the year Number Granted during the year Number Vested during the year Number Forfeited during the year Number Balance at end of the year Number 2011 1 Nov 2008 11 Dec 2009 1 Nov 2010 23 Dec 010 Total 1 Nov 2011 11 Dec 2012 1 Nov 2013 1 Nov 2013 3.30 3.33 3.23 3.33 4.27 4.97 4.62 4.97 N/A N/A N/A N/A 1,277,630 1,990,913 - - 3,268,543 - - 1,658,614 684,683 2,343,297 - - - - - (17,517) (214,330) (257,039) - (488,886) 1,260,113 1,776,583 1,401,575 684,683 5,122,954 Weighted average exercise price $4.01 $3.99 $- $4.02 $4.00 Executive Equity Plan Equity awards were granted under the Executive Equity Plan (EEP) based on executives' performance and were designed to encourage retention of executives while focusing on business excellence. Individuals who are high performers and in business critical roles were nominated for awards for their past contribution and expected future performance. Board approval was required to grant EEP awards to nominated executives. Under the EEP, eligible executives received a grant of stapled securities in the Transurban Group (Securities) at no cost that are subject to disposal restrictions for three years from the grant date. Participants are entitled to distributions paid on their Securities during the restriction period. If the executive ceases employment with Transurban during the restriction period, their Securities will be forfeited unless the Board decides otherwise. Awards were last made under the EEP on 1 November 2008. The table below provides details of the awards granted. Grant date 2012 1 Nov 2008 Total Expiry date Exercise price Balance at start of the year Number Granted during the year Number Vested during the year Number Forfeited during the year Number Balance at end of the year Number 1 Nov 2011 $4.27 433,722 433,722 - - (433,722) (433,722) - - - - Weighted average exercise price $4.27 $- $4.27 $- $- 186 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 35 Share-based payments (continued) Executive Equity Plan (continued) Grant date 2011 1 Nov 2008 Total Vesting / Expiry date Exercise price Balance at start of the year Number Granted during the year Number Vested during the year Number Forfeited during the year Number Balance at end of the year Number 1 Nov 2011 $4.27 548,650 548,650 - - (72,334) (72,334) (42,594) (42,594) 433,722 433,722 Weighted average exercise price $4.27 $- $4.27 $4.27 $4.27 Performance rights plan The Performance Rights Plan (PRP) enabled eligible executives to receive a grant of Performance Rights that entitled participants to receive stapled securities in the Transurban Group (Securities) at no cost at the end of a three year performance period, subject to the achievement of performance conditions. No dividends or distributions on Securities were payable to participants prior to vesting. The Plan has two performance measures, EBITDA and relative TSR against the S&P/ASX 100 Industrials, each applied to 50 per cent of the PRP award. For US participants of the plan, they will be awarded a cash amount instead of stapled securities at the end of the three year performance period, subject to performance conditions. There is only one testing date at the end of the performance hurdles at the vesting date. Awards were last made under the PRP in November 2007. This award matured on 1 November 2010. 84.44 per cent of awards subject to the TSR performance condition vested based on Transurban's ranking against the constituents of the S&P/ASX 100. None of the awards subject to the statutory EBITDA growth or DRIVe management fee growth conditions vested as the prescribed performance conditions were not met. Australian based plan Grant date 2011 1 Nov 2007 Total Vesting / Expiry date Fair value at grant date ($) TSR EBITDA Balance at start of the year Number Granted during the year Number Vested during the year Number Lapsed during the year Number Balance at end of the year Number 1 Nov 2010 3.50 5.96 331,594 331,594 - - (143,060) (143,060) (188,534) (188,534) - - Weighted average exercise price $4.73 $- $4.73 $4.73 $- Overseas based plan Grant date 2011 1 Nov 2007 Total Vesting / Expiry date Fair value at grant date ($) TSR DRIVe mgt fee Balance at start of the year Granted during the year Vested during the year Lapsed during the year Balance at end of the year Number Number Number Number Number 1 Nov 2010 3.50 5.96 247,561 247,561 - - (107,007) (107,007) (140,554) (140,554) - - Weighted average exercise price $4.26 $- $4.26 $4.26 $- 187 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 35 Share-based payments (continued) Assessed fair value The assessed fair value at grant date of the plans above has been independently determined in accordance with AASB 2. The TSR component of the Performance Awards has been valued applying a Monte-Carlo simulation (of a geometric Brownian motion process, as used in the Black-Scholes framework) to model Transurban’s future security price and TSR performance against the comparator group performance at vesting date. The valuation model takes into account the term of the award, the security price at grant date and expected price volatility of the underlying security, the expected dividend yield and the risk free interest rate for the term of the award. The Free Cash component of performance awards has been valued using the Black Scholes framework. The model valuation takes into account the term of the award, the security price at grant date, the expected dividend yield and the risk free interest rate for the term of the award. Employee security scheme The Transurban Employee Security Ownership Plan (the Plan) provides employees with an opportunity to be a part owner of Transurban and partner in its continued success. All Australian based permanent employees are eligible to participate in either the Investment Tax Exempt Plan or the Investment Tax Deferred Plan. Under the plans, Transurban provides participants with a matching component toward the acquisition of the stapled securities. For the period 1 July 2011 to 30 June 2012, the cost of company matches was $114,459 (2011: $89,885) for the Investment Tax Exempt Plan and $391,708 (2011: $304,375) for the Investment Tax Deferred Plan. The third element under the Plan is the Incentive Plan. Subject to Board approval and the performance of the Group, eligible employees may receive a certain number of Transurban securities at no cost to them. In February 2012, each participant was allocated 100 stapled securities at a value of $5.67 per security. Stapled Securities provided under the Plan were acquired on the open market. Eligible US based participants received an equivalent cash award. 30 June 2012 Number 30 June 2011 Number Shares purchased on the market under the plan and provided to participating employees 42,200 42,200 36 Critical accounting estimates and judgements Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that may have a financial impact on the Group and that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Valuation of Promissory notes and Concession Notes The Group holds non-interest bearing long term debt represented by promissory notes and a long term receivable that offsets a concession notes liability held in CityLink Melbourne, that are included in the financial statements at the present value of expected future repayments. The calculations to discount these notes to their present value are based on the timing and profile of the repayments. Assumptions are made in determining the timing and profile, based on expected available equity cash flows of the Trust’s cash generating units. 188 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 36 Critical accounting estimates and judgements (continued) Valuation of Promissory notes and Concession Notes (continued) A discount rate is used to value the promissory notes and concession notes receivable to their present value, which is determined through reference to other facilities in the market with similar characteristics. Fair value of derivatives and other financial instruments The fair value of financial instruments that are not traded in an active market is determined using valuation techniques. The Group uses its judgement to select a variety of methods and makes assumptions that are mainly based on market conditions existing at each balance date. Impairment of Assets The Group tests whether its assets have suffered any impairment when an event occurs that indicates that this may be the case. The recoverable amount of any cash generating units have been determined based on the greater of value-in-use and fair value less cost to sell calculations. These calculations require the use of assumptions regarding traffic flows, discount rates, growth rates and other factors affecting operating activities. 37 Financial risk management The Group’s activities expose it to a variety of financial risks: market risk (including currency risk and interest rate risk), credit risk and liquidity risk. The financial risk management function is carried out centrally by the Transurban Group Treasury team (Treasury) under policies approved by the Board. Treasury work closely with the Group’s operating units to actively identify and monitor all financial risks, and put hedging in place where appropriate. The Board are informed on a regular basis of any material exposures to financial risks. The Group’s hedging strategies are detailed below, and include the use of derivative financial instruments. The Group’s policies allow derivative transactions to be undertaken only for the purpose of reducing risk, and do not permit speculative trading. Treasury continuously monitor risk exposures over time through review of cash flows, price movements, market analysis and ongoing communication within the Group. When measuring financial risk, Treasury consider positive and negative exposures, existing hedges and the ability to offset exposures where possible. Market risk Foreign exchange risk The Group operates internationally and is exposed to foreign exchange risk when future commercial transactions and recognised assets and liabilities are denominated in a currency that is not the entity’s functional currency. Foreign currency exposures are viewed as either investment exposures or operating exposures. Exposures from investment in foreign assets are generally managed using foreign currency debt. All known material operating exposures out to 12 months are hedged, using hedging instruments, offsetting exposures or drawing on foreign currency funds. The Group's exposure to foreign currency risk at the reporting date, denominated in the currency in which the risk arises, was as follows: Consolidated Receivables Borrowings Net exposure Exposure to other foreign exchange movements is not material. 30 June 2012 30 June 2011 USD $'000 USD $'000 379,432 (342,278) 37,154 357,265 (313,600) 43,665 189 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 37 Financial risk management (continued) Market risk (continued) Foreign exchange risk (continued) Sensitivity Based on the financial instruments held at end of the period, had the Australian dollar strengthened/weakened by 10 cents against the U.S. dollar with all other variables held constant, the Group’s post-tax profit for the year would have been $3,258,000 lower (2011: $3,464,000 lower) or $3,967,000 higher (2011: $4,175,000 higher), as a result of foreign exchange gains/losses on translation of US dollar denominated financial instruments as detailed in the above table. Equity is not impacted by movements in foreign exchange. The Group’s exposure to other foreign exchange movements is not material. Price risk The Group is not exposed to price risk. Cash flow and fair value interest rate risk The Group’s main exposure to interest rate risk arises from cash equivalents, loans and other receivables with variable interest rates, and long-term borrowings. Treasury manages interest rate risk by entering into fixed rate debt facilities or using interest rate swaps to convert floating rate debt. Generally, the Group raises long term borrowings at floating rates and swaps them into fixed rates that are lower than those available if the Group borrowed at fixed rates directly. The Group’s policy is to hedge interest rate exposure at a minimum in compliance with the covenant requirements of funding facilities and up to 100 per cent. Covenant requirements vary by debt facility, and require a minimum of between 50 per cent and 80 per cent of interest rate exposure to be hedged. At 30 June 2012, 99 per cent (2011: 98 per cent) of the Group’s interest rate exposure on variable rate borrowings was hedged. As at the end of the reporting period, the Group had the following variable rate borrowings and interest rate swap contracts outstanding: 30 June 2012 30 June 2011 Weighted average interest rate % Balance $'000 Weighted average interest rate % Balance $'000 Cash and cash equivalents Floating rate borrowings Interest rate swaps (notional principal amount) Net exposure to cash flow interest rate risk 4.8% 5.3% 3.6% (3,545) 1,424,720 (1,408,500) 12,675 5.5% 7.2% 4.9% (11,036) 1,304,050 (1,282,000) 11,014 An analysis by maturities is provided in liquidity risk below. Sensitivity At 30 June 2012, if interest rates had changed by +/-100 basis points from the year-end rates with all other variables held constant, post-tax profit for the year would have been $127,000 lower/higher (2011: $110,000 lower/higher). Credit risk The Group has no significant concentrations of credit risk from operating activities, and has policies in place to ensure that transactions are made with commercial customers with an appropriate credit history. However as an owner and operator of large infrastructure assets, the Group is exposed to credit risk with its financial counterparties through undertaking financial transactions intrinsic to its business. These include funds held on deposit, cash investments and the market value of derivative transactions. 190 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 37 Financial risk management (continued) Credit risk (continued) Treasury assesses the credit strength of potential financial counterparties using objective ratings provided by multiple independent rating agencies. Board approved limit allocation rules ensure higher limits are granted to higher rated counterparties. The Group also seeks to mitigate its total credit exposure to counterparties by only dealing with credit worthy counterparties, limiting the exposure to any one counterparty, minimising the size of the exposure where possible through netting offsetting exposures, diversifying exposures across counterparties, closely monitoring changes in total credit exposures and changes in credit status, and taking mitigating action when necessary. The Group’s investment in the Westlink Motorway is through term loan notes (see note 13 for details). The return on these notes is ultimately dependent on the performance of the Motorway. The Group continually monitors the performance and expected cash flows of the Motorway. Liquidity risk The Group maintains sufficient cash and undrawn facilities to maintain short term flexibility and enable the Group to meet financial commitments in a timely manner. Treasury assesses liquidity over the short term (up to 12 months) and medium term (1 - 5 years) by maintaining accurate forecasts of operating expenses, committed capital expenditure and payments to security holders. Long term liquidity requirements are reviewed as part of the annual strategic planning process. Short term liquidity is managed by maintaining a strategic liquidity reserve. This reserve is based on the Group’s forecast annual operating costs and certain risk exposure scenarios as maintained by the Group’s strategic risk register, and is maintained as cash and undrawn facilities. The reserve is maintained on a rolling 12 month basis. Medium term liquidity forecasting is maintained on a rolling five year horizon. Financing arrangements The Group had access to the following undrawn borrowing facilities at the end of the reporting period: Floating rate - Expiring within one year - Expiring beyond one year 30 June 2012 $'000 30 June 2011 $'000 130,000 268,212 398,212 - 418,002 418,002 The facilities are committed for the term of the facility and cannot be withdrawn by the bank without notice. Maturities of financial liabilities The tables below analyse the Group's financial liabilities, net and gross settled derivative financial instruments into relevant maturity groupings based on their contractual maturities. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances as the impact of discounting is not significant. For interest rate swaps the cash flows have been estimated using forward interest rates applicable at the end of the reporting period. 191 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 37 Financial risk management (continued) Liquidity risk (continued) Contractual maturities of financial liabilities At 30 June 2012 1 year or less Over 1 to 2 years Over 2 to 3 years Over 3 to 4 years Over 4 to 5 years Over 5 years Total contractual cash flows Carrying amount (assets)/ liabilities $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 Non-derivatives Non-interest bearing Variable rate Fixed rate Total non-derivati ves Derivatives Net settled (interest rate swaps) Total derivatives 413,886 - 73,658 379,972 223,813 473,813 - 726,625 640,775 - 24,710 782,922 - 261,833 385,257 136,910 238,265 1,889,415 550,796 1,705,063 4,395,995 434,212 1,472,523 3,237,838 711,357 853,785 1,367,400 807,632 647,090 2,264,590 6,651,854 5,144,573 30,495 27,182 15,974 10,685 5,153 1,789 91,278 85,045 30,495 27,182 15,974 10,685 5,153 1,789 91,278 85,045 192 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 37 Financial risk management (continued) Liquidity risk (continued) Contractual maturities of financial liabilities 1 year or less Over 1 to 2 years Over 2 to 3 years Over 3 to 4 years Over 4 to 5 years Over 5 years Total contractual cash flows Carrying amount (assets)/ liabilities At 30 June 2011 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 Non-derivatives Non-interest bearing Variable rate Fixed rate Total non-derivatives Derivatives Net settled (interest rate swaps) Total derivatives 415,936 - 96,769 293,247 384,578 399,469 559,199 411,279 - - 725,116 381,684 - 14,716 126,465 204,460 760,541 1,617,211 542,401 435,656 1,718,886 1,325,928 4,129,383 3,196,714 912,174 852,446 795,857 1,106,800 775,257 1,948,136 6,390,670 4,958,298 5,257 4,956 2,563 2,601 1,141 5,257 4,956 2,563 2,601 1,141 258 258 16,776 13,757 16,776 13,757 Fair value measurements The carrying value of financial assets and financial liabilities brought to account at balance sheet date approximates fair value. The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes. Transurban Holding Trust has adopted the amendment to AASB 7 Financial Instruments: Disclosures which requires disclosure of fair value measurements by level of the following fair value measurement hierarchy: (a) quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1) (b) inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) (level 2), and inputs for the asset or liability that are not based on observable market data (unobservable inputs) (level 3). (c) 193 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 37 Financial risk management (continued) Fair value measurements (continued) The following table presents the Group's assets and liabilities measured and recognised at fair value at 30 June 2012 and 30 June 2011: As at 30 June 2012 Assets Derivatives used for hedging Total assets Liabilities Derivatives used for hedging Total liabilities As at 30 June 2011 Assets Derivatives used for hedging Total assets Liabilities Derivatives used for hedging Total liabilities Level 1 $'000 Level 2 $'000 Level 3 $'000 Total $'000 - - - - - - - - Level 1 $'000 70 70 85,115 85,115 Level 2 $'000 Level 3 $'000 1,663 1,663 15,420 15,420 - - - - - - - - 70 70 85,115 85,115 Total $'000 1,663 1,663 15,420 15,420 The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at the end of each reporting period. The fair value of interest rate swaps are calculated as the present value of the estimated future cash flows. These instruments are included in level 2. 194 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 38 Key management personnel disclosures Directors With the exception of the changes noted below, the following persons were Directors of Transurban Infrastructure Management Limited, the responsible entity of the Trust during the financial year: Executive Directors Christopher Lynch (resigned 16 July 2012) Scott Charlton (appointed 16 July 2012) Non-executive Directors Lindsay Maxsted Neil Chatfield Geoffrey Cosgriff (resigned 6 December 2011) Jeremy Davis AM (resigned 6 December 2011) Robert Edgar Samantha Mostyn Robert Officer Christine O'Reilly (appointed 12 April 2012) Rodney Slater Ian Smith (appointed 1 January 2012) Other key management personnel The following persons also had authority and responsibility for planning, directing and controlling the activities of the Trust, directly or indirectly, during the financial year: K Daley A Head S Hogg * T Honan * M Kulper E Mildwater President International Development Group General Manager, New South Wales Chief Financial Officer Chief Financial Officer President, North America Group General Manager, Victoria (*) - On 2 May 2012, Tom Honan resigned as Chief Financial Officer, and Samantha Hogg was appointed as Chief Financial Officer (previously she was Group General Manager, Corporate Services). 195 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 38 Key management personnel disclosures (continued) 2012 REMUNERATION REPORT (AUDITED) INTRODUCTION This report, prepared in accordance with the Corporations Act 2001, contains detailed information regarding the remuneration arrangements for the Directors and Senior Executives who are the 'key management personnel' (KMP) of the Transurban Group (Group). The KMP for the year ended 30 June 2012 are listed in the table below: Current Non-executive Directors Name Lindsay Maxsted, Chair Neil Chatfield Bob Edgar Samantha Mostyn Bob Officer Christine O'Reilly (appointed 12 April 2012) Rodney Slater Ian Smith (appointed 1 January 2012) Current Senior Executives Name and position Chris Lynch, Executive Director, CEO1 Ken Daley, President, International Development Andrew Head, Group General Manager, New South Wales Samantha Hogg, CFO2 Michael Kulper, President, North America Elizabeth Mildwater, Group General Manager, Victoria Former Non-executive Directors Jeremy Davis (retired 6 December 2011) Geoff Cosgriff (retired 6 December 2011) Jennifer Eve (Director of TIL only) (resigned 5 January 2012) James Keyes (Director of TIL only) (resigned 5 January 2012) Former Senior Executives Tom Honan, CFO (resigned 2 May 2012)2 1 On 30 January 2012, Transurban announced Chris Lynch’s intention to resign as CEO, and on 3 April 2012, Transurban announced the appointment of Scott Charlton as CEO-elect, both with effect in July 2012. 2 On 2 May 2012, Transurban announced the appointment of Samantha Hogg as CFO following the resignation of Tom Honan, with immediate effect. Until 2 May 2012, Ms Hogg was Transurban’s Group General Manager, Corporate Services. Ms Hogg has been a member of KMP for the full financial year. CONTENTS The remuneration information contained in this report is presented as follows: Content 1 Remuneration snapshot 2 Remuneration governance 3 Remuneration in context 4 CEO and Senior Executive remuneration for the year ended 30 June 2012 5 Link between Group performance, security holder wealth and remuneration 6 Non-executive Director remuneration All values in this report are in Australian dollars, unless otherwise stated. Page 197 199 200 201 217 219 196 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 38 Key management personnel disclosures (continued) Remuneration report (continued) 1 A REMUNERATION SNAPSHOT THE NEW REMUNERATION FRAMEWORK A new Group remuneration framework was implemented for the year ended 30 June 2012. Details of the new framework were summarised in the 2011 report, and security holders voted in favour of the adoption of that report at the 2011 Annual General Meeting (AGM). The implementation of the new framework followed a comprehensive review by the Board of the Group’s remuneration arrangements in the year ended 30 June 2011. The review took into account feedback sought and received from security holders and other stakeholders, market expectations and regulatory developments. The key elements of the new framework for the CEO and other Senior Executives were as follows: Remuneration mix The remuneration of the CEO and other Senior Executives was structured as a mix of fixed remuneration and variable or 'at risk' remuneration through short term and long term incentive components. The relative weightings of the three remuneration components were as follows: % of total remuneration (annualised) (at target) - 2012 * Fixed TEC Variable (performance based) CEO Other Senior Executives 33.3 45 STI 33.3** 30** LTI 33.3 25 * Refer to page 202 for the new CEO's remuneration arrangements. The transition to the remuneration mix for Michael Kulper and Ken Daley will be achieved by FY2014. ** With 30 per cent STI deferral. Short term incentive (STI) In the year ended 30 June 2012, the performance measures for the STI plan were linked to growth in proportional EBITDA, cost management based on proportional net costs, safety, and performance against individual KPIs. In the year ended 30 June 2012, mandatory deferral of 30 per cent of the overall STI award was introduced for the CEO and other Senior Executives. The deferral period is three years (comprising the 2012 financial year performance period and a two year trading restriction). For Australian Senior Executives, deferral is into securities. Due to legal restrictions on the issue of securities to US residents, US Senior Executives receive deferred cash awards. The deferred component of remuneration may, at the discretion of the Board, be subject to forfeiture or clawback (e.g. in the event of misconduct or material misstatement of financial results). Long term incentive (LTI) In the year ended 30 June 2012, the performance measures for the LTI plan were as follows: • 50 per cent relative Total Shareholder Return (TSR) measured against a bespoke comparator group comprising companies in the transport, utilities, real estate, construction and infrastructure Global Industry Classification Standards (GICS) sectors of the ASX150; and 197 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 38 Key management personnel disclosures (continued) Remuneration report (continued) • 50 per cent Free Cash Flow (FCF) per security, reflecting the Group's focus on the maximisation of free cash flow to drive security holder return. The definition of FCF per security is set out on page 210. The FCF calculation is included in note 21 of the Transurban Holdings Limited audited financial statements. B OTHER EVENTS/ACTIONS IMPACTING REMUNERATION IN THE YEAR ENDED 30 JUNE 2012 CEO transition On 30 January 2012, Transurban announced Chris Lynch’s intention to resign as CEO. On 3 April 2012, Transurban announced the appointment of Scott Charlton as CEO-elect. Mr Charlton became CEO on 16 July 2012. A summary of Mr Lynch’s entitlements on resignation is set out on page 202. Further details of Mr Lynch’s resignation arrangements and remuneration details for any part of the year ended 30 June 2013 worked by Mr Lynch will be set out in the 2013 report. The remuneration arrangements for Mr Charlton were designed in accordance with the Group’s remuneration strategy: to ensure alignment of reward with the creation of security holder value and with the achievement of corporate objectives as determined by the Board. They were developed with the benefit of input from remuneration consultants and Australian peer company benchmark data. Mr Charlton’s remuneration package was disclosed at the time of his appointment as CEO-elect and is outlined on page 202. CFO transition On 2 May 2012, Transurban announced Tom Honan’s resignation as CFO and the appointment of Samantha Hogg to the role with immediate effect. Details of Mr Honan’s entitlements on resignation are set out on page 203. Details of Ms Hogg’s remuneration are set out elsewhere in this report. Her remuneration arrangements as CFO were designed in accordance with the Group’s remuneration strategy and were developed with the benefit of Australian peer company benchmark data. Legislative changes to executive remuneration In the year ended 30 June 2012, legislative changes introduced by the Federal Government in relation to the governance of executive remuneration arrangements came into effect. The legislation in large part concerns the appointment process for, and recommendations of, independent remuneration advisers. In response, the Remuneration Committee adopted a protocol governing the appointment of ‘remuneration consultants’ and the manner in which any recommendations made by those consultants concerning the remuneration of KMP are to be provided to the Group, and in particular the circumstances in which management may be given access to those recommendations. The purpose of the protocol is to ensure that any remuneration recommendations provided by consultants are provided without undue influence by KMP. 198 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 38 Key management personnel disclosures (continued) Remuneration report (continued) 2 A REMUNERATION GOVERNANCE BOARD AND REMUNERATION COMMITTEE RESPONSIBILITY The Remuneration Committee assists the Board in fulfilling its responsibilities relating to the remuneration of Directors, the remuneration of, and incentives for, the CEO and other Senior Executives, and remuneration practices, strategies and disclosures generally. The Committee also reviews gender pay equity. It is critical that the Remuneration Committee is independent of management when making decisions affecting employee remuneration. Accordingly, the Committee comprises Non-executive Directors, all of whom are independent. Where appropriate, members of Management attend Committee meetings by invitation, however they do not participate in formal decision making. The membership of the Remuneration Committee changed in the year ended 30 June 2012. Geoff Cosgriff stood down as Chair and Jeremy Davis stood down as a member of the Committee on their respective retirement from the Board in December 2011. Bob Edgar was appointed Chair and Samantha Mostyn and Neil Chatfield joined the Committee as new members. Further details regarding the Committee’s composition are set out in the Directors’ report. B ENGAGEMENT OF REMUNERATION CONSULTANTS To ensure it has all relevant information at its disposal when making remuneration decisions, the Remuneration Committee may seek and consider advice from independent remuneration consultants where appropriate. Any advice from consultants is used to guide the Committee and the Board, but does not serve as a substitute for thorough consideration of the issues by Directors. Those consultants who provided the Remuneration Committee with a remuneration recommendation relating to KMP during the year ended 30 June 2012, and who have been deemed by the Group to be ‘remuneration consultants’ for the purposes of the new executive remuneration legislation, are listed below: Consultant Ernst & Young Remuneration recommendations and fees Other advice and fees to the Group during FY2012 $26,000 $98,921 (General HR advice) $455,825 (IT, finance, sustainability assurance work, tax advice and other general consulting services) Ernst & Young was selected by the Remuneration Committee and commissioned and instructed by the Chair of the Committee in accordance with the applicable protocol. Ernst & Young’s appointment terms specified that all remuneration recommendations and advice be sent directly to the Committee through the Chair, and prohibited the provision of such material or other information directly to Management. The appointment terms also required that Ernst & Young provide, with their recommendations, both a declaration of their independence from the KMP to whom their recommendations related, and also confirmation that the Committee’s conditions for contact and dialogue with Management had been observed. Ernst & Young provided such a declaration and confirmation in relation to their remuneration recommendations. In this way, the Committee and the Board have been assured and are satisfied that Ernst & Young’s remuneration recommendations and advice were made free from undue influence from Management generally and from KMP specifically. 199 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 38 Key management personnel disclosures (continued) Remuneration report (continued) 3 REMUNERATION IN CONTEXT Toll road concessions are an asset class characterised by defensive, predictable cash flows, which grow over the life of long dated concession agreements. There is high upfront capital expenditure during the construction phase of a project, which for quality assets shifts to a low cost, high margin cash generative business for the remainder of the concession life. The investment proposition for high quality toll road assets lies in providing investors with access to long dated, predictable, growing cash flows generated by the assets over the life of the concessions. The Group is an international toll road developer and manager with interests in Australia and the US. The Group is focused on the long term management of toll road assets at various stages of maturity to achieve the best outcomes for investors, Government partners and the community. In Australia, the Group's interests include 100 per cent ownership of CityLink in Melbourne, and Hills M2 and Lane Cove Tunnel in Sydney. The Group has partial interests in a further three roads on the Sydney orbital network, being the M1 Eastern Distributor (75.1 per cent), the M5 (50 per cent), and the Westlink M7 (50 per cent). In North America, the Group has interests in two assets, Pocahontas 895 (75 per cent) and the Capital Beltway Express (67.5 per cent), which is under construction in Northern Virginia. The Board and Management are focused on ensuring security holder value is enhanced through the strong performance of the current asset portfolio. Development activities also provide opportunities to further expand the portfolio in value accretive ways. The maximisation of free cash available to security holders over the near, medium and longer term is the Group’s aim and the Group’s remuneration framework has been determined with a focus on this outcome. 200 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 38 Key management personnel disclosures (continued) Remuneration report (continued) 4 CEO AND SENIOR EXECUTIVE REMUNERATION FOR THE YEAR ENDED 30 JUNE 2012 A REMUNERATION STRATEGY AND POLICY The Group's executive remuneration strategy is designed to attract, retain and motivate a highly qualified and experienced Management team with the necessary skills and attributes to lead the Group in achieving its business objectives. The strategy also aims to encourage Management to strive for superior performance by rewarding the achievement of targets that are challenging, clearly understood and within the control of individuals to achieve through their own actions. The Group's remuneration strategy and policy as set by the Board is summarised below: Creating Security Holder Value Remuneration Strategy Attract, retain, motivate and reward executives who are critical to the Group's growth and success by: • Offering competitive remuneration that is benchmarked against the external market. • Providing a balance of fixed and variable or 'at risk' remuneration. Align executive reward with individual and Group performance by: • Making short and long term components of remuneration 'at risk' based on performance. • Assessing rewards against appropriate financial and non-financial performance measures. • Encouraging executive security holdings. Fixed remuneration Total Employment Cost (TEC): Remuneration Structure • Comprises cash salary, superannuation and other prescribed benefits. • Provides a base level of reward for effective completion of Group and specific accountabilities. • Appropriately benchmarked and set with reference to role, responsibilities, skills and experience. Variable (or 'at risk') remuneration Short term incentive (STI): Annual rewards tied to pre-determined individual and Group performance measures, and includes a deferred element. Individual targets reflect individual specific accountabilities and key drivers for growth and success. • • • Group performance targets linked to earnings, cost management and safety. Long term incentive (LTI): • Equity rewards to align executive and security holder interests. • • Vest after three years, subject to achievement of pre-determined internal and external performance measures. Encourages sustainable performance in the medium to longer term, and provides a retention element. 201 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 38 Key management personnel disclosures (continued) Remuneration report (continued) B CHANGE OF CEO AND CFO - TRANSITION ARRANGEMENTS On ceasing employment on 30 July 2012, the following arrangements applied to Chris Lynch: • he will receive an STI award for the year ended 30 June 2012, to be awarded at 116 per cent of his current TEC based on performance against applicable performance targets (see page 208). The cash component of the award (70 per cent or $1,764,963) will be paid in August 2012. The deferred (into equity) component of the award (30 per cent or $756,413) will vest, subject to clawback provisions, on 30 June 2014; • he is contractually entitled to receive an STI award for the 30 days worked in the year ended 30 June 2013, and will receive a pro rated ‘target’ level payment for the 30 days ($178,652) after satisfying performance targets for the period which related to his role in a successful CEO transition process. The award will be paid in cash in August 2012; • equity instruments previously granted to him under the Group’s LTI plans will continue on foot in accordance with their original terms, with the applicable performance measures for each grant to be tested at the end of the applicable original performance period; • as he is contractually entitled to receive an LTI award for every day he is employed by the Group, the Board determined to pay him $1,060,000 in lieu of an LTI grant earned but not received for a 6 month period during his tenure. The cash sum will be paid in August 2012; • as he worked out his notice period, he will not receive any amount in lieu of notice; and • he will not receive any ex gratia payments on separation. Details of payments made to Mr Lynch in and for the year ended 30 June 2013 will be set out in the 2013 report. Incoming CEO - Scott Charlton Scott Charlton’s appointment as CEO took effect on 16 July 2012. Mr Charlton was not a member of KMP during the year ended 30 June 2012 and he was paid no remuneration during that year. As disclosed to the ASX at the time of his appointment, the following arrangements apply to Mr Charlton under his service agreement in relation to the year ended 30 June 2013. He is provided with the following elements of remuneration (on an annualised basis): • Total fixed remuneration (TEC) of $1,875,000; and • Variable annual remuneration comprised of a STI target opportunity of 30 per cent of his total remuneration package ($1,406,250); and an LTI target opportunity of 30 per cent of his total remuneration package ($1,406,250). 202 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 38 Key management personnel disclosures (continued) Remuneration report (continued) In recognition of Mr Charlton giving up certain STI deferred awards for the years ended 30 June 2011 and 2012 and LTI awards for the years ended 30 June 2010 to 30 June 2012 with his former employer to join Transurban, he will receive a one-off grant of equity as a sign-on award. The grant will consist of 236,256 performance awards, which will vest in three tranches (of 78,752 each) on the first, second and third anniversaries of his commencement with Transurban. Each performance award is an entitlement to receive a fully paid Transurban security on vesting. Further details of Mr Charlton’s remuneration in his first year as CEO will be set out in the 2013 report. Outgoing CFO - Tom Honan On ceasing employment as CFO on 2 May 2012, the following arrangements applied to Tom Honan: • he received a sum equivalent to 3 months TEC as a payment in lieu of notice ($246,160); • he was paid a cash sum equivalent to the pro rata vesting of his STI award for the year ended 30 June 2012, calculated based on performance against the applicable performance hurdles during the 10 month period from the start of the year up until the date his employment ceased ($475,000); • equity instruments previously granted to him under the Group’s LTI plans lapsed in accordance with their original terms ($962,416 forfeited); and • he did not receive any ex gratia payments on separation. Further details of Mr Honan’s resignation payments can be found on page 214. C REMUNERATION MIX For the year ended 30 June 2012, the remuneration of the CEO and other Senior Executives was structured as a mix of fixed remuneration and variable (or 'at risk') remuneration through short term and long term incentive components. The relative weightings of the three remuneration components were determined by the Board (on the recommendation of the Remuneration Committee) and are set out in the table below: Relative weightings of remuneration components 1 % of total remuneration (annualised) (at target) - FY20122 Fixed TEC Variable (performance based) CEO Other Senior Executives 33.3 45 STI (with 30% deferral) 33.3 30 LTI 33.3 25 1These figures do not necessarily reflect the relative value derived from each of the components, which depends on actual performance against targets for the variable components (refer to page 204). The above STI percentages are based on achieving the relevant performance targets. The above LTI percentages are based on the maximum LTI available at the time of grant to each Senior Executive if the awards granted vest at the end of the performance period. The table above reflects the percentage value of remuneration which consists of rights for each KMP. 2 Refer to page 202 for the new CEO's remuneration arrangements. The transition to the remuneration mix for Michael Kulper and Ken Daley will be achieved over a maximum of three years (or by FY2014). 203 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 38 Key management personnel disclosures (continued) Remuneration report (continued) D FIXED REMUNERATION - TOTAL EMPLOYMENT COST (TEC) What is TEC? Fixed remuneration is represented by total employment cost (TEC) comprising base salary and superannuation contributions. Fixed remuneration is not 'at risk' but is set by reference to appropriate benchmark information for an individual’s responsibilities, performance, qualifications and experience. There are no guaranteed base salary increases in any Senior Executive's employment agreement. How is TEC determined? TEC levels are reviewed annually by the Remuneration Committee with reference to an individual’s role, experience and performance, as well as relevant comparative market data. Independent remuneration consultants and surveys, internal relativities and market conditions also provide guidance. TEC is also reviewed on a change in role. Executives' TEC is determined with reference to the market median. The primary reference for determining the market median is the ASX 20 - 50. Consideration is given to sizing factors including market capitalisation and revenue. A range around the median provides flexibility to recognise individual performance. E SHORT TERM INCENTIVE (STI) How does the STI plan operate? All permanent Group employees, including the CEO and other Senior Executives, participate in the annual STI plan. The STI plan puts a significant proportion of remuneration 'at risk' subject to meeting specific pre determined Group, team and individual performance measures linked to business objectives. This aligns executive interests with the Group's financial performance, as well as management principles and the Group’s cultural values. For the year ended 30 June 2012, the CEO had a target STI opportunity of 33 per cent of his total remuneration package. Other Senior Executives had a target STI opportunity of 30 per cent of their total remuneration package. Mandatory STI deferral of 30 per cent of the overall STI award was introduced for the CEO and other Senior Executives in the year ended 30 June 2012. The deferral period is three years (comprising the 2012 financial year performance period and a two year trading restriction). For Australian Senior Executives, deferral is into securities. Due to legal restrictions on the issue of securities to US residents, US Senior Executives receive deferred cash awards. The deferred component of remuneration may, at the discretion of the Board, be subject to forfeiture or clawback (e.g. in the event of misconduct or the material misstatement of financial results). 204 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 38 Key management personnel disclosures (continued) Remuneration report (continued) What were the STI performance measures for the year ended 30 June 2012? There were two categories of STI performance measures for the CEO and other Senior Executives for the year ended 30 June 2012. They were chosen to provide a balance between corporate, individual, operational, strategic, financial and non-financial aspects of performance and are described below. STI performance measures and targets for FY2012 Measure % weighting Description of targets/indicators for FY2012 Group performance targets 20% (1) Growth in proportional EBITDA The proportional EBITDA targets for FY2012 were set against the previous year's results and the Group's FY2012 budget, and are set out below: Proportional EBITDA result Less than 7% above forecast underlying result for FY2011 7% above forecast underlying result for FY2011 Budget EBITDA for FY2012 (9% increase on result for FY2011) 17% above forecast underlying result for FY2011 150% 50% 100% % of STI that vests^ 0% ^ Straight line vesting applies between 50-100% and 100-150%. 20% (2) Cost management based on proportional net costs The proportional net costs targets for FY2012 were set against the previous year's results and the Group's FY2012 budget, and are set out below: Proportional net costs result Over budget for FY2012 On budget for FY2012 5% below budget for FY2012 10% below budget for FY2012 % of STI that vests^ 0% 50% 100% 150% ^ Straight line vesting applies between 50-100% and 100-150%. (3) Safety targets, including multiple indicators that focus on improving the Group's safety culture and reducing workplace injuries for employees and contractors. Individual KPIs are unique to the individual's area of accountability, and in FY2012 related to critical business sustainability measures, including: operational performance; cost reduction; customer satisfaction; project outcomes; succession planning; risk management; people management; strategy development; and business plan implementation. Individual KPIs reflect the behaviours valued by the Group, and are capable of measurement. Individuals have a clear line of sight to KPIs and are able to directly affect outcomes through action. 10% 50% Individual key performance indicators (KPIs) 205 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 38 Key management personnel disclosures (continued) Remuneration report (continued) Who sets the STI performance measures? STI performance measures are set at the beginning of the financial year. The CEO's individual KPIs are set by the Board. All other Senior Executives’ individual KPIs are set by the CEO and approved by the Board. The Board sets the Group performance targets. What is proportional EBITDA and why does Transurban use it as an STI performance measure? EBITDA is a common operational performance measure used by many companies. Proportional EBITDA is one of the primary measures that the Board uses to assess the operating performance of the Group, with an aim to maintain a focus on the Group’s operating results and associated cash generation. It reflects the contribution from individual assets to the Group's operating performance and focuses on elements of the result that Management can influence to drive improvements in short term earnings. Proportional EBITDA is the aggregation of EBITDA from each asset multiplied by the Group's percentage ownership, as well as any contribution from Group functions. Proportional EBITDA provides a better reflection of the underlying performance of the Group’s assets than statutory EBITDA. The EBITDA calculation from the statutory accounts would not include the EBITDA contribution of the M5, M7 or DRIVe (equity accounted in the statutory results), which are meaningful contributors to the Group’s performance. Proportional EBITDA figures used to assess performance are included in note 2 of the Transurban Holdings Limited audited financial statements. The Board can decide to exclude specific items (including contributions from acquisitions or divestments made during any one year) from proportional EBITDA to provide an underlying result when determining performance incentives. There were no such exclusions for the year ended 30 June 2012. Proportional EBITDA has been used by the Group as an STI performance measure since 2009. What are proportional net costs and why does Transurban use it as a performance measure? Proportional net costs are the operating, corporate and business development costs of the Group less non toll revenues (fees and other). The deduction of these non toll revenues encourages and allows Management to incur additional costs where these are justified by increased revenue results (e.g. toll collection activities such as video tolling and/or enforcement). The use of a cost related STI performance measure reflects the fact that Management has the ability to influence the expenditure of the business. Strong cost management throughout the business drives an increase in proportional EBITDA and free cash flow and ultimately security holder value. Proportional net costs was first used by the Group as an STI performance measure in 2010. How are the varying levels of performance achievement rewarded? STI targets are designed to differentiate and reward high performance. 50 per cent of the available STI vests for on-target performance, 100 per cent vests for high performance and up to an additional 50 per cent can be earned for exceptional performance. These targets are consistent for all of the Group’s eligible employees. Given that STI awards are contingent on performance across a range of measures, maximum STI awards can only be achieved for performance that is strong on all measures. 206 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 38 Key management personnel disclosures (continued) Remuneration report (continued) How is performance assessed? Performance against the Group performance targets is assessed by the Board. The results are independently reviewed. The CEO's performance against his individual KPIs is assessed by the Remuneration Committee which then makes recommendations to the Board. The performance of other Senior Executives against their individual KPIs is assessed by the CEO, who confers with the Committee and then the Board regarding his assessment. Once KPIs have been assessed, the Board approves STI awards. STI cash awards for the year ended 30 June 2012 will be paid in August 2012. The STI deferred component for the year ended 30 June 2012 will vest, subject to continuity of employment (unless otherwise determined by the Board) and clawback provisions, on 30 June 2014. The Board believes the method of assessment is rigorous and provides a balanced evaluation of the CEO and each other Senior Executive's performance. What if a Senior Executive ceases employment? Under the service agreements for Senior Executives (other than the CEO - refer to page 202) in place for the year ended 30 June 2012, if a Senior Executive ceased employment with the Group before performance against STI targets was assessd, they would generally not be entitled to receive any STI award, unless otherwise determined by the Board. In recognition of Tom Honan’s exceptional contribution to the business during the year ended 30 June 2012, and to facilitate an orderly succession in the CFO role, the Board determined to pay Mr Honan a sum equivalent to the pro-rata vesting of his STI for that year, calculated based on performance against the applicable performance measures during the 10 month period from the start of the year up until 2 May 2012, being the date his employment as CFO ceased. What were the STI performance outcomes for the year ended 30 June 2012? Group performance in respect of the proportional EBITDA, proportional net costs and safety performance measures for the year ended 30 June 2012 was assessed by the Board as 97 per cent in Australia and 127 per cent in the US. 207 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 38 Key management personnel disclosures (continued) Remuneration report (continued) STI awards for the CEO and other Senior Executives for the year ended 30 June 2012 are set out in the table below: STI outcome (%) Actual STI awarded1($) STI forfeited (%) Group performance Individual KPIs Total Cash2 Deferred into equity2 Name Chris Lynch Ken Daley Andrew Head Samantha Hogg Tom Honan3 Michael Kulper Elizabeth Mildwater 112% 127% 97% 97% 97% 127% 97% 120% 110% 120% 90% 100% 120% 95% 116% 119% 109% 94% 83% 124% 96% 1,764,963 354,612 756,413 151,976 297,686 127,580 251,598 475,000 107,828 - 492,765 211,185 263,390 112,882 - - - 6% 17% - 4% 1 On-target performance must be achieved before any STI is awarded. Therefore, the minimum potential value of the STI in respect of FY2012 was nil. The maximum potential value of the STI was the “Actual STI awarded”. 2 The cash STI payments in respect of FY2012 will be paid in August 2012. The STI deferred component for FY2012 (30 per cent of the actual STI awarded) will vest, subject to continuity of employment (unless otherwise determined by the Board) and clawback provisions, on 30 June 2014. 3 Tom Honan received an STI pro-rated and awarded based on individual performance and Group performance on his resignation in May 2012. The Board determined to waive the deferred element of this award and pay it in cash. F LONG TERM INCENTIVE (LTI) How does the LTI plan operate? The LTI plan aligns reward with security holder value by tying this component of executive remuneration to the achievement of performance measures that underpin sustainable long term growth. Participation in the LTI plan is only offered to the CEO and other Senior Executives, and certain other employees nominated by the CEO and approved by the Board. For the year ended 30 June 2012, the CEO was offered an LTI grant equivalent to 33 per cent of his total remuneration package. Other Senior Executives were offered grants equivalent to 25 per cent of their total remuneration package. LTI grants are delivered in the form of performance awards under the Group’s Performance Awards Plan (PAP). Each performance award is an entitlement to receive a fully paid Transurban security on terms and conditions determined by the Board, subject to the achievement of certain vesting conditions linked to performance over a three year period. If the performance measures are satisfied, the performance awards vest and Transurban securities are delivered to the participant. Whilst the Board has discretion to grant cash payments of equivalent value at the end of the performance period, and certain US based participants may be required to receive cash settled awards, the Board generally intends to settle any vested performance awards in Transurban securities. Performance awards that do not vest after testing of the performance measures lapse, without retesting. Performance awards are not transferable and do not carry voting or distribution rights. However securities allocated upon vesting of performance awards carry the same rights as other Transurban securities. 208 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 38 Key management personnel disclosures (continued) Remuneration report (continued) What were the LTI performance measures for the year ended 30 June 2012? Performance awards granted during the year ended 30 June 2012 are subject to a three year performance period and the following dual performance measures over that period: LTI performance measures for FY2012 Measure % weighting Description of measure Relative TSR 50% Relative TSR is measured against a bespoke comparator group comprising companies in the transport, utilities, real estate, construction and infrastructure Global Industry Classification Standards (GICS) sectors of the ASX150. The other 33 companies in this group are: Singapore Telecommunications Ltd, Telstra Corporation Ltd, Westfield Group, QR National Ltd, Westfield Retail Trust, Stockland, Leighton Holdings Ltd, AGL Energy Ltd, MAP Group, GPT Group, Goodman Group, CFS Retail Property Trust, Lend Lease Group, Asciano Ltd, Qantas Airways Ltd, Dexus Property Group, Mirvac Group, Telecom Corporation Of New Zealand Ltd, Toll Holdings Ltd, SP Ausnet, APA Group, Commonwealth Property Office Fund, UGL Ltd, ConnectEast Group, Boart Longyear Ltd, Investa Office Fund, Spark Infrastructure Group, Charter Hall Office Reit, Australand Property Group, Monadelphous Group Ltd, Duet Group, TPG Telecom Ltd and Australian Infrastructure Fund. TSR measures total return on investment of a security, taking into account both capital appreciation and distributed income which was reinvested on a pre-tax basis. For performance awards granted during the year ended 30 June 2012, the relative TSR component will vest on a straight line basis if the Group’s relative TSR performance is above the median of the bespoke comparator group at the end of a three year performance period, in accordance with the following table: TSR vesting schedule: The Group’s relative TSR ranking in the comparator group At or below the 50% percentile Above the 50th percentile but below the 75th percentile At or above the 75th percentile % of performance awards that vest Nil Straight line vesting between 50% and 100% 100% 209 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 38 Key management personnel disclosures (continued) Remuneration report (continued) Measure % weighting Description of measure 50% Growth in Free Cash Flow (FCF) per security Within Transurban, FCF per security is defined as: • the Group's cash flow from operating activities; • less: cash flows from operating activities of non-100% owned controlled assets; • add back: maintenance capital expenditure for 100% owned assets; • less: accounting charge for maintenance provision for the year; • less: actual tag expenditure in 100% owned assets; • add: dividends received from non 100% owned assets; • divided by: weighted average number of securities issued. The FCF calculation is included in note 21 of the Transurban Holdings Limited audited financial statements. For performance awards granted during the year ended 30 June 2012, the FCF per security component will vest based on the Group's compound annual growth in FCF per security over the three year performance period, as set out below: Growth in FCF per security vesting schedule: % compound annual growth in FCF per security 7% Between 7% and 10% 10% or more % of performance awards that vest 50% Straight line vesting between 50% and 100% 100% For performance awards granted during the year ending 30 June 2013, the performance target range for compound growth in FCF per security is between 6 per cent and 9 per cent. Why were these LTI performance measures selected? The TSR target is a relative, external, market-based performance measure against those companies with which the Group competes for capital. It provides a direct link between executive reward and security holder return. For the year ended 30 June 2012, the Group changed the relative TSR comparator group from the S&P/ASX 100 to the bespoke comparator group described above. The Group considered this comparator group to be more reflective of its competitive market. For the year ended 30 June 2012, the Group also changed the second LTI measure to FCF per security instead of proportional EBITDA to reflect the Group’s focus on the maximisation of free cash. The FCF calculation is included in note 21 to the Transurban Holdings Limited audited financial statements. 210 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 38 Key management personnel disclosures (continued) Remuneration report (continued) How will the LTI performance targets be measured? Relative TSR The Group will receive an independent report that sets out the Group's TSR growth and that of each company in the bespoke comparator group. A volume weighted average price of securities for the four weeks up to and including the test date is used in the calculation of TSRs for Transurban and the comparator group. The level of TSR growth achieved by the Group will be given a percentile ranking having regard to the Group’s performance compared to the performance of other companies in the comparator group (the highest ranking company being ranked at the 100th percentile). This ranking will determine the extent to which performance awards subject to this target will vest. FCF per security The Group's FCF per security percentage growth rate (as set out in note 21 to the Transurban Holdings Limited audited financial statements) will be calculated based on the cumulative weighted average over the three year performance period. The Board considers these methods of measurement to be rigorous and transparent. What if a Senior Executive ceases employment? Under the terms of the service agreements for Senior Executives (other than the CEO - refer to page 202) in place for the year ended 30 June 2012, if a Senior Executive ceased employment with the Group before the performance measures were tested, then their unvested performance awards would lapse, unless otherwise determined by the Board. On cessation of Tom Honan’s employment on 2 May 2012, Mr Honan forfeited his unvested performance awards. What will happen in the event of a change in control? In the event of a takeover or change of control of the Group, the treatment of any unvested performance awards granted in the year ended 30 June 2012 will be subject to the incumbent Board's discretion. What was the grant, and movement in the number and value, of performance awards during the year ended 30 June 2012? Performance awards granted in FY2012 Performance criteria Grant date Vesting date Fair value of awards at grant date1($) VWAP at grant date ($) Relative TSR FCF per security 26 Sep 2011 CEO: 11 Nov 2011 26 Sep 2011 CEO: 11 Nov 2011 30 June 2014 30 June 2014 $3.37 $3.27 $4.63 $4.81 $5.35 $5.41 $5.35 $5.41 1 An explanation of the pricing model used to calculate these values is set out in note 35 to the Transurban Holdings Limited audited financial statements. 211 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 38 Key management personnel disclosures (continued) Remuneration report (continued) Performance Awards granted in FY2012 Name Chris Lynch1 Ken Daley Andrew Head Samantha Hogg Tom Honan4 Michael Kulper Elizabeth Mildwater Number of performance awards granted2 Value at grant date ($) Maximum total value of grant yet to vest3($) 715,024 128,294 107,766 101,320 171,058 159,286 107,766 2,888,697 2,888,697 513,176 431,064 405,280 684,232 637,144 431,064 513,176 431,064 405,280 684,232 637,144 431,064 1 The grant made to the CEO constituted his full LTI entitlement for FY2012 and was made following security holder approval at the 2011 AGM on the terms summarised above. Performance awards vest subject to performance over the period from 1 July 2011 through to 30 June 2014. 2 The grants made to Senior Executives constituted their full LTI entitlement for FY2012 and were made on the terms summarised above. Performance awards vest subject to performance over the period from 1 July 2011 through to 30 June 2014. 3 The maximum value of the grant has been estimated based on the fair value per instrument at date of grant. The minimum total value of the grant, if the applicable performance measures are not met, is nil. 4 Performance awards lapse where the performance measures are not satisfied on testing. As the performance awards only vest on satisfaction of performance and service conditions which are to be tested in future financial periods, Tom Honan forfeited 171,058 awards. The value of the forfeited awards was $684,232. No other Senior Executives forfeited performance awards during the year. 212 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 38 Key management personnel disclosures (continued) Remuneration report (continued) G LEGACY LTI PLANS The Group has a number of legacy LTI plans that are no longer offered but which have existing participants. Details of these plans are set out below. Plan FY2011 PAP FY2010 PAP FY2009 PAP Grant date 1 Nov 2010 11 Dec 2009 Performance period 1 Nov 2010 - 1 Nov 2013 1 July 2009 - 30 June 2012 1 Nov 2008 1 Nov 2008 - 1 Nov 2011 FY2009 Executive Equity Plan 1 Nov 2008 1 Nov 2008 - 1 Nov 2011 External performance measure (50% of grant) Comparator group Relative TSR Relative TSR Relative TSR N/A Retention grant with service condition only The S&P/ASX 100 Relative TSR % of performance awards that vest Vesting schedule Above 50th percentile to 75th percentile Straight line vesting between 50% - 100% At or above the 75th percentile 100% vests Internal performance measure (50% of grant) Group’s annual growth in proportional EBITDA Group’s annual growth in proportional EBITDA Group’s annual growth in proportional EBITDA From 7% - 11% From 6% - 9% From 5% - 9% Compound growth % of performance awards that vest At target % 50% vests Vesting schedule From target % to stretch % Straight line vesting between 50% - 100% At or above stretch % 100% vests N/A N/A N/A N/A Current status To be tested after 1 Nov 2013 TESTED 100% to vest on 11 Dec 2012 TESTED 94.72% vested 5.28% lapsed TESTED 100% vested Value of performance awards vested and lapsed in the year ended 30 June 2012 The FY2009 Executive Equity Plan and the FY2009 PAP vested on 1 November 2011. Regarding the FY2009 PAP, 90 per cent of awards subject to the TSR performance measure vested based on the Group’s ranking against the constituents of the S&P/ASX 100. 99.43 per cent of awards subject to the proportional EBITDA measure vested based on performance against target. In total 5.28 per cent of awards lapsed. 213 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 38 Key management personnel disclosures (continued) Remuneration report (continued) FY2009 Executive Equity Plan FY2009 PAP Lapsed Vested Lapsed Vested Name Number Value ($) Number Value ($) Number Value ($) Number Value ($) C Lynch T Honan A Head E Mildwater S Hogg K Daley M Kulper - - - - - - - - - - - - - - 79,647 340,093 25,565 85,701 458,156 1,745,183 85,474 364,974 12,291 41,202 220,267 839,030 19,146 81,753 19,146 81,753 15,316 65,399 19,146 81,753 23,944 102,241 2,458 1,536 1,229 3,549 7,686 8,241 5,150 4,120 44,054 167,807 27,534 104,880 22,027 83,904 11,897 63,602 242,269 25,764 137,736 524,658 H REMUNERATION PAID TO THE CEO AND OTHER SENIOR EXECUTIVES Short-term employee benefits Non- monetary benefits2 Cash STI1 Deferred STI3 Post- employment benefits Termination benefits Super -annuation Share based benefits4 Total Long term benefits Long service leave - 227,968 - 456,860 704,498 702,287 2,153,375 2,033,360 Cash salary and fees Executive director C Lynch 2012 2011 Other KMP B Bourke 2012 2011 K Daley5 2012 2011 M Fletcher 2012 2011 A Head 2012 2011 S Hogg 2012 2011 T Honan6 2012 2011 M Kulper 2012 2011 E Mildwater 2012 2011 Total 2012 2011 6,660,430 6,930,103 955,653 1,017,385 1,149,822 976,398 571,722 541,554 555,892 433,494 569,468 540,797 1,764,963 2,461,680 46,299 18,557 252,138 - 15,775 47,500 - - 40,812 21,309 3,086,801 2,167,745 7,360,163 6,750,151 - 254,163 354,612 431,438 - 110,656 297,686 323,640 251,598 241,285 475,000 587,250 492,765 573,750 263,390 319,633 - 9,097 - - 118,030 123,596 50,659 - - 3,114 2,260 6,232 1,903 5,882 3,951 8,178 - 8,199 2,028 6,311 - - 42,527 - 35,943 - - - 70,395 - 37,627 - - 58,333 45,813 48,995 - 22,917 22,760 24,243 15,775 25,000 26,775 25,000 9,458 9,800 15,775 25,000 - 958,759 - - - (57,846) - 1,679,366 - - 21,983 11,627 594,613 180,209 1,890,208 1,498,152 - 402,234 - - - 64,842 - 831,731 - - - - - - - - - - 15,258 25,662 11,492 3,342 347,920 209,779 1,300,133 1,131,110 280,575 173,608 1,153,178 882,611 - - (824,365) 761,984 831,183 2,358,810 16,165 19,690 10,015 5,419 1,033,606 400,734 2,578,042 2,029,558 350,916 234,376 1,249,219 1,131,536 3,900,014 5,303,495 174,471 189,166 489,289 - 152,131 286,788 - 1,360,993 115,725 87,049 4,870,066 16,362,126 4,135,431 18,293,025 214 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 38 Key management personnel disclosures (continued) Remuneration report (continued) 1 The amount represents the cash STI payment to the Senior Executive for FY2012, which will be paid in August 2012. The cash component is 70% of the STI award. 2 Non-monetary benefits include Group insurance, vehicle allowances and expatriate allowances (where relevant). 3 30 per cent of STI award is deferred into equity. In accordance with Accounting Standards, the deferred component will be recognised over the three year service period from 1 July 2011 to 30 June 2014. The amount recognised in this table is the FY2012 accounting charge. 4 In accordance with the requirements of the Accounting Standards, remuneration includes a proportion of the fair value of equity compensation granted or outstanding during the year (i.e. performance awards under the LTI plan). The fair value of equity instruments is determined as at the grant date and is progressively allocated over the vesting period. The amount included as remuneration may be different to the benefit (if any) that Senior Executives may ultimately realise should the equity instruments vest. The fair value of performance awards at the date of their grant has been independently determined in accordance with AASB 2. The fair value of the performance awards has been valued applying a Monte Carlo simulation to model Transurban’s security price and where applicable, the TSR performance against the comparator group performance. The assumptions underpinning these valuations are set out in note 35 to the Transurban Holdings Limited audited financial statements. 5 Ken Daley’s 2008 PAP allocation was based on his TEC as at November 2008 of $577,500 per year. On 5 December 2008, his TEC was increased to $750,000 per year effective 1 July 2008. The 2008 PAPs were granted on 15 October 2008. The Board determined to compensate Ken for the shortfall in his performance awards allocation given that his new TEC was effective prior to the grant. 6 On ceasing employment as CFO on 2 May 2012, Tom Honan was paid all accrued entitlements owing to him (e.g. earned but unpaid salary and annual leave), a sum equivalent to the pro-rata vesting of this FY2012 STI ($475,000), and a sum equivalent to 3 months TEC as payment in lieu of notice ($246,160). He did not receive any ex gratia payments on separation. I ADDITIONAL REMUNERATION INFORMATION EMPLOYEE SECURITY PLANS The Group has three broad employee based security plans. ShareLink Incentive Plan Under the ShareLink Incentive Plan, subject to Board approval, an allocation of Transurban securities or cash payments may be made to eligible employees (excluding the CEO and other Senior Executives) in recognition of the Group’s prior year performance. Eligible employees received a grant of 100 securities at no cost to them on 20 February 2012. Due to legal restrictions on the issue of securities to US residents, eligible employees in the US received a cash payment of equivalent value in lieu of securities. Given that the plan is designed to reward employees for the Group's prior year performance and is not intended to serve as a future incentive, there are no performance measures attached to grants of securities or cash payments under the plan. 215 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 38 Key management personnel disclosures (continued) Remuneration report (continued) ShareLink Investment Tax Exempt Plan and ShareLink Investment Tax Deferred Plan The ShareLink Investment Tax Exempt Plan provides eligible employees (excluding the CEO and other Senior Executives) the opportunity to invest up to $1,000 per year in Transurban securities on a tax exempt basis. Participants contribute up to $500 by way of salary sacrifice which is matched by the Group dollar for dollar. Security acquisitions are made quarterly in September, December, March and June each year. The ShareLink Investment Tax Deferred Plan provides eligible employees (excluding the CEO and other Senior Executives) with the opportunity to contribute up to $5,000 per year by way of salary sacrifice to be invested in Transurban securities. The Group matches participants’ contributions dollar for dollar up to $3,000. The plan has a maximum disposal restriction period of three years from the date of acquisition, including a 12 month forfeiture period. Grants under both of these plans are designed to encourage employee security holdings and to align the interests of employees with those of the Group and are therefore not subject to performance measures. DEALINGS IN SECURITIES In accordance with the Group’s Dealing in Securities Policy, employees who have awards under a Group equity plan may not hedge against those awards. In addition, KMP may not hedge against entitlements that have vested but remain subject to a holding lock. Employees and Directors are not permitted to obtain margin loans using Transurban securities (either solely or as part of a portfolio) as security for loans. SERVICE AGREEMENTS The remuneration and other terms of employment for the CEO and other Senior Executives are formalised in service agreements which have no specified term. Chris Lynch's service agreement included an entitlement to participate in the Group’s STI and LTI plans (or equivalent cash plan). Scott Charlton and other Senior Executives are eligible to participate in the STI and LTI plans (or equivalent cash plans for US executives). Some key aspects of the agreements in place in the year ended 30 June 2012 are outlined below: CEO Other Senior Executives Period of notice to terminate (executives) Period of notice to terminate (the Group*) 6 months 3 months 12 months 6 months * Payment in lieu of the notice period may be provided (based on the executive's fixed remuneration). The Group may also terminate at any time without notice for serious misconduct. 216 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 38 Key management personnel disclosures (continued) Remuneration report (continued) 5 LINK BETWEEN GROUP PERFORMANCE, SECURITY HOLDER WEALTH AND REMUNERATION The variable or 'at risk' remuneration of the CEO and other Senior Executives is linked to the Group’s performance through the use of measures based on the operating performance of the business. A GROUP PERFORMANCE AND STI For the year ended 30 June 2012, 20 per cent of the Senior Executive STIs were determined with reference to proportional EBITDA, 20 per cent with reference to proportional net costs, and 10 per cent with reference to safety as discussed on page 205. Proportional EBITDA The underlying proportional EBITDA result for the year ended 30 June 2012 was $784.0 million, a 9.1 per cent increase from the prior year result. This resulted in the payment of 93.4 per cent of STI's attributable to proportional EBITDA. The proportional EBITDA result was driven by the Group's continued focus on cost control and the performance of the asset portfolio. This result was delivered despite significant disruption caused by construction on Sydney’s Hills M2 Motorway. Proportional net costs The underlying proportional net costs result for the year ended 30 June 2012 was $159.9 million, a 7.2 per cent improvement from the prior year result. This resulted in the payment of 149.6 per cent of STI's attributable to proportional net costs. Importantly, the Group’s continued focus on proportional net costs resulted in a cost decrease across operational, corporate and business development areas (when taking into account the impact of volume based cost increases). Safety For the year ended 30 June 2012, the safety performance measure resulted in a zero STI payment for Senior Executives based in Australia, and 150 per cent for Senior Executives based in the US. The safety KPI target included several components as discussed on page 205 of which a reduction in recordable injury frequency rate was one. Strong results were attained for some aspects of the Australian safety measure, however other areas did not meet all targets. B GROUP PERFORMANCE AND LTI For the year ended 30 June 2012, LTIs were linked to relative TSR and, for the first time, FCF per security (see pages 209 and 210). Relative TSR The relative TSR for the year ended 30 June 2012 is calculated on a bespoke comparator group from the ASX150 (see page 210). FCF per security The performance target for compound growth in FCF per security of between 7 per cent and 10 per cent over three years is considered an appropriate target that reflects the Group’s focus on the maximisation of free cash to drive security holder return. For performance awards granted during the year ending 30 June 2013, the compound growth in FCF per security is between 6 per cent and 9 per cent. The table below summarises the Group’s five year results for the relevant performance measures. These results show that since the year ended 30 June 2009, Transurban’s distribution policy has been to pay out 100 per cent (rounded) of FCF per security. Since that time, Transurban has delivered consistent growth on this measure based on consistent revenue and EBITDA growth. Based on investor feedback, this remains Transurban’s financial focus. 217 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 38 Key management personnel disclosures (continued) Remuneration report (continued) Group Performance1 Measure Security price at year end Distribution paid per security Underlying proportional EBITDA - $m 2012 $5.69 29.5c 2011 $5.23 27.0c 2010 $4.24 24.0c 2009 $4.18 2008 $4.23 22.0c 57.0c* 784.0 718.7 635.4 583.3 523.0 TSR performance2 15% 32% 10% 2% (41%) FCF per security performance - weighted average 29.8c 27.5c 27.4c 22.2c 26.0c * Distributions made under a previous distribution policy no longer applied by the Group. 1 For FY2012, LTIs were linked to relative TSR and FCF per security. In prior years, LTIs were linked to relative TSR and proportional EBITDA. 2 The TSR performance is the total security holder return for that financial year. 218 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 38 Key management personnel disclosures (continued) Remuneration report (continued) 6 A NON-EXECUTIVE DIRECTOR REMUNERATION REMUNERATION POLICY The diagram below sets out the key objectives of the Group’s Non-executive Director remuneration policy and how they are implemented through the Group’s remuneration framework: Securing and retaining talented, qualified Directors Preserving independence and impartiality Aligning Director and security holder interests Director fee levels are set with regards to: the responsibilities and risks attached to the role, the time commitment expected and the workload, Director experience and expertise, and market benchmark data provided by independent remuneration consultants. Director remuneration consists of base (Director) fees and Committee fees. No element of Director remuneration is 'at risk' - that is, fees are not based on the performance of the Group or individual Directors from year to year. B REMUNERATION ARRANGEMENTS Directors are encouraged to hold Transurban securities. Maximum aggregate remuneration The amount of aggregate remuneration that may be paid to Non-executive Directors in any year is capped at a level approved by security holders. The current aggregate fee pool of $2,400,000 per year (inclusive of superannuation contributions) was approved by security holders at the 2010 AGM. No change to this amount is proposed for the year ending 30 June 2013. The aggregate fee pool and the manner in which it is apportioned amongst Non-executive Directors is reviewed annually. The Remuneration Committee undertakes this review and makes recommendations to the Board. In conducting the review, the Committee considers market benchmark data from independent remuneration consultants. 2012 Non-executive Director fees A review of Non-executive Director fees was undertaken during the year ended 30 June 2012, and it was determined that there be no increase in fees. Non-executive Director fees were last increased in January 2010. Current base (Director) fees and Committee fees per year are set out below: Board Audit and Risk Committee Nomination Committee Remuneration Committee Chair fee $ 455,000 40,000 10,000 25,000 Member fee $ 170,000 20,000 10,000 20,000 The Chair of the Board does not receive any additional fees for his Committee responsibilities. 219 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 38 Key management personnel disclosures (continued) Remuneration report (continued) Non-executive Directors are permitted to be paid additional fees for special duties or exertions. No such fees were paid during the year ended 30 June 2012. Non-executive Directors are also entitled to be reimbursed for all business related expenses, including travel, as may be incurred in the discharge of their duties. Retirement benefits No current Non-executive Directors are entitled to any retirement benefits. In September 2005, the Board resolved to discontinue previously provided retirement benefits for Non-executive Directors with effect from 30 September 2005. The value of benefits accrued up to that date attracted interest at the statutory fringe benefits rate. Accrued ‘frozen’ retirement benefits plus interest were paid to Geoff Cosgriff and Jeremy Davis on their retirement from the Board on 6 December 2011. The following table details the retirement benefits paid and expensed in the years ended 30 June 2012 and 30 June 2011. Geoff Cosgriff Jeremy Davis FY2012 $ 251,028 (paid) 418,186 (paid) FY2011 $ 16,301 (accrued) 27,155 (accrued) ShareLink Investment Tax Deferred Plan Under the ShareLink Investment Tax Deferred Plan, Non-executive Directors are able to sacrifice up to 50 per cent of their pre tax fees to acquire up to $5,000 of Transurban securities per year. No securities were issued to Non-executive Directors under the plan for the year ended 30 June 2012. 220 TRANSURBAN ANNUAL REPORT 2012 Transurban Holding Trust Notes to the consolidated financial statements 30 June 2012 (continued) 38 Key management personnel disclosures (continued) Remuneration report (continued) C REMUNERATION PAID TO NON-EXECUTIVE DIRECTORS Details of Non-executive Directors’ remuneration for the years ended 30 June 2012 and 30 June 2011 are set out below: Short-term benefits Post-employment benefits Total Fees Superannuation1 Retirement benefits2,3 34,225 - 176,047 141,066 207,114 196,552 207,631 199,828 176,047 93,996 439,411 394,593 Current Non-executive Directors Lindsay Maxsted 2012 2011 Neil Chatfield 2012 2011 Bob Edgar 2012 2011 Samantha Mostyn 2012 2011 Bob Officer 2012 2011 Christine O'Reilly (appointed 12 April 2012) 2012 2011 Rodney Slater 173,720 2012 2011 155,268 Ian Smith (appointed 1 January 2012) 77,983 2012 - 2011 Former Non-executive Directors Geoff Cosgriff (resigned 6 December 2011) 2012 2011 Jeremy Davis (resigned 6 December 2011) 2012 2011 David Ryan (resigned 12 August 2010) 2012 2011 Jennifer Eve (resigned 5 January 2012) 2012 2011 James Keyes (resigned 5 January 2012) 2012 2011 Total 2012 2011 1,717,908 1,747,043 81,778 188,153 69,903 201,920 - 49,199 25,793 34,984 48,256 91,484 15,775 35,513 15,775 17,985 15,775 17,690 15,398 8,460 15,398 12,696 3,080 - - - 7,018 - 7,044 16,934 25,648 27,750 - 4,428 - - - - - - - - - - - - - - - - - - - - 251,028 16,301 418,186 27,155 - - - - - - 455,186 430,106 223,406 217,813 222,889 214,242 191,445 102,456 191,445 153,762 37,305 - 173,720 155,268 85,001 - 339,850 221,388 513,737 256,825 - 53,627 48,256 91,484 25,793 34,984 120,911 141,456 669,214 43,456 2,508,0333 1,931,955 1 Superannuation contributions made on behalf of Non-executive Directors to satisfy the Group’s obligations under applicable superannuation guarantee legislation. 2 Amounts represent contractual retirement benefits paid (in the year ended 30 June 2012) and provided for (in the year end 30 June 2011) for two former Non-executive Directors. No current Non-executive Directors are entitled to any retirement benefits. 3 Retirement benefits are excluded from the amount of aggregate remuneration that may be paid to Non-executive Directors in any year. 221 TRANSURBAN ANNUAL REPORT 2012 In the Directors' opinion: Transurban Holding Trust Directors' declaration 30 June 2012 (a) the financial statements and notes set out on pages 147 to 221 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 giving a true and fair view of the Group's financial position as at 30 June 2012 and of its performance for the year ended on that date, and (ii) (b) there are reasonable grounds to believe that the Group will be able to pay its debts as and when they become due and payable. Note 1(a) confirms that the financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. The Directors have been given the declarations by the Chief Executive Officer and Chief Financial Officer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the Directors. Lindsay Maxsted Director Scott Charlton Director Melbourne 7 August 2012 222 TRANSURBAN ANNUAL REPORT 2012 223 TRANSURBAN ANNUAL REPORT 2012 224 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited and Controlled Entities ABN 90 121 746 825 Annual report for the year ended 30 June 2012 225 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited ABN 90 121 746 825 Annual report - 30 June 2012 Contents Directors' report Auditor's Independence Declaration Financial statements Directors' declaration Independent auditor's report to the members Page 227 264 265 318 319 226 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Directors' report 30 June 2012 Directors' report The Directors of Transurban International Limited (TIL or "the Company") present their report on the consolidated entity (and referred to hereafter as "the Group") consisting of TIL and the entities it controlled at the end of, or during, the year ended 30 June 2012. TIL forms part of the triple staple that is Transurban. A Stapled Security comprises one share in Transurban Holdings Limited, one share in TIL and one unit in Transurban Holding Trust. None of the components of the Stapled Security can be traded separately. Directors With the exception of the changes noted below, the following persons were Directors of the Company during the whole of the financial year and up to the date of this report. Non-executive Directors Lindsay Maxsted Neil Chatfield Robert Edgar Samantha Mostyn Robert Officer Christine O'Reilly Rodney Slater Ian Smith Jennifer Eve James Keyes (Appointed 5 January 2012) (Appointed 5 January 2012) (Appointed 5 January 2012) (Appointed 5 January 2012) (Appointed 12 April 2012) (Appointed 5 January 2012) (Appointed 5 January 2012) (Resigned 5 January 2012) (Resigned 5 January 2012) Executive Directors Christopher Lynch Scott Charlton (Resigned 16 July 2012) (Appointed 16 July 2012) Principal activities During the year the Group's principal activity was providing management services to, and acting as the holding entity of, the Transurban Group's investment in Transurban DRIVe Holdings LLC (DRIVe), an unlisted co-investment vehicle which invests in existing and new toll roads and similar or related opportunities in North America. The Group currently holds a 75 per cent interest in DRIVe. Dividends No dividends were declared or paid during the financial year. Review of operations The consolidated net loss for the year ended for the Group was $227,526,000 (2011: $28,448,000). Key highlights for the Group during the period were as follows: Pocahontas 895 (Virginia USA) - Transurban DRIVe Toll revenue for the year ended 30 June 2012 increased by 5.7 per cent to US$14.9 million. Average daily trips increased by 3.2 per cent, due to milder weather conditions and the benefit of the completion of the Airport Connector in January 2011. Transurban announced on the 18 June 2012, that after a detailed review of traffic and operating forecast for Pocahontas 895, it was necessary to reduce the carrying value of the asset based on revised lower revenue forecasts. This resulted in an equity accounting charge for the year ended 30 June 2012 of $213.3 million. TIL’s investment in Pocahontas is held via Transurban DRIVe, which is 75 per cent owned by Transurban. As a result of this equity accounting charge, TIL’s carrying value of its investment in DRIVe will be reduced to zero. 227 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Directors' report 30 June 2012 (continued) Review of operations (continued) Business development activities Capital Beltway (Virginia USA) - Transurban DRIVe Construction on the Capital Beltway 495 Express lane project is now more than 95 per cent complete. The construction project remains on budget and on track for completion late 2012, with first tolls expected in early 2013. 95 Express Lanes (Virginia USA) - Transurban DRIVe On 1 August 2012, Transurban announced that financial close had been reached with the Commonwealth of Virginia to build and operate the 95 Express Lanes in northern Virginia, USA. The 95 Express Lanes will be a 29 mile (46 kilometre), reversible two and three lane facility, with a 73 year operating concession from opening date (2015). Other corporate activities Chief Executive Officer (CEO) On 30 January 2012, Transurban announced Mr Chris Lynch’s intention to resign as CEO and as a Director effective from July 2012 after a four year tenure. After a comprehensive Board selection process, Transurban announced on 3 April 2012 the appointment of Mr Scott Charlton as new CEO effective from July 2012. Significant changes in the state of affairs On 5 January 2012, TIL and its wholly owned subsidiary, Transurban International Holdings Limited, changed registered domicile from Bermuda to Australia. The change in domicile has had no financial impact on the Group. There were no other significant changes to the state of affairs of the Group during the financial year. Matters subsequent to the end of the financial year As noted above, on 1 August 2012, the Group reached financial close on the 95 Express Lanes project. Transurban also announced that the 95 Express Lanes investment will be the final new toll road project undertaken by Transurban's co-investment vehicle, DRIVe. Transurban will continue to manage the assets owned by DRIVe. At the date of this report the Directors are not aware of any other circumstances that have arisen since 30 June 2012 that have significantly affected, or may significantly affect, the Group's operations in future financial years, the results of those operations in future financial years, or the Group's state of affairs in future financial years. Likely developments and expected results of operations Likely developments in the operations of the Group and the expected results of operations have not been included in these financial statements because the directors believe it would be likely to result in unreasonable prejudice to the Group. Environmental regulation The Group is subject to environmental regulations under Australian Commonwealth and State laws and certain applicable laws in the USA. The Group maintains a comprehensive environmental management plan to monitor the performance of its motorways, and any external parties responsible for operating any of the Group's motorways, and takes remedial steps where necessary. There were no significant breaches reported during the financial year on the Group's assets. 228 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Directors' report 30 June 2012 (continued) Information on Directors Lindsay Maxsted Dip Bus, FCA. Chair and independent Non-executive Director Term of office Director and Chair since 12 August 2010. Lindsay is currently Chairman and a Non-executive Director of Westpac Banking Corporation, and a Non-executive Director of BHP Billiton Limited and BHP Billiton plc. He is the Managing Director of Align Capital Pty Ltd and the Honorary Treasurer of Baker IDI Heart and Diabetes Institute. Lindsay was formerly the CEO of KPMG Australia from 2001 - 2007. His principal area of practice prior to this was in the corporate recovery field managing a number of Australia’s largest insolvency / workout / turnaround engagements. Lindsay was previously a Non-executive Director of St George Bank and of VicRacing Pty Ltd. Lindsay holds interests in 30,000 Stapled Securities. Transurban Board Committee membership Chair of the Nomination Committee and a member of the Audit and Risk Committee. Christopher Lynch B Comm, MBA, FCPA, FAICD. Chief Executive Officer Term of office Director since 18 February 2008. CEO since April 2008. Resigned 16 July 2012. Chris has experience in senior leadership roles in global corporations operating across multiple markets, and the development and operation of major projects with large up-front capital requirements. Chris came to Transurban from BHP Billiton, where he held senior roles, including as CFO and as Executive Director and Group President - Carbon Steel Materials. Prior to this the bulk of Chris’s career was with Alcoa Inc where his roles included Vice President and CIO, CFO-Europe and Managing Director of KAAL Australia Limited. Chris is currently a Non-executive Director of Rio Tinto plc and Rio Tinto Limited and a Commissioner of the Australian Football League. Chris holds interests in 713,563 Stapled Securities and 2,016,918 performance awards. Scott Charlton BSci, MBA (Texas) Chief Executive Officer Term of office Director since 16 July 2012. CEO since 16 July 2012. Scott recently joined Transurban from Lend Lease, where he was Group COO (since November 2011) and Group Director of Operations (from March 2010). Prior to this, Scott held several senior appointments across a range of infrastructure and financial institutions, including as CFO of Leighton Holdings (2007-2009) and as Managing Director of Deutsche Bank in Australia and Hong Kong (1995 - 2003). Scott does not hold interests in any Stapled Securities. 229 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Directors' report 30 June 2012 (continued) Information on Directors (continued) Neil Chatfield M.Bus, FCPA, FAICD Independent Non-executive Director Term of office Director since 5 January 2012. Neil served as Executive Director and the CFO of Toll Holdings Limited from 1997 until September 2008. Neil has extensive experience in general and financial management, capital markets, mergers and acquisitions and risk management. Neil is currently the Chairman of Virgin Australia Holdings Limited and a Non-executive Director of Seek Limited and of Grange Resources Limited. Neil is also Honorary Chairman of HomeGround Services. He was previously a Non-executive Director of Whitehaven Coal Limited. Neil holds interests in 30,910 Stapled Securities. Transurban Board Committee membership Chair of the Audit and Risk Committee and a member of the Nomination and Remuneration Committees. Robert Edgar BEc (Hons), PhD, FAICD Independent Non-executive Director Term of office Director since 5 January 2012. Bob has over 30 years experience as a Senior Executive, with 25 years at ANZ Banking Group in various senior roles, including Deputy CEO, Senior Managing Director, COO, and Chief Economist. Bob is currently the Chairman of Centro Retail Australia and a Non-executive Director of Asciano Group and of Linfox Armaguard Pty Ltd. He is also Chairman of the Prince Henry’s Institute of Medical Research. He was previously a Non-executive Director of Nufarm Limited, AMMB Holdings Berhad, Shanghai Rural Commercial Bank and of the Bank of Tianjin. Bob holds interests in 23,733 Stapled Securities. Transurban Board Committee membership Chair of the Remuneration Committee and member of the Audit and Risk and Nomination Committees. 230 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Directors' report 30 June 2012 (continued) Information on Directors (continued) Samantha Mostyn BA, LLB Independent Non-executive Director Term of office Director since 5 January 2012. Sam is a Non-executive Director and corporate advisor and has previously held Senior Executive positions at IAG, Optus and Cable & Wireless Plc. Sam is currently Chair of the Stakeholder Advisory Council of the CSIRO’s Climate Adaptation Flagship and Deputy Chair of the Diversity Council of Australia. She is a member of the NSW Climate Change Council, the advisory boards of ClimateWorks Australia and the Crawford School of Government and Economics, ANU. Sam is a Commissioner of the Australian Football League and the National Mental Health Commission. She is currently a Non-executive Director of Virgin Australia Holdings Limited, Sydney Theatre Company, Citgroup Pty Ltd, Australian Volunteers International and St James Ethics Centre Foundation. Sam holds 10,300 Stapled Securities. Transurban Board Committee membership Member of the Remuneration and Nomination Committees. Robert Officer BAgSc (Melb), MAgEc (New Eng), MBA, PhD (Chicago), FASSA, FINSIA Non-independent Non-executive Director Term of office Director since 5 January 2012. Bob is currently Professor Emeritus of the University of Melbourne and a specialist in financial economics. His career has spanned academia and consulting across private and public organisations. Bob has held a number of finance professorships at Australian and overseas universities and consulted to a large number of public, private and government organisations in valuation and investment appraisal, international finance, capital markets and takeovers. Bob is currently Chairman of Acorn Capital Ltd and JCP Investment Partners Ltd. He is on the Boards of CP2 Limited, the Transport Accident Commission, Colonial Foundation and Tactical Global Management Ltd. He is a past Chairman of Victorian WorkCover Authority and was previously on the Boards of the Bank of Melbourne, the Over Fifty Group and Melbourne University Publishing Pty Ltd. Bob holds interests in 20,115 Stapled Securities. Transurban Board Committee membership Member of the Nomination and Audit and Risk Committees. 231 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Directors' report 30 June 2012 (continued) Information on Directors (continued) Christine O'Reilly BBus Independent Non-executive Director Term of office Director since 12 April 2012 Christine is the Head of Asset Management for Unlisted Infrastructure at Colonial First State Global Asset Management, with a primary focus on direct investment in and management of major infrastructure projects. In this capacity, Christine is a Director of the Anglian Water Group (UK) and Electricity North West (UK). She will step down from these positions on 30 September 2012. Prior to her time with Colonial, Christine was CEO and Director of the Gasnet Australia Group. She has more than 20 years of infrastructure and financial experience including an early involvement in the reform and establishment of the regulatory framework for the Australian gas industry. Christine is currently a Non-executive Director of CSL Limited and of Care Australia. Christine does not hold interests in any Stapled Securities. Rodney Slater J.D., BS Independent Non-executive Director Term of office Director since 5 January 2012. Rodney is a partner in the public policy practice group of Washington DC firm Patton Boggs, where he has been a leader of its transportation practice since 2001. He served as US Secretary of Transportation from 1997 until the end of the Clinton Administration in January 2001 and was the Administrator of the Federal Highway Administration between 1993 and 1996. In the US, Rodney’s current directorships include Kansas City Southern (railroads), Verizon Communications Inc, Atkins Global, and Southern Development Bancorporation. He was previously a Director of Parsons Brinckerhoff, Delta Airlines, Northwest Airlines, and ICx Technologies Inc. He also served on Transurban’s US Advisory Board until November 2008. Rodney is a Director of the Congressional Awards Foundation and United Way Worldwide. Rodney does not hold interests in any Stapled Securities. Transurban Board Committee membership Member of the Nomination Committee. 232 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Directors' report 30 June 2012 (continued) Information on Directors (continued) Ian Smith BE Mining (Hons), BFin Admin Independent Non-executive Director Term of office Director since 5 January 2012. Ian has more than 30 years experience in the global mining industry in a variety of operational and project management roles. He is currently the Managing Director and CEO of Orica Limited. Ian is President of The Australian Mines and Metals Association. He was previously the CEO at Newcrest Mining Limited and a Director of the Australian Chamber of Commerce and Industry. Ian holds interests in 70,000 Stapled Securities. Jennifer Eve BA, LLB (Hons), LLM in Corporate Law Independent Non-executive Director Term of office Director of TIL from 18 September 2006 to 5 January 2012. Jennifer is an associate and member of the Funds and Investment Services Team within the Corporate and Commercial Practice Group at offshore law firm Appleby. She practices in the area of company and commercial law, specialising in the formation and administration of investment vehicles. Jennifer also has experience involving debt restructuring and intergroup restructuring. She is a local team member of the Segregated Accounts Portfolio Team and the Global Islamic Finance Team. Jennifer was educated in Bermuda, Canada and the United Kingdom. She is a member of the Bar of England and Wales (non-practicing) and Bermuda. Jennifer does not hold interests in any Stapled Securities. James Keyes MA. (Hons) Independent Non-executive Director Term of office Director of TIL from 18 September 2006 to 5 January 2012. James is Managing Director of Renaissance Capital. He is responsible for the Bermuda office, which he established for Renaissance in 2008. He was previously a partner at offshore law firm Appleby. He practised as a lawyer for over 15 years, specialising in mutual funds, corporate finance and securities. James attended Oxford University in England and graduated as a Rhodes Scholar. James does not hold interests in any Stapled Securities. 233 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Directors' report 30 June 2012 (continued) Company Secretaries Amanda Street LLB (Hons), BComm. Amanda joined Transurban in September 2008 and was appointed as Company Secretary in February 2011. Before joining Transurban, Amanda was Assistant Company Secretary at SP Ausnet and Senior Corporate Counsel at National Australia Bank. She has over 10 years of legal, company secretarial and other relevant experience. Prior to her in-house work, Amanda was a solicitor specialising in M&A work with Australian law firm Mallesons. Julie Galligan LLB, BA Julie joined Transurban in November 2008 and was appointed as General Counsel, Australia in February 2012. Julie has over 10 years of legal experience in private practice and in-house roles in both Australia and the United Kingdom. Prior to joining Transurban, Julie worked in-house at Associated British Ports. 234 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Directors' report 30 June 2012 (continued) Meetings of Directors The numbers of meetings of the Company's board of Directors and of each board committee held during the year ended 30 June 2012, and the numbers of meetings attended by each Director were: Lindsay Maxsted Christopher Lynch Neil Chatfield (Appointed 5 January 2012) Robert Edgar (Appointed 5 January 2012) Samantha Mostyn (Appointed 5 January 2012 Robert Officer (Appointed 5 January 2012) Christine O'Reilly (Appointed 12 April 2012) Rodney Slater (Appointed 5 January 2012) Ian Smith (Appointed 5 January 2012) Jennifer Eve (Resigned 5 January 2012) James Keyes (Resigned 5 January 2012) Attended Held# 8 8 6 5 6 6 3 5 5 2 2 8 8 6 6 6 6 3 6 6 2 2 # = Number of meetings held during the time the director held office The number of meetings of each Board Committee held during the year ended 30 June 2012, and the number of meetings attended by each Director, are set out in the following table. Audit and Risk Committee(1) Remuneration Committee(2) Attended Held# Attended Held# Attended Held# Nomination Committee(3) Lindsay Maxsted Christopher Lynch Neil Chatfield (Appointed 5 January 2012) Robert Edgar (Appointed 5 January 2012) Samantha Mostyn (Appointed 5 January 2012) Robert Officer (Appointed 5 January 2012) Christine O'Reilly (Appointed 12 April 2012) Rodney Slater (Appointed 5 January 2012) Ian Smith (Appointed 5 January 2012) Jennifer Eve (Resigned 5 January 2012) James Keyes (Resigned 5 January 2012) 8 8 8 8 * 5 1 1 * * * 8 * 8 8 * 4 * * * * * 4 4 4 5 5 1 * 1 * * * * * 2 4 2 * * * * * * 2 2 2 1 1 2 2 2 1 * * 2 * 2 2 2 2 * 2 * * * # = Number of meetings held during the time the director held office or was a member of the Committee * = Not a member of the relevant Committee (1) Chris Lynch, Christine O'Reilly and Rodney Slater were not members of the Audit and Risk Committee but attended meetings during the year. Bob Officer attended a meeting prior to becoming a member. (2) Lindsay Maxsted, Chris Lynch, Bob Officer and Rodney Slater were not members of the Remuneration Committee but attended meetings during the year. Neil Chatfield, Samantha Mostyn and Bob Edgar attended meetings prior to becoming members. Chris Lynch was excluded from discussions involving his remuneration during meetings of the Remuneration Committee which he attended. (3) Chris Lynch, Christine O'Reilly and Ian Smith were not members of the Nomination Committee but attended meetings during the year. 235 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Directors' report 30 June 2012 (continued) 2012 REMUNERATION REPORT (AUDITED) INTRODUCTION This report, prepared in accordance with the Corporations Act 2001, contains detailed information regarding the remuneration arrangements for the Directors and Senior Executives who are the 'key management personnel' (KMP) of the Transurban Group (Group). The KMP for the year ended 30 June 2012 are listed in the table below: Current Non-executive Directors Name Lindsay Maxsted, Chair Neil Chatfield Bob Edgar Samantha Mostyn Bob Officer Christine O'Reilly (appointed 12 April 2012) Rodney Slater Ian Smith (appointed 1 January 2012) Current Senior Executives Name and position Chris Lynch, Executive Director, CEO1 Ken Daley, President, International Development Andrew Head, Group General Manager, New South Wales Samantha Hogg, CFO2 Michael Kulper, President, North America Elizabeth Mildwater, Group General Manager, Victoria Former Non-executive Directors Jeremy Davis (retired 6 December 2011) Geoff Cosgriff (retired 6 December 2011) Jennifer Eve (Director of TIL only) (resigned 5 January 2012) James Keyes (Director of TIL only) (resigned 5 January 2012) Former Senior Executives Tom Honan, CFO (resigned 2 May 2012)2 1 On 30 January 2012, Transurban announced Chris Lynch’s intention to resign as CEO, and on 3 April 2012, Transurban announced the appointment of Scott Charlton as CEO-elect, both with effect in July 2012. 2 On 2 May 2012, Transurban announced the appointment of Samantha Hogg as CFO following the resignation of Tom Honan, with immediate effect. Until 2 May 2012, Ms Hogg was Transurban’s Group General Manager, Corporate Services. Ms Hogg has been a member of KMP for the full financial year. CONTENTS The remuneration information contained in this report is presented as follows: Content 1 Remuneration snapshot 2 Remuneration governance 3 Remuneration in context 4 CEO and Senior Executive remuneration for the year ended 30 June 2012 5 Link between Group performance, security holder wealth and remuneration 6 Non-executive Director remuneration All values in this report are in Australian dollars, unless otherwise stated. Page 237 239 240 241 257 259 236 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) 1 A REMUNERATION SNAPSHOT THE NEW REMUNERATION FRAMEWORK A new Group remuneration framework was implemented for the year ended 30 June 2012. Details of the new framework were summarised in the 2011 report, and security holders voted in favour of the adoption of that report at the 2011 Annual General Meeting (AGM). The implementation of the new framework followed a comprehensive review by the Board of the Group’s remuneration arrangements in the year ended 30 June 2011. The review took into account feedback sought and received from security holders and other stakeholders, market expectations and regulatory developments. The key elements of the new framework for the CEO and other Senior Executives were as follows: Remuneration mix The remuneration of the CEO and other Senior Executives was structured as a mix of fixed remuneration and variable or 'at risk' remuneration through short term and long term incentive components. The relative weightings of the three remuneration components were as follows: % of total remuneration (annualised) (at target) - 2012 * Fixed TEC Variable (performance based) CEO Other Senior Executives 33.3 45 STI 33.3** 30** LTI 33.3 25 * Refer to page 242 for the new CEO's remuneration arrangements. The transition to the remuneration mix for Michael Kulper and Ken Daley will be achieved by FY2014. ** With 30 per cent STI deferral. Short term incentive (STI) In the year ended 30 June 2012, the performance measures for the STI plan were linked to growth in proportional EBITDA, cost management based on proportional net costs, safety, and performance against individual KPIs. In the year ended 30 June 2012, mandatory deferral of 30 per cent of the overall STI award was introduced for the CEO and other Senior Executives. The deferral period is three years (comprising the 2012 financial year performance period and a two year trading restriction). For Australian Senior Executives, deferral is into securities. Due to legal restrictions on the issue of securities to US residents, US Senior Executives receive deferred cash awards. The deferred component of remuneration may, at the discretion of the Board, be subject to forfeiture or clawback (e.g. in the event of misconduct or material misstatement of financial results). Long term incentive (LTI) In the year ended 30 June 2012, the performance measures for the LTI plan were as follows: • 50 per cent relative Total Shareholder Return (TSR) measured against a bespoke comparator group comprising companies in the transport, utilities, real estate, construction and infrastructure Global Industry Classification Standards (GICS) sectors of the ASX150; and • 50 per cent Free Cash Flow (FCF) per security, reflecting the Group's focus on the maximisation of free cash flow to drive security holder return. The definition of FCF per security is set out on page 250. The FCF calculation is included in note 21 of the Transurban Holdings Limited audited financial statements. 237 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) B OTHER EVENTS/ACTIONS IMPACTING REMUNERATION IN THE YEAR ENDED 30 JUNE 2012 CEO transition On 30 January 2012, Transurban announced Chris Lynch’s intention to resign as CEO. On 3 April 2012, Transurban announced the appointment of Scott Charlton as CEO-elect. Mr Charlton became CEO on 16 July 2012. A summary of Mr Lynch’s entitlements on resignation is set out on page 242. Further details of Mr Lynch’s resignation arrangements and remuneration details for any part of the year ended 30 June 2013 worked by Mr Lynch will be set out in the 2013 report. The remuneration arrangements for Mr Charlton were designed in accordance with the Group’s remuneration strategy: to ensure alignment of reward with the creation of security holder value and with the achievement of corporate objectives as determined by the Board. They were developed with the benefit of input from remuneration consultants and Australian peer company benchmark data. Mr Charlton’s remuneration package was disclosed at the time of his appointment as CEO-elect and is outlined on page 226. CFO transition On 2 May 2012, Transurban announced Tom Honan’s resignation as CFO and the appointment of Samantha Hogg to the role with immediate effect. Details of Mr Honan’s entitlements on resignation are set out on page 243. Details of Ms Hogg’s remuneration are set out elsewhere in this report. Her remuneration arrangements as CFO were designed in accordance with the Group’s remuneration strategy and were developed with the benefit of Australian peer company benchmark data. Legislative changes to executive remuneration In the year ended 30 June 2012, legislative changes introduced by the Federal Government in relation to the governance of executive remuneration arrangements came into effect. The legislation in large part concerns the appointment process for, and recommendations of, independent remuneration advisers. In response, the Remuneration Committee adopted a protocol governing the appointment of ‘remuneration consultants’ and the manner in which any recommendations made by those consultants concerning the remuneration of KMP are to be provided to the Group, and in particular the circumstances in which management may be given access to those recommendations. The purpose of the protocol is to ensure that any remuneration recommendations provided by consultants are provided without undue influence by KMP. 238 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) 2 A REMUNERATION GOVERNANCE BOARD AND REMUNERATION COMMITTEE RESPONSIBILITY The Remuneration Committee assists the Board in fulfilling its responsibilities relating to the remuneration of Directors, the remuneration of, and incentives for, the CEO and other Senior Executives, and remuneration practices, strategies and disclosures generally. The Committee also reviews gender pay equity. It is critical that the Remuneration Committee is independent of management when making decisions affecting employee remuneration. Accordingly, the Committee comprises Non-executive Directors, all of whom are independent. Where appropriate, members of Management attend Committee meetings by invitation, however they do not participate in formal decision making. The membership of the Remuneration Committee changed in the year ended 30 June 2012. Geoff Cosgriff stood down as Chair and Jeremy Davis stood down as a member of the Committee on their respective retirement from the Board in December 2011. Bob Edgar was appointed Chair and Samantha Mostyn and Neil Chatfield joined the Committee as new members. Further details regarding the Committee’s composition are set out in the Directors’ report. B ENGAGEMENT OF REMUNERATION CONSULTANTS To ensure it has all relevant information at its disposal when making remuneration decisions, the Remuneration Committee may seek and consider advice from independent remuneration consultants where appropriate. Any advice from consultants is used to guide the Committee and the Board, but does not serve as a substitute for thorough consideration of the issues by Directors. Those consultants who provided the Remuneration Committee with a remuneration recommendation relating to KMP during the year ended 30 June 2012, and who have been deemed by the Group to be ‘remuneration consultants’ for the purposes of the new executive remuneration legislation, are listed below: Consultant Ernst & Young Remuneration recommendations and fees Other advice and fees to the Group during FY2012 $26,000 $98,921 (General HR advice) $455,825 (IT, finance, sustainability assurance work, tax advice and other general consulting services) Ernst & Young was selected by the Remuneration Committee and commissioned and instructed by the Chair of the Committee in accordance with the applicable protocol. Ernst & Young’s appointment terms specified that all remuneration recommendations and advice be sent directly to the Committee through the Chair, and prohibited the provision of such material or other information directly to Management. The appointment terms also required that Ernst & Young provide, with their recommendations, both a declaration of their independence from the KMP to whom their recommendations related, and also confirmation that the Committee’s conditions for contact and dialogue with Management had been observed. Ernst & Young provided such a declaration and confirmation in relation to their remuneration recommendations. In this way, the Committee and the Board have been assured and are satisfied that Ernst & Young’s remuneration recommendations and advice were made free from undue influence from Management generally and from KMP specifically. 239 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) 3 REMUNERATION IN CONTEXT Toll road concessions are an asset class characterised by defensive, predictable cash flows, which grow over the life of long dated concession agreements. There is high upfront capital expenditure during the construction phase of a project, which for quality assets shifts to a low cost, high margin cash generative business for the remainder of the concession life. The investment proposition for high quality toll road assets lies in providing investors with access to long dated, predictable, growing cash flows generated by the assets over the life of the concessions. The Group is an international toll road developer and manager with interests in Australia and the US. The Group is focused on the long term management of toll road assets at various stages of maturity to achieve the best outcomes for investors, Government partners and the community. In Australia, the Group's interests include 100 per cent ownership of CityLink in Melbourne, and Hills M2 and Lane Cove Tunnel in Sydney. The Group has partial interests in a further three roads on the Sydney orbital network, being the M1 Eastern Distributor (75.1 per cent), the M5 (50 per cent), and the Westlink M7 (50 per cent). In North America, the Group has interests in two assets, Pocahontas 895 (75 per cent) and the Capital Beltway Express (67.5 per cent), which is under construction in Northern Virginia. The Board and Management are focused on ensuring security holder value is enhanced through the strong performance of the current asset portfolio. Development activities also provide opportunities to further expand the portfolio in value accretive ways. The maximisation of free cash available to security holders over the near, medium and longer term is the Group’s aim and the Group’s remuneration framework has been determined with a focus on this outcome. 240 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) 4 CEO AND SENIOR EXECUTIVE REMUNERATION FOR THE YEAR ENDED 30 JUNE 2012 A REMUNERATION STRATEGY AND POLICY The Group's executive remuneration strategy is designed to attract, retain and motivate a highly qualified and experienced Management team with the necessary skills and attributes to lead the Group in achieving its business objectives. The strategy also aims to encourage Management to strive for superior performance by rewarding the achievement of targets that are challenging, clearly understood and within the control of individuals to achieve through their own actions. The Group's remuneration strategy and policy as set by the Board is summarised below: Creating Security Holder Value Remuneration Strategy Attract, retain, motivate and reward executives who are critical to the Group's growth and success by: • Offering competitive remuneration that is benchmarked against the external market. • Providing a balance of fixed and variable or 'at risk' remuneration. Align executive reward with individual and Group performance by: • Making short and long term components of remuneration 'at risk' based on performance. • Assessing rewards against appropriate financial and non-financial performance measures. • Encouraging executive security holdings. Fixed remuneration Total Employment Cost (TEC): Remuneration Structure • Comprises cash salary, superannuation and other prescribed benefits. • Provides a base level of reward for effective completion of Group and specific accountabilities. • Appropriately benchmarked and set with reference to role, responsibilities, skills and experience. Variable (or 'at risk') remuneration Short term incentive (STI): Annual rewards tied to pre-determined individual and Group performance measures, and includes a deferred element. Individual targets reflect individual specific accountabilities and key drivers for growth and success. • • • Group performance targets linked to earnings, cost management and safety. Long term incentive (LTI): • Equity rewards to align executive and security holder interests. • • Vest after three years, subject to achievement of pre-determined internal and external performance measures. Encourages sustainable performance in the medium to longer term, and provides a retention element. 241 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) B CHANGE OF CEO AND CFO - TRANSITION ARRANGEMENTS On ceasing employment on 30 July 2012, the following arrangements applied to Chris Lynch: • he will receive an STI award for the year ended 30 June 2012, to be awarded at 116 per cent of his current TEC based on performance against applicable performance targets (see page 248). The cash component of the award (70 per cent or $1,764,963) will be paid in August 2012. The deferred (into equity) component of the award (30 per cent or $756,413) will vest, subject to clawback provisions, on 30 June 2014; • he is contractually entitled to receive an STI award for the 30 days worked in the year ended 30 June 2013, and will receive a pro rated ‘target’ level payment for the 30 days ($178,652) after satisfying performance targets for the period which related to his role in a successful CEO transition process; The award will be paid in cash in August 2012; • equity instruments previously granted to him under the Group’s LTI plans will continue on foot in accordance with their original terms, with the applicable performance measures for each grant to be tested at the end of the applicable original performance period; • as he is contractually entitled to receive an LTI award for every day he is employed by the Group, the Board determined to pay him $1,060,000 in lieu of an LTI grant earned but not received for a 6 month period during his tenure. The cash sum will be paid in August 2012; • as he worked out his notice period, he will not receive any amount in lieu of notice; and • he will not receive any ex gratia payments on separation. Details of payments made to Mr Lynch in and for the year ended 30 June 2013 will be set out in the 2013 report. Incoming CEO - Scott Charlton Scott Charlton’s appointment as CEO took effect on 16 July 2012. Mr Charlton was not a member of KMP during the year ended 30 June 2012 and he was paid no remuneration during that year. As disclosed to the ASX at the time of his appointment, the following arrangements apply to Mr Charlton under his service agreement in relation to the year ended 30 June 2013. He is provided with the following elements of remuneration (on an annualised basis): • Total fixed remuneration (TEC) of $1,875,000; and • Variable annual remuneration comprised of a STI target opportunity of 30 per cent of his total remuneration package ($1,406,250); and an LTI target opportunity of 30 per cent of his total remuneration package ($1,406,250). In recognition of Mr Charlton giving up certain STI deferred awards for the years ended 30 June 2011 and 2012 and LTI awards for the years ended 30 June 2010 to 30 June 2012 with his former employer to join Transurban, he will receive a one-off grant of equity as a sign-on award. The grant will consist of 236,256 performance awards, which will vest in three tranches (of 78,752 each) on the first, second and third anniversaries of his commencement with Transurban. Each performance award is an entitlement to receive a fully paid Transurban security on vesting. Further details of Mr Charlton’s remuneration in his first year as CEO will be set out in the 2013 report. 242 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) Outgoing CFO - Tom Honan On ceasing employment as CFO on 2 May 2012, the following arrangements applied to Tom Honan: • he received a sum equivalent to 3 months TEC as a payment in lieu of notice ($246,160); • he was paid a cash sum equivalent to the pro rata vesting of his STI award for the year ended 30 June 2012, calculated based on performance against the applicable performance hurdles during the 10 month period from the start of the year up until the date his employment ceased ($475,000); • equity instruments previously granted to him under the Group’s LTI plans lapsed in accordance with their original terms ($962,416 forfeited); and • he did not receive any ex gratia payments on separation. Further details of Mr Honan’s resignation payments can be found on page 254. C REMUNERATION MIX For the year ended 30 June 2012, the remuneration of the CEO and other Senior Executives was structured as a mix of fixed remuneration and variable (or 'at risk') remuneration through short term and long term incentive components. The relative weightings of the three remuneration components were determined by the Board (on the recommendation of the Remuneration Committee) and are set out in the table below: Relative weightings of remuneration components 1 % of total remuneration (annualised) (at target) - FY20122 Fixed TEC Variable (performance based) CEO Other Senior Executives 33.3 45 STI (with 30% deferral) 33.3 30 LTI 33.3 25 1These figures do not necessarily reflect the relative value derived from each of the components, which depends on actual performance against targets for the variable components (refer to page 244). The above STI percentages are based on achieving the relevant performance targets. The above LTI percentages are based on the maximum LTI available at the time of grant to each Senior Executive if the awards granted vest at the end of the performance period. The table above reflects the percentage value of remuneration which consists of rights for each KMP. 2Refer to page 242 for the new CEO's remuneration arrangements.The transition to the remuneration mix for Michael Kulper and Ken Daley will be achieved over a maximum of three years (or by FY2014). 243 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) D FIXED REMUNERATION - TOTAL EMPLOYMENT COST (TEC) What is TEC? Fixed remuneration is represented by total employment cost (TEC) comprising base salary and superannuation contributions. Fixed remuneration is not 'at risk' but is set by reference to appropriate benchmark information for an individual’s responsibilities, performance, qualifications and experience. There are no guaranteed base salary increases in any Senior Executive's employment agreement. How is TEC determined? TEC levels are reviewed annually by the Remuneration Committee with reference to an individual’s role, experience and performance, as well as relevant comparative market data. Independent remuneration consultants and surveys, internal relativities and market conditions also provide guidance. TEC is also reviewed on a change in role. Executives' TEC is determined with reference to the market median. The primary reference for determining the market median is the ASX 20 - 50. Consideration is given to sizing factors including market capitalisation and revenue. A range around the median provides flexibility to recognise individual performance. E SHORT TERM INCENTIVE (STI) How does the STI plan operate? All permanent Group employees, including the CEO and other Senior Executives, participate in the annual STI plan. The STI plan puts a significant proportion of remuneration 'at risk' subject to meeting specific pre determined Group, team and individual performance measures linked to business objectives. This aligns executive interests with the Group's financial performance, as well as management principles and the Group’s cultural values. For the year ended 30 June 2012, the CEO had a target STI opportunity of 33 per cent of his total remuneration package. Other Senior Executives had a target STI opportunity of 30 per cent of their total remuneration package. Mandatory STI deferral of 30 per cent of the overall STI award was introduced for the CEO and other Senior Executives in the year ended 30 June 2012. The deferral period is three years (comprising the 2012 financial year performance period and a two year trading restriction). For Australian Senior Executives, deferral is into securities. Due to legal restrictions on the issue of securities to US residents, US Senior Executives receive deferred cash awards. The deferred component of remuneration may, at the discretion of the Board, be subject to forfeiture or clawback (e.g. in the event of misconduct or the material misstatement of financial results). 244 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) What were the STI performance measures for the year ended 30 June 2012? There were two categories of STI performance measures for the CEO and other Senior Executives for the year ended 30 June 2012. They were chosen to provide a balance between corporate, individual, operational, strategic, financial and non-financial aspects of performance and are described below. STI performance measures and targets for FY2012 Measure % weighting Description of targets/indicators for FY2012 Group performance targets 20% (1) Growth in proportional EBITDA The proportional EBITDA targets for FY2012 were set against the previous year's results and the Group's FY2012 budget, and are set out below: Proportional EBITDA result Less than 7% above forecast underlying result for FY2011 7% above forecast underlying result for FY2011 Budget EBITDA for FY2012 (9% increase on result for FY2011) 17% above forecast underlying result for FY2011 150% 50% 100% % of STI that vests^ 0% ^ Straight line vesting applies between 50-100% and 100-150%. 20% (2) Cost management based on proportional net costs The proportional net costs targets for FY2012 were set against the previous year's results and the Group's FY2012 budget, and are set out below: Proportional net costs result Over budget for FY2012 On budget for FY2012 5% below budget for FY2012 10% below budget for FY2012 % of STI that vests^ 0% 50% 100% 150% ^ Straight line vesting applies between 50-100% and 100-150%. (3) Safety targets, including multiple indicators that focus on improving the Group's safety culture and reducing workplace injuries for employees and contractors. Individual KPIs are unique to the individual's area of accountability, and in FY2012 related to critical business sustainability measures, including: operational performance; cost reduction; customer satisfaction; project outcomes; succession planning; risk management; people management; strategy development; and business plan implementation. Individual KPIs reflect the behaviours valued by the Group, and are capable of measurement. Individuals have a clear line of sight to KPIs and are able to directly affect outcomes through action. 10% 50% Individual key performance indicators (KPIs) Who sets the STI performance measures? STI performance measures are set at the beginning of the financial year. The CEO's individual KPIs are set by the Board. All other Senior Executives’ individual KPIs are set by the CEO and approved by the Board. The Board sets the Group performance targets. 245 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) What is proportional EBITDA and why does Transurban use it as an STI performance measure? EBITDA is a common operational performance measure used by many companies. Proportional EBITDA is one of the primary measures that the Board uses to assess the operating performance of the Group, with an aim to maintain a focus on the Group’s operating results and associated cash generation. It reflects the contribution from individual assets to the Group's operating performance and focuses on elements of the result that Management can influence to drive improvements in short term earnings. Proportional EBITDA is the aggregation of EBITDA from each asset multiplied by the Group's percentage ownership, as well as any contribution from Group functions. Proportional EBITDA provides a better reflection of the underlying performance of the Group’s assets than statutory EBITDA. The EBITDA calculation from the statutory accounts would not include the EBITDA contribution of the M5, M7 or DRIVe (equity accounted in the statutory results), which are meaningful contributors to the Group’s performance. Proportional EBITDA figures used to assess performance are included in note 2 of the Transurban Holdings Limited audited financial statements. The Board can decide to exclude specific items (including contributions from acquisitions or divestments made during any one year) from proportional EBITDA to provide an underlying result when determining performance incentives. There were no such exclusions for the year ended 30 June 2012. Proportional EBITDA has been used by the Group as an STI performance measure since 2009. What are proportional net costs and why does Transurban use it as a performance measure? Proportional net costs are the operating, corporate and business development costs of the Group less non these non toll revenues encourages and allows toll revenues (fees and other). The deduction of Management to incur additional costs where these are justified by increased revenue results (e.g. toll collection activities such as video tolling and/or enforcement). The use of a cost related STI performance measure reflects the fact that Management has the ability to influence the expenditure of the business. Strong cost management throughout the business drives an increase in proportional EBITDA and free cash flow and ultimately security holder value. Proportional net costs was first used by the Group as an STI performance measure in 2010. How are the varying levels of performance achievement rewarded? STI targets are designed to differentiate and reward high performance. 50 per cent of the available STI vests for on-target performance, 100 per cent vests for high performance and up to an additional 50 per cent can be earned for exceptional performance. These targets are consistent for all of the Group’s eligible employees. Given that STI awards are contingent on performance across a range of measures, maximum STI awards can only be achieved for performance that is strong on all measures. 246 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) How is performance assessed? Performance against the Group performance targets is assessed by the Board. The results are independently reviewed. The CEO's performance against his individual KPIs is assessed by the Remuneration Committee which then makes recommendations to the Board. The performance of other Senior Executives against their individual KPIs is assessed by the CEO, who confers with the Committee and then the Board regarding his assessment. Once KPIs have been assessed, the Board approves STI awards. STI cash awards for the year ended 30 June 2012 will be paid in August 2012. The STI deferred component for the year ended 30 June 2012 will vest, subject to continuity of employment (unless otherwise determined by the Board) and clawback provisions, on 30 June 2014. The Board believes the method of assessment is rigorous and provides a balanced evaluation of the CEO and each other Senior Executive's performance. What if a Senior Executive ceases employment? Under the service agreements for Senior Executives (other than the CEO - refer to page 242) in place for the year ended 30 June 2012, if a Senior Executive ceased employment with the Group before performance against STI targets was assessd, they would generally not be entitled to receive any STI award, unless otherwise determined by the Board. In recognition of Tom Honan’s exceptional contribution to the business during the year ended 30 June 2012, and to facilitate an orderly succession in the CFO role, the Board determined to pay Mr Honan a sum equivalent to the pro-rata vesting of his STI for that year, calculated based on performance against the applicable performance measures during the 10 month period from the start of the year up until 2 May 2012, being the date his employment as CFO ceased. What were the STI performance outcomes for the year ended 30 June 2012? Group performance in respect of the proportional EBITDA, proportional net costs and safety performance measures for the year ended 30 June 2012 was assessed by the Board as 97 per cent in Australia and 127 per cent in the US. 247 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) STI awards for the CEO and other Senior Executives for the year ended 30 June 2012 are set out in the table below: STI outcome (%) Actual STI awarded1($) STI forfeited (%) Group performance Individual KPIs Total Cash2 Deferred into equity2 Name Chris Lynch Ken Daley Andrew Head Samantha Hogg Tom Honan3 Michael Kulper Elizabeth Mildwater 112% 127% 97% 97% 97% 127% 97% 120% 110% 120% 90% 100% 120% 95% 116% 119% 109% 94% 83% 124% 96% 1,764,963 354,612 756,413 151,976 297,686 127,580 251,598 475,000 107,828 - 492,765 211,185 263,390 112,882 - - - 6% 17% - 4% 1 On-target performance must be achieved before any STI is awarded. Therefore, the minimum potential value of the STI in respect of FY2012 was nil. The maximum potential value of the STI was the “Actual STI awarded”. 2 The cash STI payments in respect of FY2012 will be paid in August 2012. The STI deferred component for FY2012 (30 per cent of the actual STI awarded) will vest, subject to continuity of employment (unless otherwise determined by the Board) and clawback provisions, on 30 June 2014. 3 Tom Honan received an STI pro-rated and awarded based on individual performance and Group performance on his resignation in May 2012. The Board determined to waive the deferred element of this award and pay it in cash. F LONG TERM INCENTIVE (LTI) How does the LTI plan operate? The LTI plan aligns reward with security holder value by tying this component of executive remuneration to the achievement of performance measures that underpin sustainable long term growth. Participation in the LTI plan is only offered to the CEO and other Senior Executives, and certain other employees nominated by the CEO and approved by the Board. For the year ended 30 June 2012, the CEO was offered an LTI grant equivalent to 33 per cent of his total remuneration package. Other Senior Executives were offered grants equivalent to 25 per cent of their total remuneration package. LTI grants are delivered in the form of performance awards under the Group’s Performance Awards Plan (PAP). Each performance award is an entitlement to receive a fully paid Transurban security on terms and conditions determined by the Board, subject to the achievement of certain vesting conditions linked to performance over a three year period. If the performance measures are satisfied, the performance awards vest and Transurban securities are delivered to the participant. Whilst the Board has discretion to grant cash payments of equivalent value at the end of the performance period, and certain US based participants may be required to receive cash settled awards, the Board generally intends to settle any vested performance awards in Transurban securities. Performance awards that do not vest after testing of the performance measures lapse, without retesting. Performance awards are not transferable and do not carry voting or distribution rights. However securities allocated upon vesting of performance awards carry the same rights as other Transurban securities. 248 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) What were the LTI performance measures for the year ended 30 June 2012? Performance awards granted during the year ended 30 June 2012 are subject to a three year performance period and the following dual performance measures over that period: LTI performance measures for FY2012 Measure % weighting Description of measure Relative TSR 50% Relative TSR is measured against a bespoke comparator group comprising companies in the transport, utilities, real estate, construction and infrastructure Global Industry Classification Standards (GICS) sectors of the ASX150. The other 33 companies in this group are: Singapore Telecommunications Ltd, Telstra Corporation Ltd, Westfield Group, QR National Ltd, Westfield Retail Trust, Stockland, Leighton Holdings Ltd, AGL Energy Ltd, MAP Group, GPT Group, Goodman Group, CFS Retail Property Trust, Lend Lease Group, Asciano Ltd, Qantas Airways Ltd, Dexus Property Group, Mirvac Group, Telecom Corporation Of New Zealand Ltd, Toll Holdings Ltd, SP Ausnet, APA Group, Commonwealth Property Office Fund, UGL Ltd, ConnectEast Group, Boart Longyear Ltd, Investa Office Fund, Spark Infrastructure Group, Charter Hall Office Reit, Australand Property Group, Monadelphous Group Ltd, Duet Group, TPG Telecom Ltd and Australian Infrastructure Fund. TSR measures total return on investment of a security, taking into account both capital appreciation and distributed income which was reinvested on a pre-tax basis. For performance awards granted during the year ended 30 June 2012, the relative TSR component will vest on a straight line basis if the Group’s relative TSR performance is above the median of the bespoke comparator group at the end of a three year performance period, in accordance with the following table: TSR vesting schedule: The Group’s relative TSR ranking in the comparator group At or below the 50% percentile Above the 50th percentile but below the 75th percentile At or above the 75th percentile % of performance awards that vest Nil Straight line vesting between 50% and 100% 100% 249 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) Measure % weighting Description of measure 50% Growth in Free Cash Flow (FCF) per security Within Transurban, FCF per security is defined as: • the Group's cash flow from operating activities; • less: cash flows from operating activities of non-100% owned controlled assets; • add back: maintenance capital expenditure for 100% owned assets; • less: accounting charge for maintenance provision for the year; • less: actual tag expenditure in 100% owned assets; • add: dividends received from non 100% owned assets; • divided by: weighted average number of securities issued. The FCF calculation is included in note 21 of the Transurban Holdings Limited audited financial statements. For performance awards granted during the year ended 30 June 2012, the FCF per security component will vest based on the Group's compound annual growth in FCF per security over the three year performance period, as set out below: Growth in FCF per security vesting schedule: % compound annual growth in FCF per security 7% Between 7% and 10% 10% or more % of performance awards that vest 50% Straight line vesting between 50% and 100% 100% For performance awards granted during the year ending 30 June 2013, the performance target range for compound growth in FCF per security is between 6 per cent and 9 per cent. Why were these LTI performance measures selected? The TSR target is a relative, external, market-based performance measure against those companies with which the Group competes for capital. It provides a direct link between executive reward and security holder return. For the year ended 30 June 2012, the Group changed the relative TSR comparator group from the S&P/ASX 100 to the bespoke comparator group described above. The Group considered this comparator group to be more reflective of its competitive market. For the year ended 30 June 2012, the Group also changed the second LTI measure to FCF per security instead of proportional EBITDA to reflect the Group’s focus on the maximisation of free cash. The FCF calculation is included in note 21 to the Transurban Holdings Limited audited financial statements. 250 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) How will the LTI performance targets be measured? Relative TSR The Group will receive an independent report that sets out the Group's TSR growth and that of each company in the bespoke comparator group. A volume weighted average price of securities for the four weeks up to and including the test date is used in the calculation of TSRs for Transurban and the comparator group. The level of TSR growth achieved by the Group will be given a percentile ranking having regard to the Group’s performance compared to the performance of other companies in the comparator group (the highest ranking company being ranked at the 100th percentile). This ranking will determine the extent to which performance awards subject to this target will vest. FCF per security The Group's FCF per security percentage growth rate (as set out in note 21 to the Transurban Holdings Limited audited financial statements) will be calculated based on the cumulative weighted average over the three year performance period. The Board considers these methods of measurement to be rigorous and transparent. What if a Senior Executive ceases employment? Under the terms of the service agreements for Senior Executives (other than the CEO - refer to page 242) in place for the year ended 30 June 2012, if a Senior Executive ceased employment with the Group before the performance measures were tested, then their unvested performance awards would lapse, unless otherwise determined by the Board. On cessation of Tom Honan’s employment on 2 May 2012, Mr Honan forfeited his unvested performance awards. What will happen in the event of a change in control? In the event of a takeover or change of control of the Group, the treatment of any unvested performance awards granted in the year ended 30 June 2012 will be subject to the incumbent Board's discretion. What was the grant, and movement in the number and value, of performance awards during the year ended 30 June 2012? Performance awards granted in FY2012 Performance criteria Grant date Vesting date Fair value of awards at grant date1($) VWAP at grant date ($) Relative TSR FCF per security 26 Sep 2011 CEO: 11 Nov 2011 26 Sep 2011 CEO: 11 Nov 2011 30 June 2014 30 June 2014 $3.37 $3.27 $4.63 $4.81 $5.35 $5.41 $5.35 $5.41 1 An explanation of the pricing model used to calculate these values is set out in note 35 to the Transurban Holdings Limited audited financial statements. 251 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) Performance Awards granted in FY2012 Name Chris Lynch1 Ken Daley Andrew Head Samantha Hogg Tom Honan4 Michael Kulper Elizabeth Mildwater Number of performance awards granted2 Value at grant date ($) Maximum total value of grant yet to vest3($) 715,024 128,294 107,766 101,320 171,058 159,286 107,766 2,888,697 2,888,697 513,176 431,064 405,280 684,232 637,144 431,064 513,176 431,064 405,280 684,232 637,144 431,064 1 The grant made to the CEO constituted his full LTI entitlement for FY2012 and was made following security holder approval at the 2011 AGM on the terms summarised above. Performance awards vest subject to performance over the period from 1 July 2011 through to 30 June 2014. 2 The grants made to Senior Executives assume full vesting of their full LTI entitlement for FY2012 and were made on the terms summarised above. Performance awards actually vest subject to performance over the period from 1 July 2011 through to 30 June 2014. 3 The maximum value of the grant has been estimated based on the fair value per instrument at date of grant. The minimum total value of the grant, if the applicable performance measures are not met, is nil. 4 Performance awards lapse where the performance measures are not satisfied on testing. As the performance awards only vest on satisfaction of performance and service conditions which are to be tested in future financial periods, Tom Honan forfeited 171,058 awards. The value of the forfeited awards was $684,232. No other Senior Executives forfeited performance awards during the year. 252 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) G LEGACY LTI PLANS The Group has a number of legacy LTI plans that are no longer offered but which have existing participants. Details of these plans are set out below. Plan FY2011 PAP FY2010 PAP FY2009 PAP Grant date 1 Nov 2010 11 Dec 2009 Performance period 1 Nov 2010 - 1 Nov 2013 1 July 2009 - 30 June 2012 1 Nov 2008 1 Nov 2008 - 1 Nov 2011 FY2009 Executive Equity Plan 1 Nov 2008 1 Nov 2008 - 1 Nov 2011 External performance measure (50% of grant) Comparator group Relative TSR Relative TSR Relative TSR N/A Retention grant with service condition only The S&P/ASX 100 Relative TSR % of performance awards that vest Vesting schedule Above 50th percentile to 75th percentile Straight line vesting between 50% - 100% At or above the 75th percentile 100% vests Internal performance measure (50% of grant) Group’s annual growth in proportional EBITDA Group’s annual growth in proportional EBITDA Group’s annual growth in proportional EBITDA From 7% - 11% From 6% - 9% From 5% - 9% Compound growth % of performance awards that vest At target % 50% vests Vesting schedule From target % to stretch % Straight line vesting between 50% - 100% At or above stretch % 100% vests N/A N/A N/A N/A Current status To be tested after 1 Nov 2013 TESTED 100% to vest on 11 Dec 2012 TESTED 94.72% vested 5.28% lapsed TESTED 100% vested Value of performance awards vested and lapsed in the year ended 30 June 2012 The FY2009 Executive Equity Plan and the FY2009 PAP vested on 1 November 2011. Regarding the FY2009 PAP, 90 per cent of awards subject to the TSR performance measure vested based on the Group’s ranking against the constituents of the S&P/ASX 100. 99.43 per cent of awards subject to the proportional EBITDA measure vested based on performance against target. In total 5.28 per cent of awards lapsed. 253 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) FY2009 Executive Equity Plan FY2009 PAP Lapsed Vested Lapsed Vested Name Number Value ($) Number Value ($) Number Value ($) Number Value ($) C Lynch T Honan A Head E Mildwater S Hogg K Daley M Kulper - - - - - - - - - - - - - - 79,647 340,093 25,565 85,701 458,156 1,745,183 85,474 364,974 12,291 41,202 220,267 839,030 19,146 81,753 19,146 81,753 15,316 65,399 19,146 81,753 23,944 102,241 2,458 1,536 1,229 3,549 7,686 8,241 5,150 4,120 44,054 167,807 27,534 104,880 22,027 83,904 11,897 63,602 242,269 25,764 137,736 524,658 H REMUNERATION PAID TO THE CEO AND OTHER SENIOR EXECUTIVES Short-term employee benefits Non- monetary benefits2 Cash STI1 Deferred STI3 Post- employment benefits Termination benefits Super -annuation Share based benefits4 Total Long term benefits Long service leave 704,498 702,287 - 227,968 - 456,860 2,153,375 2,033,360 Cash salary and fees Executive director C Lynch 2012 2011 Other KMP B Bourke 2012 2011 K Daley5 2012 2011 M Fletcher 2012 2011 A Head 2012 2011 S Hogg 2012 2011 T Honan6 2012 2011 M Kulper 2012 2011 E Mildwater 2012 2011 Total 2012 2011 955,653 1,017,385 6,660,430 6,930,103 1,149,822 976,398 555,892 433,494 571,722 541,554 569,468 540,797 1,764,963 2,461,680 46,299 18,557 252,138 - 15,775 47,500 - - 40,812 21,309 3,086,801 2,167,745 7,360,163 6,750,151 - 254,163 354,612 431,438 - 110,656 297,686 323,640 251,598 241,285 475,000 587,250 492,765 573,750 263,390 319,633 - 9,097 - - 118,030 123,596 50,659 - - 3,114 2,260 6,232 1,903 5,882 3,951 8,178 - 8,199 2,028 6,311 - - 42,527 - 35,943 - - - 70,395 - 37,627 - - 58,333 45,813 48,995 - 22,917 22,760 24,243 15,775 25,000 26,775 25,000 9,458 9,800 15,775 25,000 - 958,759 - - - (57,846) - 1,679,366 - - 21,983 11,627 594,613 180,209 1,890,208 1,498,152 - 402,234 - - - 64,842 - 831,731 - - - - - - - - - - 15,258 25,662 11,492 3,342 347,920 209,779 1,300,133 1,131,110 280,575 173,608 1,153,178 882,611 - - (824,365) 761,984 831,183 2,358,810 16,165 19,690 10,015 5,419 1,033,606 400,734 2,578,042 2,029,558 350,916 234,376 1,249,219 1,131,536 3,900,014 5,303,495 174,471 189,166 489,289 - 152,131 286,788 - 1,360,993 115,725 87,049 4,870,066 16,362,126 4,135,431 18,293,025 254 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) 1 The amount represents the cash STI payment to the Senior Executive for FY2012, which will be paid in August 2012. The cash component is 70% of the STI award. 2 Non-monetary benefits include Group insurance, vehicle allowances and expatriate allowances (where relevant). 3 30 per cent of STI award is deferred into equity. In accordance with Accounting Standards, the deferred component will be recognised over the three year service period from 1 July 2011 to 30 June 2014. The amount recognised in this table is the FY2012 accounting charge. 4 In accordance with the requirements of the Accounting Standards, remuneration includes a proportion of the fair value of equity compensation granted or outstanding during the year (i.e. performance awards under the LTI plan). The fair value of equity instruments is determined as at the grant date and is progressively allocated over the vesting period. The amount included as remuneration may be different to the benefit (if any) that Senior Executives may ultimately realise should the equity instruments vest. The fair value of performance awards at the date of their grant has been independently determined in accordance with AASB 2. The fair value of the performance awards has been valued applying a Monte Carlo simulation to model Transurban’s security price and where applicable, the TSR performance against the comparator group performance. The assumptions underpinning these valuations are set out in note 35 to the Transurban Holdings Limited audited financial statements. 5 Ken Daley’s 2008 PAP allocation was based on his TEC as at November 2008 of $577,500 per year. On 5 December 2008, his TEC was increased to $750,000 per year effective 1 July 2008. The 2008 PAPs were granted on 15 October 2008. The Board determined to compensate Ken for the shortfall in his performance awards allocation given that his new TEC was effective prior to the grant. 6 On ceasing employment as CFO on 2 May 2012, Tom Honan was paid all accrued entitlements owing to him (e.g. earned but unpaid salary and annual leave), a sum equivalent to the pro-rata vesting of this FY2012 STI ($475,000), and a sum equivalent to 3 months TEC as payment in lieu of notice ($246,160). He did not receive any ex gratia payments on separation. I ADDITIONAL REMUNERATION INFORMATION EMPLOYEE SECURITY PLANS The Group has three broad employee based security plans. ShareLink Incentive Plan Under the ShareLink Incentive Plan, subject to Board approval, an allocation of Transurban securities or cash payments may be made to eligible employees (excluding the CEO and other Senior Executives) in recognition of the Group’s prior year performance. Eligible employees received a grant of 100 securities at no cost to them on 20 February 2012. Due to legal restrictions on the issue of securities to US residents, eligible employees in the US received a cash payment of equivalent value in lieu of securities. Given that the plan is designed to reward employees for the Group's prior year performance and is not intended to serve as a future incentive, there are no performance measures attached to grants of securities or cash payments under the plan. ShareLink Investment Tax Exempt Plan and ShareLink Investment Tax Deferred Plan The ShareLink Investment Tax Exempt Plan provides eligible employees (excluding the CEO and other Senior Executives) the opportunity to invest up to $1,000 per year in Transurban securities on a tax exempt basis. Participants contribute up to $500 by way of salary sacrifice which is matched by the Group dollar for dollar. Security acquisitions are made quarterly in September, December, March and June each year. The ShareLink Investment Tax Deferred Plan provides eligible employees (excluding the CEO and other Senior Executives) with the opportunity to contribute up to $5,000 per year by way of salary sacrifice to be invested in Transurban securities. The Group matches participants’ contributions dollar for dollar up to $3,000. The plan has a maximum disposal restriction period of three years from the date of acquisition, including a 12 month forfeiture period. Grants under both of these plans are designed to encourage employee security holdings and to align the interests of employees with those of the Group and are therefore not subject to performance measures. 255 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) DEALINGS IN SECURITIES In accordance with the Group’s Dealing in Securities Policy, employees who have awards under a Group equity plan may not hedge against those awards. In addition, KMP may not hedge against entitlements that have vested but remain subject to a holding lock. Employees and Directors are not permitted to obtain margin loans using Transurban securities (either solely or as part of a portfolio) as security for loans. SERVICE AGREEMENTS The remuneration and other terms of employment for the CEO and other Senior Executives are formalised in service agreements which have no specified term. Chris Lynch's service agreement included an entitlement to participate in the Group’s STI and LTI plans (or equivalent cash plan). Scott Charlton and other Senior Executives are eligible to participate in the STI and LTI plans (or equivalent cash plans for US executives). Some key aspects of the agreements in place in the year ended 30 June 2012 are outlined below: CEO Other Senior Executives Period of notice to terminate (executives) Period of notice to terminate (the Group*) 6 months 3 months 12 months 6 months * Payment in lieu of the notice period may be provided (based on the executive's fixed remuneration). The Group may also terminate at any time without notice for serious misconduct. 256 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) 5 LINK BETWEEN GROUP PERFORMANCE, SECURITY HOLDER WEALTH AND REMUNERATION The variable or 'at risk' remuneration of the CEO and other Senior Executives is linked to the Group’s performance through the use of measures based on the operating performance of the business. A GROUP PERFORMANCE AND STI For the year ended 30 June 2012, 20 per cent of the Senior Executive STIs were determined with reference to proportional EBITDA, 20 per cent with reference to proportional net costs, and 10 per cent with reference to safety as discussed on page 245. Proportional EBITDA The underlying proportional EBITDA result for the year ended 30 June 2012 was $784.0 million, a 9.1 per cent increase from the prior year result. This resulted in the payment of 93.4 per cent of STI's attributable to proportional EBITDA. The proportional EBITDA result was driven by the Group's continued focus on cost control and the performance of the asset portfolio. This result was delivered despite significant disruption caused by construction on Sydney’s Hills M2 Motorway. Proportional net costs The underlying proportional net costs result for the year ended 30 June 2012 was $159.9 million, a 7.2 per cent improvement from the prior year result. This resulted in the payment of 149.6 per cent of STI's attributable to proportional net costs. Importantly, the Group’s continued focus on proportional net costs resulted in a cost decrease across operational, corporate and business development areas (when taking into account the impact of volume based cost increases). Safety For the year ended 30 June 2012, the safety performance measure resulted in a zero STI payment for Senior Executives based in Australia, and 150 per cent for Senior Executives based in the US. The safety KPI target included several components as discussed on page 245 of which a reduction in recordable injury frequency rate was one. Strong results were attained for some aspects of the Australian safety measure, however other areas did not meet all targets. B GROUP PERFORMANCE AND LTI For the year ended 30 June 2012, LTIs were linked to relative TSR and, for the first time, FCF per security (see page 249 and 250). Relative TSR The relative TSR for the year ended 30 June 2012 is calculated on a bespoke comparator group from the ASX150 (see page 250). FCF per security The performance target range for compound growth in FCF per security of between 7 per cent and 10 per cent over three years is considered an appropriate target that reflects the Group’s focus on the maximisation of free cash to drive security holder return. For performance awards granted during the year ending 30 June 2013, the performance target range for compound growth in FCF per security is between 6 per cent and 9 per cent. The table below summarises the Group’s five year results for the relevant performance measures. These results show that since the year ended 30 June 2009, Transurban’s distribution policy has been to pay out 100 per cent (rounded) of FCF per security. Since that time, Transurban has delivered consistent growth on this measure based on consistent revenue and EBITDA growth. Based on investor feedback, this remains Transurban’s financial focus. 257 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) Group Performance1 Measure Security price at year end Distribution paid per security Underlying proportional EBITDA - $m 2012 $5.69 29.5c 2011 $5.23 27.0c 2010 $4.24 24.0c 2009 $4.18 2008 $4.23 22.0c 57.0c* 784.0 718.7 635.4 583.3 523.0 TSR performance2 15% 32% 10% 2% (41%) FCF per security performance - weighted average 29.8c 27.5c 27.4c 22.2c 26.0c * Distributions made under a previous distribution policy no longer applied by the Group. 1 For FY2012, LTIs were linked to relative TSR and FCF per security. In prior years, LTIs were linked to relative TSR and proportional EBITDA. 2 The TSR performance is the total security holder return for that financial year. 258 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) 6 A NON-EXECUTIVE DIRECTOR REMUNERATION REMUNERATION POLICY The diagram below sets out the key objectives of the Group’s Non-executive Director remuneration policy and how they are implemented through the Group’s remuneration framework: Securing and retaining talented, qualified Directors Preserving independence and impartiality Aligning Director and security holder interests Director fee levels are set with regards to: the responsibilities and risks attached to the role, the time commitment expected and the workload, Director experience and expertise, and market benchmark data provided by independent remuneration consultants. Director remuneration consists of base (Director) fees and Committee fees. No element of Director remuneration is 'at risk' - that is, fees are not based on the performance of the Group or individual Directors from year to year. B REMUNERATION ARRANGEMENTS Directors are encouraged to hold Transurban securities. Maximum aggregate remuneration The amount of aggregate remuneration that may be paid to Non-executive Directors in any year is capped at a level approved by security holders. The current aggregate fee pool of $2,400,000 per year (inclusive of superannuation contributions) was approved by security holders at the 2010 AGM. No change to this amount is proposed for the year ending 30 June 2013. The aggregate fee pool and the manner in which it is apportioned amongst Non-executive Directors is reviewed annually. The Remuneration Committee undertakes this review and makes recommendations to the Board. In conducting the review, the Committee considers market benchmark data from independent remuneration consultants. 2012 Non-executive Director fees A review of Non-executive Director fees was undertaken during the year ended 30 June 2012 and it was determined that there be no increase in fees. Current base (Director) fees and Committee fees per year are set out below: Board Audit and Risk Committee Nomination Committee Remuneration Committee Chair fee $ 455,000 40,000 10,000 25,000 Member fee $ 170,000 20,000 10,000 20,000 The Chair of the Board does not receive any additional fees for his Committee responsibilities. 259 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) Non-executive Directors are permitted to be paid additional fees for special duties or exertions. No such fees were paid during the year ended 30 June 2012. Non-executive Directors are also entitled to be reimbursed for all business related expenses, including travel, as may be incurred in the discharge of their duties. Retirement benefits No current Non-executive Directors are entitled to any retirement benefits. In September 2005, the Board resolved to discontinue previously provided retirement benefits for Non-executive Directors with effect from 30 September 2005. The value of benefits accrued up to that date attracted interest at the statutory fringe benefits rate. Accrued ‘frozen’ retirement benefits plus interest were paid to Geoff Cosgriff and Jeremy Davis on their retirement from the Board on 6 December 2011. The following table details the retirement benefits paid and expensed in the years ended 30 June 2012 and 30 June 2011. Geoff Cosgriff Jeremy Davis FY2012 $ 251,028 (paid) 418,186 (paid) FY2011 $ 16,301 (accrued) 27,155 (accrued) ShareLink Investment Tax Deferred Plan Under the ShareLink Investment Tax Deferred Plan, Non-executive Directors are able to sacrifice up to 50 per cent of their pre tax fees to acquire up to $5,000 of Transurban securities per year. No securities were issued to Non-executive Directors under the plan for the year ended 30 June 2012. 260 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Directors' report 30 June 2012 (continued) Remuneration report (continued) C REMUNERATION PAID TO NON-EXECUTIVE DIRECTORS Details of Non-executive Directors’ remuneration for the years ended 30 June 2012 and 30 June 2011 are set out below: Short-term benefits Post-employment benefits Total Fees Superannuation1 Retirement benefits2,3 34,225 - 176,047 141,066 439,411 394,593 207,114 196,552 176,047 93,996 207,631 199,828 Current Non-executive Directors Lindsay Maxsted 2012 2011 Neil Chatfield 2012 2011 Bob Edgar 2012 2011 Samantha Mostyn 2012 2011 Bob Officer 2012 2011 Christine O'Reilly (appointed 12 April 2012) 2012 2011 Rodney Slater 173,720 2012 155,268 2011 Ian Smith (appointed 1 January 2012) 77,983 2012 2011 - Former Non-executive Directors Geoff Cosgriff (resigned 6 December 2011) 2012 2011 Jeremy Davis (resigned 6 December 2011) 2012 2011 David Ryan (resigned 12 August 2010) 2012 2011 Jennifer Eve (resigned 5 January 2012) 2012 2011 James Keyes (resigned 5 January 2012) 2012 2011 Total 2012 2011 1,717,908 1,747,043 81,778 188,153 69,903 201,920 48,256 91,484 - 49,199 25,793 34,984 15,775 35,513 15,775 17,985 15,775 17,690 15,398 8,460 15,398 12,696 3,080 - - - 7,018 - 7,044 16,934 25,648 27,750 - 4,428 - - - - - - - - - - - - - - - - - - - - 251,028 16,301 418,186 27,155 - - - - - - 455,186 430,106 223,406 217,813 222,889 214,242 191,445 102,456 191,445 153,762 37,305 - 173,720 155,268 85,001 - 339,850 221,388 513,737 256,825 - 53,627 48,256 91,484 25,793 34,984 120,911 141,456 669,214 43,456 2,508,0333 1,931,955 1 Superannuation contributions made on behalf of Non-executive Directors to satisfy the Group’s obligations under applicable superannuation guarantee legislation. 2 Amounts represent contractual retirement benefits paid (in the year ended 30 June 2012) and provided for (in the year end 30 June 2011) for two former Non-executive Directors. No current Non-executive Directors are entitled to any retirement benefits. 3 Retirement benefits are excluded from the amount of aggregate remuneration that may be paid to Non-executive Directors in any year. 261 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Directors' report 30 June 2012 (continued) Non-audit services The Group has an "External Auditor Independence" policy which is intended to support the independence of the external auditor by regulating the provision of services by the external auditor. The external auditor will not be engaged to perform any service that may impair or be perceived to impair the external auditor's judgement or independence. The external auditor will only provide a permissible non-audit service where there is a compelling reason for it to do so, and the aim is for the external auditor not to provide non-audit services at all. All non-audit services must be pre-approved by the Chief Financial Officer (services less than $5,000) or the Chair of the Audit and Risk Committee (in all other cases). The Board has considered the position and, in accordance with advice received from the Audit and Risk 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, as set out below, did not compromise the auditor independence requirements of the Corporations Act 2001 for the following reasons: • • the Audit and Risk Committee reviews the non-audit services to ensure they do not impact the impartiality and objectivity of the auditor; and none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants , including reviewing or auditing the auditor’s own work, acting in a management or a decision making capacity for the Group, acting as advocate for the Group or jointly sharing economic risk and rewards. During the year the following fees were paid or payable for audit and non-audit services provided by the auditor of TIL, its related practices and non-related audit firms: 30 June 2012 $ 30 June 2011 $ Amounts received or due and receivable by PricewaterhouseCoopers Audit and review of financial reports Total remuneration for PricewathouseCoopers 52,000 52,000 50,000 50,000 Indemnification and insurance Each officer (including each Director) of the Group is indemnified, to the maximum extent permitted by law, against any liabilities incurred as an officer of the Group pursuant to agreements with the Group. Each officer is also indemnified against reasonable costs (whether legal or otherwise) incurred in relation to relevant proceedings in which the officer is involved because the officer is or was an officer. The Group has arranged to pay a premium for a Directors and officers liability insurance policy to indemnify directors and officers in accordance with the terms and conditions of the policy. This policy is subject to a confidentiality clause which prohibits disclosure of the nature of the liability covered, the name of the Insurer, the Limit of Liability and the Premium paid for this policy. Auditor's independence declaration A copy of the auditor's independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 264. 262 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Directors' report 30 June 2012 (continued) Rounding of amounts The Group is of a kind referred to in Class Order 98/100, 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 dollars, or in certain cases, to the nearest dollar. Auditor PricewaterhouseCoopers was re-elected as auditor, at the Annual General Meeting on 26 October 2011, and continues in office in accordance with section 327 of the Corporations Act 2001. This report is made in accordance with a resolution of Directors. Lindsay Maxsted Director Scott Charlton Director Melbourne 7 August 2012 263 TRANSURBAN ANNUAL REPORT 2012 264 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited ABN 90 121 746 825 Annual report - 30 June 2012 Contents Financial statements Consolidated income statement Consolidated statement of comprehensive income Consolidated balance sheet Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements Directors' declaration Independent auditor's report to the members Page 266 267 268 269 270 271 318 319 This financial report covers the consolidated financial statements of the consolidated entity consisting of Transurban International Limited and its subsidiaries. The financial report is presented in the Australian currency. Transurban International Limited is incorporated and domiciled in Australia. Its registered office is: Level 3 505 Little Collins Street Melbourne VIC 3000 The financial statements were authorised for issue by the Directors on 7 August 2012 . The Directors have the power to amend and reissue the financial statements. Through the use of the internet, we have ensured that our corporate reporting is timely and 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 265 TRANSURBAN ANNUAL REPORT 2012 Consolidated statement of comprehensive income Transurban International Limited For the year ended 30 June 2012 30 June 2012 $'000 30 June 2011 $'000 (227,526) (28,448) (39,996) 12,113 (27,883) 11,427 (6,461) 4,966 (255,409) (23,482) (255,409) (255,409) (23,482) (23,482) Loss for the year Other comprehensive income Changes in the fair value of cash flow hedges, net of tax Exchange differences on translation of US operations, net of tax Other comprehensive income for the year, net of tax Total comprehensive income for the year Total comprehensive income for the year is attributable to: Owners of Transurban International Limited Revenue Construction revenue Business development and other revenue Administration costs Business development costs Construction costs Profit (loss) before depreciation and amortisation, net finance costs, equity accounted investments and income tax Depreciation and amortisation expense Finance costs Finance costs Share of net losses of equity accounted investments Loss before income tax Income tax (expense) benefit Loss for the year Loss is attributable to: Owners of Transurban International Limited Transurban International Limited Consolidated income statement For the year ended 30 June 2012 30 June 2012 $'000 30 June 2011 $'000 Notes 3 3 4 5 9 6 20,723 19,883 40,606 (9,477) (15,778) (14,687) (39,942) 7,356 16,915 24,271 (7,062) (12,177) (7,356) (26,595) 664 (2,324) (592) (14,211) (14,211) (140) (13,268) (13,268) (213,338) (17,785) (227,477) (33,517) (49) (227,526) 5,069 (28,448) (227,526) (227,526) (28,448) (28,448) Cents Cents Loss per share for loss attributable to the ordinary equity holders of the Company: Basic earnings per share Diluted earnings per share 27 27 (15.7) (15.7) (2.0) (2.0) The above consolidated income statement should be read in conjunction with the accompanying notes. accompanying notes. The above consolidated statement of comprehensive income should be read in conjunction with the 266 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Consolidated statement of comprehensive income For the year ended 30 June 2012 Loss for the year Other comprehensive income Changes in the fair value of cash flow hedges, net of tax Exchange differences on translation of US operations, net of tax Other comprehensive income for the year, net of tax Total comprehensive income for the year Total comprehensive income for the year is attributable to: Owners of Transurban International Limited 30 June 2012 $'000 30 June 2011 $'000 (227,526) (28,448) (39,996) 12,113 (27,883) 11,427 (6,461) 4,966 (255,409) (23,482) (255,409) (255,409) (23,482) (23,482) Profit (loss) before depreciation and amortisation, net finance costs, equity accounted investments and income tax Revenue Construction revenue Business development and other revenue Administration costs Business development costs Construction costs Depreciation and amortisation expense Finance costs Finance costs Loss before income tax Income tax (expense) benefit Loss for the year Loss is attributable to: Owners of Transurban International Limited Share of net losses of equity accounted investments (213,338) (17,785) Transurban International Limited Consolidated income statement For the year ended 30 June 2012 30 June 2012 $'000 30 June 2011 $'000 Notes 3 3 4 5 9 6 20,723 19,883 40,606 (9,477) (15,778) (14,687) (39,942) 7,356 16,915 24,271 (7,062) (12,177) (7,356) (26,595) 664 (2,324) (592) (14,211) (14,211) (140) (13,268) (13,268) (227,477) (33,517) (49) (227,526) 5,069 (28,448) (227,526) (227,526) (28,448) (28,448) Cents Cents Loss per share for loss attributable to the ordinary equity holders of the Company: Basic earnings per share Diluted earnings per share 27 27 (15.7) (15.7) (2.0) (2.0) The above consolidated income statement should be read in conjunction with the accompanying notes. The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. 267 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Consolidated balance sheet As at 30 June 2012 30 June 2012 $'000 30 June 2011 $'000 Notes 7 8 9 10 11 12 13 14 15 16 16 9,186 9,889 462 19,537 - 2,009 12,551 14,560 6,574 6,345 - 12,919 212,197 969 12,899 226,065 34,097 238,984 251,349 - 4,767 12,678 268,794 201,721 954 4,903 13,581 221,159 268,794 221,159 (234,697) 17,825 205,065 (72,711) (367,051) 201,661 (44,289) (139,547) (234,697) 17,825 Transurban International Limited Consolidated statement of changes in equity For the year ended 30 June 2012 Attributable to members of Transurban International Limited Contributed Accumulated Notes equity $'000 Reserves $'000 losses $'000 Total equity $'000 Balance at 1 July 2010 192,977 (49,896) (111,099) 31,982 Comprehensive income Loss for the year Other comprehensive income Total comprehensive income Transactions with owners in their capacity as owners: Distribution reinvestment plan Treasury securities Changes in fair value of share-based payment reserve 15 15 16 Balance at 30 June 2011 Balance at 1 July 2011 Comprehensive income Loss for the year Other comprehensive income Total comprehensive income - - - 8,719 (35) - 8,684 4,966 4,966 - - - 641 641 (28,448) (28,448) (28,448) 4,966 (23,482) 8,719 (35) 641 9,325 201,661 (44,289) (139,547) 17,825 201,661 (44,289) (139,547) 17,825 - - - (27,883) (27,883) (227,526) (227,526) (227,526) (27,883) (255,409) - - - - - - - - - - - Transactions with owners in their capacity as owners: Distribution reinvestment plan Treasury securities Changes in fair value of share-based payment reserve 15 15 16 3,040 207 157 3,404 (539) (539) 22 22 3,040 207 (360) 2,887 Balance at 30 June 2012 205,065 (72,711) (367,051) (234,697) ASSETS Current assets Cash and cash equivalents Trade and other receivables Current tax receivables Total current assets Non-current assets Equity accounted investments Property, plant and equipment Deferred tax assets Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables Current tax liabilities Provisions Other liabilities Total current liabilities Total liabilities Net (liabilities)/assets EQUITY Contributed equity Reserves Accumulated losses Total equity The above consolidated balance sheet should be read in conjunction with the accompanying notes. notes. The above consolidated statement of changes in equity should be read in conjunction with the accompanying 268 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Consolidated balance sheet As at 30 June 2012 30 June 2012 $'000 30 June 2011 $'000 Notes 7 8 9 10 11 12 13 14 15 16 16 9,186 9,889 462 19,537 - 2,009 12,551 14,560 6,574 6,345 - 12,919 212,197 969 12,899 226,065 34,097 238,984 251,349 - 4,767 12,678 268,794 201,721 954 4,903 13,581 221,159 268,794 221,159 (234,697) 17,825 205,065 (72,711) (367,051) 201,661 (44,289) (139,547) (234,697) 17,825 Transurban International Limited Consolidated statement of changes in equity For the year ended 30 June 2012 Attributable to members of Transurban International Limited Contributed equity $'000 Reserves $'000 Accumulated losses $'000 Notes Total equity $'000 Balance at 1 July 2010 192,977 (49,896) (111,099) 31,982 Comprehensive income Loss for the year Other comprehensive income Total comprehensive income Transactions with owners in their capacity as owners: Distribution reinvestment plan Treasury securities Changes in fair value of share-based payment reserve 15 15 16 Balance at 30 June 2011 Balance at 1 July 2011 Comprehensive income Loss for the year Other comprehensive income Total comprehensive income Transactions with owners in their capacity as owners: Distribution reinvestment plan Treasury securities Changes in fair value of share-based payment reserve 15 15 16 - - - - 4,966 4,966 (28,448) - (28,448) (28,448) 4,966 (23,482) 8,719 (35) - 8,684 - - 641 641 - - - - 8,719 (35) 641 9,325 201,661 (44,289) (139,547) 17,825 201,661 (44,289) (139,547) 17,825 - - - - (27,883) (27,883) (227,526) - (227,526) (227,526) (27,883) (255,409) 3,040 207 157 3,404 - - (539) (539) - - 22 22 3,040 207 (360) 2,887 Balance at 30 June 2012 205,065 (72,711) (367,051) (234,697) ASSETS Current assets Cash and cash equivalents Trade and other receivables Current tax receivables Total current assets Non-current assets Equity accounted investments Property, plant and equipment Deferred tax assets Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables Current tax liabilities Provisions Other liabilities Total current liabilities Total liabilities Net (liabilities)/assets EQUITY Contributed equity Reserves Accumulated losses Total equity The above consolidated balance sheet should be read in conjunction with the accompanying notes. The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 269 TRANSURBAN ANNUAL REPORT 2012 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 Summary of significant accounting policies Segment information Revenue Expenses Finance costs Income tax benefit Current assets - Cash and cash equivalents Current assets - Trade and other receivables Equity accounted investments Non-current assets - Property, plant and equipment Deferred tax assets and liabilities Current liabilities - Trade and other payables Provisions Current liabilities - Other current liabilities Contributed equity Reserves and accumulated losses Dividends Remuneration of auditors Contingencies Intra-group guarantees Commitments Related party transactions Subsidiaries Parent entity financial information Events occurring after the reporting period Loss per share Share-based payments Key management personnel disclosures Critical accounting estimates and judgements Financial risk management Reconciliation of profit after income tax to net cash inflow from operating activities Page 272 282 286 286 287 287 288 288 289 292 293 293 294 294 295 296 297 298 298 299 299 300 301 302 302 303 303 305 309 314 315 Transurban International Limited Consolidated statement of cash flows For the year ended 30 June 2012 30 June 2012 $'000 30 June 2011 $'000 Notes Contents of the notes to the consolidated financial statements Transurban International Limited Notes to the consolidated financial statements 30 June 2012 Cash flows from operating activities Receipts from customers (inclusive of GST) Payments to suppliers and employees (inclusive of GST) Interest paid Tax (income taxes paid)/refunds Net cash inflow from operating activities Cash flows from investing activities Payments for property, plant and equipment Payment for investments in equity accounted investments Net cash (outflow) from investing activities Cash flows from financing activities Proceeds from sale of treasury securities, net of costs Loans from related parties Repayment of loans to related parties Net cash inflow from financing activities Net increase (decrease) in cash and cash equivalents 26 Cash and cash equivalents at the beginning of the financial year Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents at end of year 7 33,621 (29,031) (901) (460) 3,229 (1,568) (18,221) (19,789) - 32,630 (13,900) 18,730 2,170 6,574 442 9,186 33,322 (29,007) (427) 88 3,976 (577) (29,356) (29,933) (35) 31,879 (10,814) 21,030 (4,927) 13,743 (2,242) 6,574 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. 270 TRANSURBAN ANNUAL REPORT 2012 Cash flows from operating activities Receipts from customers (inclusive of GST) Payments to suppliers and employees (inclusive of GST) Interest paid Tax (income taxes paid)/refunds Net cash inflow from operating activities Cash flows from investing activities Payments for property, plant and equipment Payment for investments in equity accounted investments Net cash (outflow) from investing activities Cash flows from financing activities Proceeds from sale of treasury securities, net of costs Loans from related parties Repayment of loans to related parties Net cash inflow from financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents at end of year 7 Transurban International Limited Consolidated statement of cash flows For the year ended 30 June 2012 30 June 2012 $'000 30 June 2011 $'000 Notes 26 33,621 (29,031) (901) (460) 3,229 (1,568) (18,221) (19,789) - 32,630 (13,900) 18,730 2,170 6,574 442 9,186 33,322 (29,007) (427) 88 3,976 (577) (29,356) (29,933) (35) 31,879 (10,814) 21,030 (4,927) 13,743 (2,242) 6,574 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 Contents of the notes to the consolidated financial statements 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 Summary of significant accounting policies Segment information Revenue Expenses Finance costs Income tax benefit Current assets - Cash and cash equivalents Current assets - Trade and other receivables Equity accounted investments Non-current assets - Property, plant and equipment Deferred tax assets and liabilities Current liabilities - Trade and other payables Provisions Current liabilities - Other current liabilities Contributed equity Reserves and accumulated losses Dividends Remuneration of auditors Contingencies Intra-group guarantees Commitments Related party transactions Subsidiaries Parent entity financial information Events occurring after the reporting period Reconciliation of profit after income tax to net cash inflow from operating activities Loss per share Share-based payments Key management personnel disclosures Critical accounting estimates and judgements Financial risk management Page 272 282 286 286 287 287 288 288 289 292 293 293 294 294 295 296 297 298 298 299 299 300 301 302 302 303 303 305 309 314 315 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. 271 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 1 Summary of significant accounting policies The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. (a) Basis of preparation This general purpose financial statements has been prepared in accordance with Australian Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board, Urgent Issues Group Interpretations and the Corporations Act 2001. The financial report includes the consolidated entity consisting of Transurban International Limited and its subsidiaries ("the Group"). Where necessary, comparatives have been reclassified for consistency with current year disclosures. Compliance with IFRS The consolidated financial statements of Transurban International Limited also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. Early adoption of standards The Group has not elected to adopt any new accounting standards early. Historical cost convention These financial statements have been prepared under the historical cost convention, as modified by the revaluation of other financial assets and liabilities. Rounding of amounts The Group is of a kind referred to in Class order 98/100, 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, or in certain cases, the nearest dollar. (b) Principles of consolidation Subsidiaries Subsidiaries are all those entities over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one-half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. The aggregated financial statements 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 financial statements except as otherwise indicated. The acquisition method of accounting is used to account for business combinations by the Group (refer to note 1(h)). Associates Associates are all entities over which the Group has significant influence but not control. Investments in associates are accounted for using the equity method of accounting, after initially being recognised at cost. The Group's share of its associates' post-acquisition profits or losses is recognised in the income statement, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group's share of losses in an associate equals or exceeds its interest in the associate, the Group does not recognise further losses. Dividends received from associates reduce the carrying amount of the investment. 272 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 1 Summary of significant accounting policies (continued) (c) Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the Chief Executive Officer (the chief operating decision maker) and the Executive Committee who report to the Chief Executive Officer (CEO). (d) Foreign currency translation Functional and presentation currency The Group's functional currency is United States Dollars and its presentation currency is Australian Dollars, being Transurban Holdings Limited’s (the ultimate parent of the Transurban Group) functional and presentation currency. Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated income statement, except when they are deferred in equity as qualifying cash flow hedges and qualifying net investment hedges or are attributable to part of the net investment in a foreign operation. Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Translation differences on assets and liabilities carried at fair value are reported as part of the fair value gain or loss. For example, translation differences on non-monetary financial assets and liabilities such as equities held at fair value through profit or loss are recognised in profit or loss as part of the fair value gain or loss and translation differences on non-monetary financial assets such as equities classified as available-for-sale financial assets are included in the fair value reserve in equity. Foreign operations The results and financial position of all Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • • • assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; income and expenses for each income statement are translated at average exchange rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and all resulting exchange differences are recognised in other comprehensive income. On consolidation, exchange differences arising from the translation of any net investment in foreign entities, and of borrowings and other financial instruments designated as hedges of such investments, are taken to shareholders' equity. (e) Revenue recognition Revenue is measured at the fair value of the consideration received or receivable. Revenue is recognised for the major business activities as follows: • • Business development revenue - Business development fees are recognised when receivable, and to the extent of costs incurred and that these costs will be recovered. Interest income - Interest income is recognised using the effective interest rate method. • Construction revenue - Construction revenue is recognised during the development phase of assets for sale to third parties. 273 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 1 Summary of significant accounting policies (continued) (f) Income tax The income tax expense or benefit for the period is the tax payable or benefit on the current period’s taxable income based on the applicable income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the Group operates and generates taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the end of the reporting period and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in foreign operations where the company is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. Current and deferred tax is recognised in the income statement, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income, or directly in equity, respectively. Investment allowances Companies within the Group may be entitled to claim special tax deductions for investments in qualifying assets (investment allowances). The Group accounts for such allowances as tax credits, which means that the allowance reduces income tax payable and current tax expense. A deferred tax asset is recognised for unclaimed tax credits that are carried forward as tax losses. (g) Leases Leases in which a significant portion of the risks and rewards of ownership are not transferred to the Group as lessee are classified as operating leases (note 21). Payments made under operating leases (net of any incentives received from the lessor) are charged to profit or loss on a straight-line basis over the period of the lease. Lease incentives are recognised as a reduction of the rental expense over the lease term on a straight-line basis. 274 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 1 Summary of significant accounting policies (continued) (h) Business combinations The acquisition method of accounting is used to account for all business combinations, including business combinations involving entities or businesses under common control, regardless of whether equity instruments or other assets are acquired. The consideration transferred for the acquisition of a subsidiary comprises the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred also includes the fair value of any contingent consideration arrangement and the fair value of any pre-existing equity interest in the subsidiary. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are, with limited exceptions, measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the Group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest's proportionate share of the acquiree's net identifiable assets. The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition date fair value of any previous equity interest in the acquiree over the fair value of the Group's share of the net identifiable assets acquired is recorded as goodwill. If those amounts are less than the fair value of the net identifiable assets of the subsidiary acquired and the measurement of all amounts has been reviewed, the difference is recognised directly in the income statement as a bargain purchase. Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the entity's incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions. Contingent consideration is classified either as equity or a financial liability. Amounts classified as a financial liability are subsequently remeasured to fair value with changes in fair value recognised in the income statement. (i) Impairment of assets At each reporting date, the Group assesses whether there is any indication that an asset may be impaired. Where an indicator of impairment exists, the Group makes an estimate of the recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount the asset is considered impaired and is written down to its recoverable amount through the income statement. The decrement in the carrying amount is recognised as an expense in the income statement in the reporting period in which the impairment occurs. Recoverable amount is the greater of fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. (j) Cash and cash equivalents For the purpose of presentation in the consolidated statement of cash flows, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to insignificant risk of changes in value, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet. 275 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 1 Summary of significant accounting policies (continued) (k) Investments and other financial assets Classification The Group classifies its investments and other financial assets in the following categories: financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments and available -for-sale financial assets. The classification depends on the purpose for which the investments were acquired. The classification of the Group's investments at initial recognition and, in the case of assets classified as held-to-maturity, is re-evaluated at each reporting period. Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term. Derivatives are classified as held for trading unless they are designated as hedges. Assets in this category are classified as current assets. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for those with maturities greater than 12 months after the reporting period which are classified as non-current assets. Loans and receivables are included in trade and other receivables (note 8) in the balance sheet. Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less allowance for impairment. Trade receivables are due for settlement no more than 30 days from the date of revenue recognition. Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off by reducing the carrying amount directly. An impairment allowance account (provision for impairment of trade receivables) is used when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. The amount of the impairment allowance is the difference between the asset’s carrying amount and the present value of estimated future cash flows. The amount of the impairment allowance is recognised in the income statement. Recognition and derecognition Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognised at fair value and transaction costs are expensed in the income statement. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership. When securities classified as available-for-sale are sold, the accumulated fair value adjustments recognised in equity are included in the income statement as gains and losses from investment securities. Subsequent Measurement Loans and receivables and held-to-maturity investments are carried at amortised cost using the effective interest method. Financial assets at fair value through profit and loss are subsequently carried at fair value. Gains or losses arising from changes in the fair value of the 'financial assets at fair value through profit or loss' category are presented in the income statement within other income or other expenses in the period in which they arise. Dividend income from financial assets at fair value through profit and loss is recognised in the income statement as part of revenue from continuing operations when the Group's right to receive payments is established. 276 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 1 Summary of significant accounting policies (continued) (k) Investments and other financial assets (continued) Impairment The Group assesses at each balance date whether there is objective evidence that a financial asset or group of financial assets is impaired. In the case of equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of a security below its cost is considered an indicator that the securities are impaired. If any such evidence exists for available-for-sale, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in the profit or loss - is reclassified from equity and recognised in the income statement as a reclassification adjustment. Impairment losses recognised in the income statement on equity instruments classified as available-for-sale are not reversed through the income statement. (l) Property, plant and equipment Property, plant and equipment is stated at historical cost less accumulated depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Costs incurred on development projects (including computer software and hardware) are recognised as an asset when it is probable that the project will, after considering its commercial and technical feasibility, be completed and generate future economic benefits and its costs can be reliably measured. The expenditure capitalised comprises all directly attributable costs, including costs of materials, services, direct labour and an appropriate proportion of overheads. Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. The carrying amount of any component accounted for as a separate asset is derecognised when replaced. All other repairs and maintenance are charged to profit or loss during the reporting period in which they are incurred. Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the income statement. Depreciation Depreciation is calculated on a straight line basis so as to write-off the net costs of items of plant and equipment over their expected useful lives. Estimates of remaining useful lives will be made annually for all assets. The expected useful lives are 3 - 15 years. Impairment Fixed assets are assessed for impairment in line with the policy stated in note 1(i). (m) Financial liabilities Trade and other payables Trade and other payables represent liabilities for goods and services provided to the Group prior to the end of the financial year and which are unpaid. The amounts are unsecured and are usually paid within 30 days of recognition. (n) Borrowings Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. 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. Fees paid on the establishment of loan facilities, are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a prepayment for liquidity services and amortised over the period of the facility to which it relates. Borrowings are removed from the balance sheet when the obligation specified in the contract is discharged, cancelled or expired. The difference between the carrying amount of a financial liability that has been extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognised in finance income or finance costs. 277 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 1 Summary of significant accounting policies (continued) (n) Borrowings (continued) Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting period. (o) 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 specifically identifiable borrowing costs are capitalised into the cost of the asset. Borrowing costs include interest on short-term and long term borrowings. Costs incurred in connection with the arrangement of borrowings are deferred and amortised over the effective period of the funding. (p) Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. Provisions are not recognised for future operating losses. Provisions are discounted at the present value of management’s best estimate of the expenditure required to settle the present obligation at the reporting date. The discount rate used to determine the present value reflects current market assessments of the time value of money and the risks specific to the liability. The increase in the provision is due to the discount unwinding over the passage of time and is recognised as a finance cost. (q) Employee benefits Short-term obligations Liabilities for wages and salaries, including non-monetary benefits, annual leave and short-term incentives, and long service leave expected to be settled within 12 months after the end of the period are recognised in respect of employees' services up to the reporting date. They are measured at the amounts expected to be paid when the liabilities are settled. The liability for annual leave and short-term incentives, and long service leave expected to be settled within 12 months of the reporting date is recognised in the provision for employee benefits. All other short-term employee benefit obligations are presented in payables. An expense for non-accumulating sick leave is recognised when the leave is taken and measured at the rates paid or payable. Long-term employee benefit obligations The liability for long service leave which is not expected to be settled within 12 months after the end of the period is recognised in the provision for employee benefits. It is 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 wage and salary levels, experience of employee departures 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. Equity-based compensation benefits Equity-based compensation benefits have been provided to some employees. The fair value of units granted under the plans are recognised as an employee benefit expense with a corresponding increase in equity. The fair value is measured at grant date and recognised over the period during which the employees become unconditionally entitled to the units. The fair value of units granted under cash settled share-based compensation plans is recognised as an expense over the vesting period with a corresponding increase in liabilities. The fair value of the liability is remeasured at each reporting date with any changes in fair value recognised in the income statement for the period. 278 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 1 Summary of significant accounting policies (continued) (q) Employee benefits (continued) Equity-based compensation benefits (continued) The fair value at grant date is independently determined using a Black-Scholes option pricing model that takes into account the exercise price, the term, the impact of dilution, the security price at grant date and expected price volatility of the underlying security, the expected dividend yield and the risk free interest rate for the term of the plan. The fair value granted is adjusted to reflect the market vesting conditions, but excludes the impact of any non-market vesting conditions (for example, profitability and growth targets). Non-market vesting conditions are included in assumptions about the number of units that are expected to become exercisable. At each reporting date, the Group revises its estimate of the number of units that are expected to become exercisable. The employee benefit expense recognised each reporting period takes into account the most recent estimate. The impact of the revision to original estimates, if any, is recognised in the income statement with a corresponding adjustment to equity. 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 income statement. Termination benefits Termination benefits are payable when employment is terminated before the normal retirement date, or when an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits when it is demonstrably committed to either terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal or providing termination benefits as a result of an offer made to encourage voluntary redundancy. (r) Contributed equity Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a reduction, net of tax, from the proceeds. If the Group reacquires its own equity shares, those shares are deducted from equity. No gain or loss is recognised in the profit or loss and the consideration paid including any directly attributable incremental costs (net of income taxes) is recognised directly in equity. (s) Parent entity financial information The financial information for the parent entity, Transurban International Limited, disclosed in note 24 has been prepared on the same basis as the consolidated financial statements, except as set out below. Investments in subsidiaries and associates Investments in subsidiaries and associates are accounted for at cost in the financial statements of Transurban International Limited. Dividends received from associates are recognised in the parent entity's profit or loss, rather than being deducted from the carrying amount of these investments. (t) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case it is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the consolidated balance sheet. 279 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 1 Summary of significant accounting policies (continued) (t) Goods and Services Tax (GST) (continued) Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the taxation authority, are presented as operating cash flows. (u) Net asset deficiency As at 30 June 2012 the Group has a net asset deficiency represented by net liabilities of $234.7 million. This deficiency reflects a number of specific factors primarily related to an intercompany loan payable with another entity within the Transurban Group. (v) New accounting standards and interpretations Certain new accounting standards and interpretations have been published that are not mandatory for 30 June 2012 reporting periods. The Groups assessment of the impact of these new standards and interpretations is set out below. (i) AASB 9 Financial Instruments, AASB 2009-11 Amendments to Australian Accounting Standards arising from AASB 9 and AASB 2010-7 Amendments to Australian Accounting Standards arising from AASB 9 (December 2010) (effective from 1 January 2013*) AASB 9 Financial Instruments addresses the classification, measurement and derecognition of financial assets and financial liabilities. The standard is not applicable until 1 January 2013* but is available for early adoption. Management are in the process of assessing the impact on financial assets but do not believe this will be significant. There will be no impact on the Group's accounting for financial liabilities, as the new requirements only affect the accounting for financial liabilities that are designated at fair value through profit or loss and the Company does not have any such liabilities. The Group has not yet decided when to adopt AASB 9. * In December 2011, the IASB delayed the application date of IFRS 9 to 1 January 2015. The AASB is expected to make an equivalent amendment to AASB 9 shortly. (ii) AASB 10 Consolidated Financial Statements, AASB 11 Joint Arrangements, AASB 12 Disclosure of Interests in Other Entities, revised AASB 127 Separate Financial Statements and AASB 128 Investments in Associates and Joint Ventures and AASB 2011-7 Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements Standards (effective 1 January 2013) In August 2011, the AASB issued a suite of five new and amended standards which address the accounting for joint arrangements, consolidated financial statements and associated disclosures. AASB 10 replaces all of the guidance on control and consolidation in AASB 127 Consolidated and Separate Financial Statements, and Interpretation 112 Consolidation - Special Purpose Entities. The core principle that a consolidated entity presents a parent and its subsidiaries as if they are a single economic entity remains unchanged, as do the mechanics of consolidation. However the standard introduces a single definition of control that applies to all entities. It focuses on the need to have both power and rights or exposure to variable returns before control is present. Power is the current ability to direct the activities that significantly influence returns. Returns must vary and can be positive, negative or both. Management are currently assessing the impact but do not believe it will be significant. AASB 11 introduces a principles based approach to accounting for joint arrangements. The focus is no longer on the legal structure of joint arrangements, but rather on how rights and obligations are shared by the parties to the joint arrangement. AASB 11 also provides guidance for parties that participate in joint arrangements but do not share joint control. This will not impact the Group as it does not have any such arrangements. AASB 12 sets out the required disclosures for entities reporting under the two new standards, AASB 10 and AASB 11, and replaces the disclosure requirements currently found in AASB 127 and AASB 128. Application of this standard by the Group will not affect any of the amounts recognised in the financial statements, but will impact the type of information disclosed in relation to the Group's investments. 280 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 1 Summary of significant accounting policies (continued) (v) New accounting standards and interpretations (continued) (ii) AASB 10 Consolidated Financial Statements, AASB 11 Joint Arrangements, AASB 12 Disclosure of Interests in Other Entities, revised AASB 127 Separate Financial Statements and AASB 128 Investments in Associates and Joint Ventures and AASB 2011-7 Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements Standards (effective 1 January 2013) Amendments to AASB 128 provide clarification that an entity continues to apply the equity method and does not remeasure its retained interest as part of ownership changes where a joint venture becomes an associate, and vice versa. The amendments also introduce a 'partial disposal' concept. The Group is still assessing the impact of these amendments. The Group does not expect to adopt the new standards before their operative date. (iii) AASB 1053 Application of Tiers of Australian Accounting Standards and AASB 2010-2 Amendments to Australian Accounting Standards arising from Reduced Disclosure Requirements (effective from 1 July 2013) On 30 June 2010 the AASB officially introduced a revised differential reporting framework in Australia. Under this framework, a two-tier differential reporting regime applies to all entities that prepare general purpose financial statements. Transurban International Limited is listed on the ASX and is therefore not eligible to adopt the new Australian Accounting Standards - Reduced Disclosure Requirements. The two standards will have no impact on the financial statements of the Group. (iv) AASB 13 Fair Value Measurement and AASB 2011-8 Amendments to Australian Accounting Standards arising from AASB 13 (effective 1 January 2013) AASB 13 was released in September 2011. It explains how to measure fair value and aims to enhance fair value disclosures. The Group has yet to determine which, if any, of its current measurement techniques will have to change as a result of the new guidance. It is therefore not possible to state the impact, if any, of the new rules on any of the amounts recognised in the financial statements. However, application of the new standard will impact the type of information disclosed in the notes to the consolidated financial statements. The Group does not intend to adopt the new standard before its operative date. (v) AASB 2011-9 Amendments to Australian Accounting Standards - Presentation of Items of Other Comprehensive Income (effective 1 July 2012) In September 2011, the AASB made an amendment to AASB 101 Presentation of Financial Statements which requires entities to separate items presented in other comprehensive income into two groups, based on whether they may be recycled to profit or loss in the future. This will not affect the measurement of any of the items recognised in the balance sheet or the profit or loss in the current period. The Group intends to adopt the new standard from 1 July 2012. (vi) AASB 2011-4 Amendments to Australian Accounting Standards to Remove Individual Key Management Personnel Disclosure Requirements (effective 1 July 2013) In July 2011 the AASB decided to remove the individual key management personnel (KMP) disclosure requirements from AASB 124 Related Party Disclosures, to achieve consistency with the international equivalent standard and remove a duplication of the requirements with the Corporations Act 2001. While this will reduce the disclosures that are currently required in the notes to the financial statements, it will not affect any of the amounts recognised in the financial statements. The amendments apply from 1 July 2013 and cannot be adopted early. The Corporations Act requirements in relation to remuneration reports will remain unchanged for now, but these requirements are currently subject to review and may also be revised in the near future. 281 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 2 Segment information Description of segments The Group operates in one business sector only, being the development, operation and maintenance of toll roads. The CEO and Executive Committee therefore consider the business from the perspective of locations. The Group's corporate function is not an operating segment under the requirements of AASB 8 as its revenue generating activities are only incidental to the business. Management have aggregated and disclosed the corporate business units as the contribution to the business is closely monitored. The operating segments have been further broken down by asset to assist with external analysis of the financial statements. Segment information - Proportional Income Statement The CEO and Executive Committee assess the performance of the operating segments based on a measure of proportional EBITDA. EBITDA excludes the impact of interest income and expense which have been presented by segment where applicable. Interest income and expense are allocated across segments where the charges are related specifically to the assets. Otherwise they have been allocated to the Corporate function. The segment information provided to the Executive Committee is presented on a proportional basis. The information for the reportable segments for the year ended 30 June 2012 and 30 June 2011 is as follows: 30 June 2012 $'000 Toll revenue from external customers Fee and other revenue Total revenue Underlying proportional EBITDA Proportional EBITDA Interest revenue Interest expense Depreciation and amortisation Impairment of assets Proportional profit (loss) before tax Income tax benefit (expense) Proportional net profit (loss) Pocahontas 895 75.0% Transurban DRIVe Other Transurban DRIVe 75.0% Capital Beltway 67.5% Total Transurban DRIVe Corporate Total 100.0% 10,750 105 10,855 6,981 6,981 - - - - - - - - (3,955) (3,955) 10,750 105 10,855 3,026 3,026 - 20,882 20,882 10,750 20,987 31,737 664 664 3,690 3,690 3 (19,499) (15,755) (302,490) 1,501 - - - - - - - 1,504 (19,499) (15,755) (302,490) - (14,210) (592) - 1,504 (33,709) (16,347) (302,490) (330,760) 1,501 (3,955) (333,214) (14,138) (347,352) 73,959 (256,801) 245,946 - 1,501 (1,501) 2,972 (983) 983 76,931 (256,283) 245,428 (49) (14,187) (6,695) 76,882 (270,470) 238,733 282 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 2 Segment information (continued) Segment information - Proportional Income Statement (continued) 30 June 2011 $'000 Pocahontas 895 75.0% Capital Beltway 67.5% Transurban DRIVe Other Transurban DRIVe Corporate Total Total Transurban DRIVe 75.0% 100.0% Toll revenue from external customers Fee and other revenue Total revenue Underlying proportional EBITDA Proportional EBITDA Interest revenue Interest expense Depreciation and amortisation Foreign exchange gain (loss) Proportional profit (loss) before tax Income tax benefit (expense) Proportional net profit (loss) 10,818 19 10,837 6,321 6,321 59 (18,775) (9,194) - (21,589) 10,097 (11,492) - - - - - 1,595 - - - 1,595 - 1,595 - - - (4,114) (4,114) - - - - (4,114) (3,774) (7,888) 10,818 19 10,837 2,207 2,207 1,654 (18,775) (9,194) - (24,108) - 7,555 7,555 10,818 7,574 18,392 (2,324) (2,324) (117) (117) - (12,524) (140) (744) (15,732) 1,654 (31,299) (9,334) (744) (39,840) 6,323 (17,785) 5,069 (10,663) 11,392 (28,448) Other segment information - Proportional income statement Proportional basis of presenting results The Executive Committee and the CEO receive information for assessing the business on an underlying proportional basis reflecting the contribution of individual assets in the proportion of Transurban's equity ownership. The Group's proportional EBITDA result reflects business performance and permits a more appropriate and meaningful analysis of the Group's underlying performance on a comparative basis. This method of presentation differs from the statutory accounting format and has been reconciled below. EBITDA is earnings before interest, taxation, depreciation and amortisation. Segment revenue Revenue from external customers is through toll and fee revenues earned on toll roads. There are no inter-segment revenues. Segment revenue reconciles to total statutory revenue as follows: 30 June 2012 $'000 30 June 2011 $'000 Total segment revenue (proportional) Less: Revenue of non-controlled assets Interest revenue Business Development revenue (offset against Business Development costs for proportional results) Other Total revenue (note 3) 31,737 (12,359) 1,504 19,550 174 40,606 18,392 (12,491) 1,654 16,255 461 24,271 283 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 2 Segment information (continued) Other segment information - Proportional income statement (continued) Interest revenue Interest revenue is earned through bank interest revenue. Interest revenue reconciles to total statutory finance income as follows: Total segment interest revenue (proportional) Less: Interest revenue of non-controlled assets Total finance income Proportional EBITDA Proportional EBITDA reconciles to statutory net loss for the year as follows: Proportional EBITDA Less: Proportional EBITDA of Pocahontas Less: Proportional EBITDA of DRIVe Statutory profit (loss) before depreciation and amortisation, net finance costs, equity accounted investments and tax Net finance costs Statutory depreciation and amortisation Share of associates profit/(loss) Income tax (expense)/benefit Loss for the year 30 June 2012 $'000 30 June 2011 $'000 1,504 (1,504) - 1,654 (1,654) - 30 June 2012 $'000 30 June 2011 $'000 3,690 (6,981) 3,955 664 (14,211) (592) (213,338) (49) (227,526) (117) (6,321) 4,114 (2,324) (13,268) (140) (17,785) 5,069 (28,448) 284 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 2 Segment information (continued) Segment information - Segment assets The segment information provided to the CEO and Executive Committee in respect of assets is presented on a statutory consolidated basis. The information for the reportable segments for the periods ended 30 June 2012 and 30 June 2011 is as follows: 30 June 2012 Total segment assets Total segment assets include: Investment in associates and joint venture partnerships Additions to non-current assets (other than financial assets and deferred tax) 30 June 2011 Transurban DRIVe $'000 Corporate $'000 Total $'000 - - - 34,097 34,097 - 677 - 677 Transurban DRIVe $'000 Corporate $'000 Total $'000 Total segment assets 212,197 26,787 238,984 Total segment assets include: Investments in associates and joint venture partnerships Additions to non-current assets (other than financial assets and deferred tax) 212,197 - 212,197 - 560 560 285 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) Notes 3(a) 3(b) 30 June 2012 $'000 30 June 2011 $'000 20,723 19,883 40,606 7,356 16,915 24,271 3 Revenue Construction revenue Management and Business development revenue Total Revenue (a) Construction revenue Construction revenue is recognised during the development of assets for sale to third parties. (b) Management and Business development revenue Business development revenue relates to the provision of management and development services to third parties. 4 Expenses 30 June 2012 $'000 30 June 2011 $'000 Loss before income tax includes the following specific expenses: Employee benefits expense Rental expense 10,269 635 11,451 756 286 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 5 Finance costs Finance costs Interest and finance charges paid/payable Foreign exchange losses Total finance costs Finance costs 6 Income tax benefit Income tax benefit Current tax Deferred tax Under/(over) provided in prior years Deferred income tax (benefit) expense included in income tax benefit comprises: Decrease (Increase) in deferred tax assets (note 11) (Decrease) Increase in deferred tax liabilities (note 11) Numerical reconciliation of income tax benefit to prima facie tax payable Loss before income tax benefit Tax at the Australian tax rate of 30.0% (2011 - 30.0%) Tax effect of amounts which are not deductible (taxable) in calculating taxable income: Non-deductible interest Tax differential Share of equity accounted results Income not subject to tax Sundry items Under/(over) provision in prior years Income tax expense (benefit) 287 TRANSURBAN ANNUAL REPORT 2012 30 June 2012 $'000 30 June 2011 $'000 (14,211) - (14,211) (12,524) (744) (13,268) (14,211) (13,268) 30 June 2012 $'000 30 June 2011 $'000 (703) 1,178 (426) 49 6,891 (5,713) 1,178 1,435 (6,784) 280 (5,069) (9,847) 3,063 (6,784) 30 June 2012 $'000 30 June 2011 $'000 (227,477) (68,243) (33,517) (10,055) 3,810 58 64,001 - 849 (426) 49 - (1,372) 5,335 146 597 280 (5,069) 227,428 38,586 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 7 Current assets - Cash and cash equivalents Cash at bank and in hand All cash balances are interest bearing. 8 Current assets - Trade and other receivables Loans to related parties Other receivables Prepayments 30 June 2012 $'000 30 June 2011 $'000 9,186 9,186 6,574 6,574 30 June 2012 $'000 30 June 2011 $'000 4,377 5,486 26 9,889 3,864 2,456 25 6,345 No class within trade and other receivables contain impaired or passed due assets. Based on the credit history, it is expected that these amounts will be received when due. The Group does not hold any collateral in relation to these receivables. 288 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 9 Equity accounted investments Ownership interest Carrying amount 30 June 2012 % 30 June 2011 % 30 June 2012 $'000 30 June 2011 $'000 Transurban DRIVe Holdings LLC 75 75 - - 212,197 212,197 Summarised financial information of equity accounted investments Ownership Interest % Assets $'000 Liabilities $'000 Revenues $'000 Loss $'000 Group's share of: 2012 Transurban DRIVe Holdings LLC 2011 Transurban DRIVe Holdings LLC 75 75 1,344,261 1,344,261 (1,374,961) (1,374,961) 10,855 10,855 (249,269) (249,269) 1,371,454 1,371,454 (1,159,257) (1,159,257) 10,837 10,837 (17,785) (17,785) 289 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 9 Equity accounted investments (continued) Movements in carrying amounts Carrying amount 1 July Investments in associates Share of (losses) after income tax Movements in exchange rates Movements in reserves Carrying amount at 30 June Share of profits or losses Loss before income tax Income tax benefit Share of losses not recognised Balance at 1 July Unrecognised losses for the year Balance at 30 June Share of expenditure commitments Capital commitments Operating commitments Contingent liabilities of associates As at the reporting date there are no contingent liabilities. DRIVe 30 June 2012 $'000 30 June 2011 $'000 212,197 17,586 (213,338) 23,551 (39,996) - 242,321 28,103 (17,785) (51,869) 11,427 212,197 (279,007) 65,669 (213,338) (24,108) 6,323 (17,785) - 35,931 35,931 64,387 186,554 250,941 - - - 325,835 143,657 469,492 290 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 9 Equity accounted investments (continued) Transurban DRIVe Holdings LLC The Group owns 75 per cent of Transurban DRIVe Holdings LLC (DRIVe). Whilst its ownership represents greater than half of the voting rights of DRIVe, it does not have power to govern its financial, investing and operating policies and accordingly accounts for DRIVe as an associate. A Meeting of Members of DRIVe is required to make decisions in relation to such areas as the legal and financial structure of DRIVe, including distribution policies. 80 per cent or more of the membership interests of those voting is required to pass a decision of the Meeting of Members. Key decisions relating to the operations and financing of DRIVe, such as approval to bid for or dispose of an investment and approval of budgets, are made by the Investment and Management Review Committee (IMRC). IMRC decisions also require an affirmative vote by all current members. DRIVe owns 100 per cent of Pocahontas 895 and 90 per cent of Capital Beltway Express, both in Virginia, USA. Pocahontas is a 99 year concession ending in June 2105. Tolls are escalated according to a prescribed schedule until 2016, and the greater of CPI, real GDP or 2.8 per cent thereafter. Capital Beltway Express is currently in construction phase and is scheduled to open in late 2012, and will have a 75 year concession period. In June 2012, after a detailed review of traffic operating forecasts for Pocahontas 895, it was necessary to reduce the carrying value of the asset based on revised lower revenue forecasts. This resulted in a proportional impairment charge of $302.5 (see note 2) and an equity accounting charge for the year ended 30 June 2012 of $213.3 million within the Group. As noted there are further additional unrecognised losses of $35.9 million. 291 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 10 Non-current assets - Property, plant and equipment At 1 July 2010 Cost Accumulated depreciation Net book amount Year ended 30 June 2011 Opening net book amount Additions Depreciation charge Movement in foreign exchange rates Closing net book amount At 30 June 2011 Cost Accumulated depreciation Net book amount Year ended 30 June 2012 Opening net book amount Additions Disposals Depreciation charge Movement in foreign exchange rates Closing net book amount At 30 June 2012 Cost Accumulated depreciation Net book amount Included in property, plant and equipment is operating systems, equipment and fittings. Equipment, fittings, operating systems $'000 4,712 (4,031) 681 681 560 (140) (132) 969 4,276 (3,307) 969 969 1,600 (3) (592) 35 2,009 5,608 (3,599) 2,009 292 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 11 Deferred tax assets and liabilities Assets Liabilities Net 30 June 2012 $'000 30 June 2011 $'000 30 June 2012 $'000 30 June 2011 $'000 30 June 2012 $'000 30 June 2011 $'000 621 1,251 2,638 8,014 - 67 12,591 (40) 12,551 219 1,038 - 14,577 - 2,818 18,652 (5,753) 12,899 - - - - (40) - (40) 40 - - - - - (5,753) - (5,753) 5,753 - 621 1,251 2,638 8,014 (40) 67 12,551 - 12,551 219 1,038 - 14,577 (5,753) 2,818 12,899 - 12,899 The balance comprises temporary difference attribulate to: Accrued expenses Provisions Current and prior year losses Unearned income Fixed Assets/Intangibles Unrealised foreign exchange Tax assets/(liabilities) Set off of tax Net tax assets/(liabilities) Movements: Opening balance at 1 July Credited/(charged) to the income statement Foreign exchange movements Closing balance 30 June Deferred tax assets/(liabilities) to be recovered after more than 12 months 18,652 (6,891) 830 12,591 12,051 9,847 (3,246) 18,652 (5,753) 5,713 - (40) (3,436) (3,063) 746 (5,753) 12,899 (1,178) 830 12,551 8,615 6,784 (2,500) 12,899 12,591 12,591 (18,652) (18,652) (40) (40) 5,753 5,753 12,551 12,551 (12,899) (12,899) 12 Current liabilities - Trade and other payables Trade payables and accruals Loans from related parties (note 22) 30 June 2012 $'000 30 June 2011 $'000 6,008 245,341 251,349 4,960 196,761 201,721 293 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) Notes 13(a) 13(b) 30 June 2012 $'000 30 June 2011 $'000 3,207 1,560 4,767 3,165 1,738 4,903 13 Provisions Employee benefits Onerous lease provision Movements in provisions Movements in each class of provision during the financial year, other than employee benefits, are set out below: Onerous lease provision $'000 1,738 (271) 93 1,560 Consolidated - 2012 Carrying amount at start of year Amounts paid/utilised during the year Movements in foreign exchange rates Carrying amount at the end of year (a) Employee benefits Employee benefits relate to the provision for annual leave, bonuses and long service leave. (b) Onerous lease provision An onerous lease is recognised when the Group has lease commitments on property no longer used. 14 Current liabilities - Other current liabilities Unearned income (a) Unearned income Notes 14(a) 30 June 2012 $'000 30 June 2011 $'000 12,678 12,678 13,581 13,581 Unearned income represents amounts received in advance and will be recognised when the income is earned. 294 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 15 Contributed equity Share capital 2012 Number '000 2011 Number '000 30 June 2012 $'000 30 June 2011 $'000 Ordinary shares - fully paid 1,458,321 1,458,321 1,443,193 1,443,193 205,065 205,065 201,661 201,661 Movements in ordinary share capital Details Opening balance at 1 July 2010 Distribution Reinvestment Plan Purchase, disposal and vesting of treasury securities Closing balance at 30 June 2011 Opening balance at 1 July 2011 Distribution Reinvestment Plan Disposal and vesting of treasury securities Transfer vesting portion of LTI from share-based payment reserve Purchase of Performance Awards Plan shares Closing balance at 30 June 2012 Notes 15(a) 15(b) 15(a) 15(b) Number of securities '000 $'000 1,414,295 28,876 22 1,443,193 1,443,193 14,162 351 615 - 1,458,321 192,977 8,719 (35) 201,661 201,661 3,040 207 517 (360) 205,065 (a) Distribution Reinvestment Plan The Transurban Group has established a distribution reinvestment plan under which holders of stapled securities may elect to have all or part of their distribution entitlements satisfied by the issue of new stapled securities rather than by cash. (b) Treasury securities Stapled securities were issued to Transurban Group executives under the share-based payment plans. The securities are held by the executive but will only vest in the executive in accordance with the terms of the plans. The acquired securities cannot be transferred or sold prior to vesting date. On forfeit, the securities are sold on market. 295 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 15 Contributed equity (continued) Ordinary shares The number of shares on issue is 1,458,321,112 (2011: 1,443,543,731). The difference in the prior year of 351,075 relates to treasury securities of the Group. All shares issued are a component of stapled securities issued by the Transurban Group. Prior to June 2008, a nil value was assigned to TIL with the value being apportioned between Transurban Holdings Limited and Transurban Holding Trust. Shares 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 shares held. On a show of hands, every holder of shares present at a meeting in person or by proxy is entitled to one vote. Capital risk management The Group is subject to a gearing ratio covenant imposed by senior secured lenders. The Group monitors capital on the basis of the gearing ratio to ensure compliance with the covenant. The Group’s objective when managing capital is to safeguard its ability to continue as a going concern, so that they can continue to provide returns to security holders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may adjust the amounts of distributions paid to security holders, return capital to security holders, issue new securities or sell assets to reduce debt. 16 Reserves and accumulated losses Reserves Cash flow hedges Share-based payments Foreign currency translation Transactions with non-controlling interests Movements: Cash flow hedges Balance 1 July Movement in associate's reserve (note 9) Balance 30 June 30 June 2012 $'000 30 June 2011 $'000 (104,334) 765 40,083 (9,225) (72,711) (64,338) 1,304 27,970 (9,225) (44,289) (64,338) (39,996) (104,334) (75,765) 11,427 (64,338) 296 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 16 Reserves and accumulated losses (continued) Reserves (continued) Share-based payments Balance 1 July Employee share plan expense Transfer vesting portion of LTI to contributed equity Transfer non-vesting portion of LTI to retained earnings Balance 30 June Foreign currency translation Balance 1 July Currency translation differences arising during the year Balance 30 June Common control reserve Balance 1 July Balance 30 June Accumulated losses Balance 1 July Net (loss) for the year Transfer of non-vesting portion of LTI from shared-based payment reserve Balance 30 June 1,304 (725) 208 (22) 765 27,970 12,113 40,083 663 641 - - 1,304 34,431 (6,461) 27,970 (9,225) (9,225) (9,225) (9,225) 2012 $'000 2011 $'000 (139,547) (227,526) 22 (367,051) (111,099) (28,448) - (139,547) Nature and purpose of other reserves Cash flow hedges The cash flow hedge reserve is used to record gains or losses on a hedging instrument in a cash flow hedge that are recognised in other comprehensive income and accumulated in this reserve in equity. Amounts are reclassified to profit or loss when the associated hedged transaction affects profit and loss. Share-based payments The share-based payments reserve is used to recognise the fair value of long-term incentives issued but not exercised. Foreign currency translation Exchange differences arising on translation of the foreign controlled entities are recognised in other comprehensive income as described in note 1(d) and accumulated in this reserve in equity. Transactions with non-controlling interests The transactions with non-controlling interests arose as a result of the acquisition of Transurban (USA) Holdings Inc. and its subsidiaries Transurban (USA) Inc. and Transurban (USA) Operations Inc. from a commonly controlled Transurban Group entity (Transurban Limited). 17 Dividends No dividends were paid or declared during the year. 297 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 18 Remuneration of auditors During the year the following fees were paid or payable for services provided by the auditor of the parent entity, its related practices: Amounts received or due and receivable by PricewaterhouseCoopers Audit services Audit and review of financial reports Total remuneration for PricewaterhouseCoopers 19 Contingencies Contingent liabilities 30 June 2012 $ 30 June 2011 $ 52,000 52,000 50,000 50,000 The parent entity and the Group had contingent liabilities at 30 June 2012 in respect of: Equity guarantee Transurban DRIVe Holdings LLC (DRIVe), a related party of the Group, holds a concession agreement with The Commonwealth of Virginia to construct and operate High Occupancy Toll (HOT) lanes on the Capital Beltway (Capital Beltway project), a ring road that runs around Washington DC. The project is currently in the construction phase. Construction is expected to be complete in late 2012 and the tolling concession will operate for 75 years. On 20 December 2007 (and as amended on 12 June 2008) the Transurban Group, through the entities in the triple staple, being Transurban Holdings Limited, Transurban International Limited and Transurban Infrastructure Management Limited (as responsible entity of the Transurban Holding Trust), entered into an agreement with Capital Beltway Express LLC (Capital Beltway Express), a subsidiary of DRIVe, the Virginia Department of Transportation, Goldman Sachs Capital Markets L.P., Depfa Bank plc and Wells Fargo Bank N.A. to provide an Equity Funding Guarantee (the Guarantee) over all of DRIVe’s equity obligations associated with funding the equity contributions to the Capital Beltway project. The Group owns 75% of the equity of DRIVe and recognises this investment in the consolidated financial statements using the equity method of accounting. DRIVe holds 90 per cent of the equity in Capital Beltway Express and, from time to time, is required to make equity contributions to Capital Beltway Express to fund the equity component of the Capital Beltway project costs. The total equity contribution DRIVe is obliged to make to Capital Beltway Express is US$313,825,757, of which US$182,857,326 had been paid at balance sheet date. In accordance with the DRIVe Holdings LLC Agreement, should a DRIVe member default on any capital calls, the Transurban Group has the right to acquire their share of DRIVe at a 50 per cent discount to its fair value. As such, in the instance of the Guarantee being called, the Transurban Group may exercise its right to the interest in DRIVe at a discounted value. 298 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 19 Contingencies (continued) Contingent assets DRIVe capital sum As a part of the establishment of Transurban DRIVe, DRIVe Holdings LLC agreed to make a "capital sum" compensation payment to Transurban for contributing to DRIVe the right to negotiate the Capital Beltway and I-95. The fee is payable to Transurban if the pre-financing/pre-tax net present value of Capital Beltway or I-95 is positive as at financial close, when calculated three years after the completion of construction. Receipt of the capital sum is contingent on the projects achieving positive net present value at the strike date, and as such this amount has not been recognised on the balance sheet. Due to uncertainty associated with the amount and timing of the potential receipt, an asset has not been recognised. 20 Intra-group guarantees As at 30 June 2012 the Transurban Group comprises Transurban Holdings Limited, Transurban Holding Trust and Transurban International Limited, traded and quoted on the ASX as one triple stapled security. Under the stapling arrangement, each entity directly and/or indirectly supports each entity and its controlled entities within the group on a continual basis. 21 Commitments Capital commitments Capital expenditure contracted for at the reporting date but not recognised as liabilities is as follows: Property, plant and equipment Payable: Within one year Later than one year but not later than five years Later than five years Lease commitments Commitments in relation to leases contracted for at the reporting date but no recognised as liabilities, payable: Within one year Later than one year but not later than five years Later than five years 30 June 2012 $'000 30 June 2011 $'000 3,457 - - 3,457 10,635 2,414 - 13,049 30 June 2012 $'000 30 June 2011 $'000 932 3,371 496 4,799 952 3,416 1,138 5,506 299 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 21 Commitments (continued) Lease commitments (continued) Sub-lease payments Future minimum lease payments expected to be received in relation to non-cancellable sub-leases of operating leases 22 Related party transactions Transactions with related parties The following transactions occurred with related parties: Revenue from services provided to associate Management and Business development fees Loans to/from related parties Loans to related parties Beginning of the year Loans advanced Repayment of loans Foreign exchange movements Loans from related parties Beginning of the year Loans advanced Loans repayments Foreign exchange movements Other related parties 30 June 2012 $'000 30 June 2011 $'000 428 428 812 812 30 June 2012 $ 30 June 2011 $ 19,883,145 19,883,145 16,917,972 16,917,972 3,864,127 23,493,685 (23,164,126) 182,844 4,376,530 6,247,973 25,088,416 (26,298,488) (1,173,774) 3,864,127 196,761,369 64,326,442 (26,961,002) 11,214,513 245,341,322 223,562,646 70,515,117 (52,361,651) (44,954,743) 196,761,369 All the Directors of TIL are also Directors of Transurban Holdings Limited and Transurban Infrastructure Management Limited. Related party transactions have occurred with these Transurban Group entities and their wholly-owned subsidiaries. Ms Eve is an Associate of the Appleby law firm. During the year Transurban International Limited utilised Appleby for various legal services. These services are based on normal commercial terms. 300 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 23 Subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following principal subsidiaries in accordance with the accounting policy described in note 1(b): Name of entity incorporation Class of shares Equity holding Country of Transurban International Holdings Limited Transurban (USA) Holdings Inc Transurban (USA) Inc Transurban DRIVe Management LLC Transurban (USA) Operations Inc. Australia* USA USA USA USA Ordinary Ordinary Ordinary Ordinary Ordinary 2012 % 2011 % 100 100 100 100 100 100 100 100 100 100 * Transurban International Holdings Limited changed domicile from Bermuda to Australia on 5 January 2012. The proportion of ownership interest is equal to the proportion of voting power held. 301 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 24 Parent entity financial information Summary financial information The individual financial statements for the parent entity show the following aggregate amounts: Balance sheet Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Shareholders' equity Contributed equity Reserves Accumulated losses Profit for the year Total comprehensive income 30 June 2012 $'000 30 June 2011 $'000 184,876 172,442 1 1 184,877 172,443 - - - 61 - 61 (554,631) (517,146) 205,061 (19,471) (712) 184,877 201,658 (28,369) (905) 172,384 172 172 94 94 Contingent liabilities and guarantees of the parent entity For details of contingent liabilities and guarantees of the parent entity, refer to note 19. 25 Events occurring after the reporting period On 1 August 2012, the Group announced that financial close had been reached with the Commonwealth of Virginia to build and operate the 95 Express Lanes in northern Virginia, USA. The Group also announced that the 95 Express Lanes investment will be the final new toll road project undertaken by Transurban's co-investment vehicle, DRIVe. Transurban will continue to manage the assets owned by DRIVe. There are no other unusual matters or circumstances that have arisen since the end of the financial year that have significantly affected or may significantly affect the operations of the Group, the results of those operations or the state of affairs of the Group in subsequent financial years. 302 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 26 Reconciliation of profit after income tax to net cash inflow from operating activities Loss for the year Depreciation and amortisation Share of net losses of equity accounted investments Change in operating assets and liabilities: (Increase) decrease in prepayments (Increase) decrease in trade and other receivables Increase in related party loans Increase in trade payables and accruals (Decrease) in provisions (Decrease) increase in unearned income Movement in current taxes and deferred taxes Net cash inflow from operating activities 27 Loss per share Basic earnings per share Loss attributable to the ordinary equity holders of the company Diluted earnings per share Loss from continuing operations attributable to the ordinary equity holders of the company Reconciliation of losses used in calculating loss per share Basic and diluted earnings per share Loss for the year 30 June 2012 $'000 30 June 2011 $'000 (227,526) 592 213,338 (1) (3,030) 20,915 1,048 (136) (903) (1,068) 3,229 (28,448) 140 17,785 4 227 12,929 1,056 (1,951) 4,619 (2,385) 3,976 30 June 2012 Cents 30 June 2011 Cents (15.7) (15.7) (2.0) (2.0) 30 June 2012 Cents 30 June 2011 Cents (15.7) (15.7) (2.0) (2.0) 30 June 2012 $'000 30 June 2011 $'000 (227,526) (227,526) (28,448) (28,448) 303 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 27 Loss per share (continued) Weighted average number of shares used as denominator 30 June 2012 Number 30 June 2011 Number Weighted average number of ordinary shares used as the denominator in calculating basic and diluted loss per share 1,452,932,838 1,437,820,619 Loss per share Basic loss per share Basic loss per share is calculated by dividing the loss attributable to members of the share excluding any non-controlling interest and costs of servicing equity other than distributions, by the weighted average number of shares outstanding during the financial year. Diluted loss per share Diluted loss per share adjusts the figures used in the determination of basic loss per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of additional ordinary shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares. 304 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 28 Share-based payments The disclosure below represents the Share-based payment plans offered by the Transurban Group. Performance Awards Plan Under the Performance Awards Plan (PAP), eligible executives receive a grant of Performance Awards which entitles participants to receive securities at no cost subject to the achievement of performance conditions. The Board has discretion as to the form of the award at the end of the performance period and may grant cash payments of equivalent value at vesting. No dividends or distributions on securities are payable to participants prior to vesting. Dual performance measures (Free Cash Flow (FCF) (from 1 July 2011) or earnings before interest, tax, depreciation and amortisation (EBITDA) measure (pre 1 July 2011) and relative total security holder return (TSR) apply to Performance Awards, each representing 50 per cent of the award. The use of dual measures balances the need to both improve the underlying performance of the business over the long term as well as appropriate returns relative to the market. Performance Awards were granted with a three year vesting period. For the plan granted 11 December 2009 and future grants, the awards are tested at the end of the three year vesting period. However, for the 1 November 2008 grant, the awards were tested at the end of each year. If the performance measures were satisfied for the year, one third of the awards were preserved until the end of the three year period. At the end of the three years a cumulative test of the performance measures was applied to any unvested awards. Grant date Vesting / Expiry date Fair value at grant date ($) FCF EBITDA TSR Balance at start of the year Number Granted during the year Number Vested during the year Number Forfeited during the year Number Balance at end of the year Number 2012 1 Nov 2008 11 Dec 2009 1 Nov 2010 23 Dec 2010 26 Sep 2011 11 Nov 2011 Total 1 Nov 2011 11 Dec 2012 1 Nov 2013 1 Nov 2013 30 Jun 2014 30 Jun 2014 3.30 3.33 3.23 3.33 3.37 3.27 4.27 4.97 4.62 4.97 N/A N/A N/A N/A N/A N/A 4.63 4.81 1,260,113 1,776,583 1,401,575 684,683 - - 5,122,954 - - - - 837,990 715,024 (1,193,516) - - - - - 1,553,014 (1,193,516) (66,597) (150,589) (200,498) - (176,058) - (593,742) - 1,625,994 1,201,077 684,683 661,932 715,024 4,888,710 Weighted average exercise price $4.00 $4.02 $3.79 $3.99 $4.06 Grant date Vesting / Expiry date Fair value at grant date ($) FCF EBITDA TSR Balance at start of the year Number Granted during the year Number Vested during the year Number Forfeited during the year Number Balance at end of the year Number 2011 1 Nov 2008 11 Dec 2009 1 Nov 2010 23 Dec 2010 Total 1 Nov 2011 11 Dec 2012 1 Nov 2013 1 Nov 2013 3.30 3.33 3.23 3.33 4.27 4.97 4.62 4.97 N/A N/A N/A N/A 1,277,630 1,990,913 - - 3,268,543 - - 1,658,614 684,683 2,343,297 - - - - - (17,517) (214,330) (257,039) - (488,886) 1,260,113 1,776,583 1,401,575 684,683 5,122,954 Weighted average exercise price $4.01 $3.99 $- $4.02 $4.00 305 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 28 Share-based payments (continued) Executive Equity Plan Equity awards were granted under the Executive Equity Plan (EEP) based on executives’ performance and were designed to encourage retention of executives while focusing on business excellence. Individuals who are high performers and in business critical roles were nominated for awards for their past contribution and expected future performance. Board approval was required to grant EEP awards to nominated executives. Under the EEP, eligible executives received a grant of stapled securities in the Transurban Group (”securities”) at no cost that are subject to disposal restrictions for three years from the grant date. Participants are entitled to distributions paid on their Securities during the restriction period. If the executive ceases employment with Transurban during the restriction period, their Securities will be forfeited unless the Board decides otherwise. Awards were last made under the EEP on 1 November 2008. The table below provides details of the awards granted. Grant date 2012 1 Nov 2008 Total Expiry date Exercise price ($) Balance at start of the year Number Granted during the year Number Vested during the year Number Forfeited during the year Number Balance at end of the year Number 1 Nov 2011 4.27 433,722 433,722 - - (433,722) (433,722) - - - - Weighted average exercise price $4.27 $- $4.27 $- $- Grant date 2011 1 Nov 2008 Total Expiry date Exercise price ($) Balance at start of the year Number Granted during the year Number Vested during the year Number Forfeited during the year Number Balance at end of the year Number 1 Nov 2011 4.27 548,650 548,650 - - (72,334) (72,334) (42,594) (42,594) 433,722 433,722 Weighted average exercise price $4.27 $- $4.27 $4.27 $4.27 306 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 28 Share-based payments (continued) Performance rights plan The Performance Rights Plan (PRP) enabled eligible executives to receive a grant of Performance Rights that entitled participants to receive stapled securities in the Transurban Group (Securities) at no cost at the end of a three year performance period, subject to the achievement of performance conditions. No dividends or distributions on Securities were payable to participants prior to vesting. The Plan has two performance measures, EBITDA and relative TSR against the S&P/ASX 100 Industrials, each applied to 50 per cent of the PRP award. For US participants of the plan, they will be awarded a cash amount instead of stapled securities at the end of the three year performance period, subject to performance conditions. There is only one testing date at the end of the performance hurdles at the vesting date. Awards were last made under the PRP in November 2007. This award matured on 1 November 2010. 84.44% of awards subject to the TSR performance condition vested based on Transurban's ranking against the constituents of the S&P/ASX 100. None of the awards subject to the statutory EBITDA growth or DRIVe management fee growth conditions vested as the prescribed performance conditions were not met. Australian based plan Grant date 2011 1 Nov 2007 Total Vesting / Expiry date Fair value at grant date ($) TSR EBITDA Balance at start of the year Number Granted during the year Number Vested during the year Number Lapsed during the year Number Balance at end of the year Number 1 Nov 2010 3.50 5.96 331,594 331,594 - - (143,060) (143,060) (188,534) (188,534) - - Weighted average exercise price $4.73 $- $4.73 $4.73 $- Overseas based plan Grant date 2011 1 Nov 2007 Total Vesting / Expiry date Fair value at grant date ($) TSR DRIVe mgt fee Balance at start of the year Granted during the year Vested during the year Lapsed during the year Balance at end of the year Number Number Number Number Number 1 Nov 2010 3.50 5.96 247,561 247,561 - - (107,007) (107,007) (140,554) (140,554) - - Weighted average exercise price $4.26 $- $4.26 $4.26 $- 307 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 28 Share-based payments (continued) Performance rights plan (continued) Assessed fair value The assessed fair value at grant date of the plans above has been independently determined in accordance with AASB 2. The TSR component of the Performance Awards has been valued applying a Monte-Carlo simulation (of a geometric Brownian motion process, as used in the Black-Scholes framework) to model Transurban’s future security price and TSR performance against the comparator group performance at vesting date. The valuation model takes into account the term of the award, the security price at grant date and expected price volatility of the underlying security, the expected dividend yield and the risk free interest rate for the term of the award. The Free Cash component of performance awards has been valued using the Black Scholes framework. The model valuation takes into account the term of the award, the security price at grant date, the expected dividend yield and the risk free interest rate for the term of the award. Employee security scheme The Transurban Employee Security Ownership Plan (the Plan) provides employees with an opportunity to be a part owner of Transurban and partner in its continued success. All Australian based permanent employees are eligible to participate in either the Investment Tax Exempt Plan or the Investment Tax Deferred Plan. Under the plans, Transurban provides participants with a matching component toward the acquisition of the stapled securities. For the period 1 July 2011 to 30 June 2012, the cost of company matches was $114,459 (2011: $89,885) for the Investment Tax Exempt Plan and $391,708 (2011: $304,375) for the Investment Tax Deferred Plan. The third element under the Plan is the Incentive Plan. Subject to Board approval and the performance of the company, eligible employees may receive a certain number of Transurban securities at no cost to them. In February 2012, each participant was allocated 100 stapled securities at a value of $5.67 per security. Stapled securities provided under the Plan were acquired on the open market. Eligible US based participants received an equivalent cash award. 2012 Number 2011 Number Shares purchased on the market under the plan and provided to participating employees 42,200 42,200 308 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 29 Key management personnel disclosures Directors The following persons were Directors of Transurban International Limited during the financial year: Executive Directors Christopher Lynch Scott Charlton (Resigned 16 July 2012) (Appointed 16 July 2012) Non-executive Directors Lindsay Maxsted Neil Chatfield Robert Edgar Samantha Mostyn Robert Officer Christine O'Reilly Rodney Slater Ian Smith Jennifer Eve James Keyes (Chairman) (Appointed 5 January 2012) (Appointed 5 January 2012) (Appointed 5 January 2012) (Appointed 5 January 2012) (Appointed 12 April 2012) (Appointed 5 January 2012) (Appointed 5 January 2012) (Resigned 5 January 2012) (Resigned 5 January 2012) Other key management personnel The following persons also had authority and responsibility for planning, directing and controlling the activities of the Group, directly or indirectly, during the financial year: K Daley A Head S Hogg* T Honan* M Kulper E Mildwater President, International Development Group General Manager, New South Wales Chief Financial Officer Chief Financial Officer President, Transurban North America Group General Manager, Victoria (*) - On 2 May 2012, Tom Honan resigned as Chief Financial Officer, and Samantha Hogg was appointed as Chief Financial Officer (previously she was Group General Manager, Corporate Services). Key management personnel compensation The remuneration amounts below represent the entire amounts paid by the Transurban Group. The full amounts have been disclosed as a reasonable basis of apportionment is not available to reflect the Group's portion. Short-term employee benefits Deferred STIs Post-employment benefits Long-term benefits Termination benefits Share-based payments 30 June 2012 $ 30 June 2011 $ 12,301,143 489,289 240,351 115,725 - 4,870,066 18,016,574 12,993,024 - 326,729 87,049 1,360,993 4,135,431 18,903,226 Detailed remuneration disclosures are made in the Directors’ report. The relevant information can be found in the remuneration report in the Directors' report. 309 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 29 Key management personnel disclosures (continued) Equity instrument disclosures relating to key management personnel Share based payments Details of long-term incentives provided as remuneration and shares issued, together with terms and conditions of long-term incentives, can be found in the remuneration report in the Directors' report. Performance Awards Plan (PAP) 2012 Balance at start of the year Granted during the year as remuneration Matured and paid during the year Other changes during the year Balance at end of the year Matured and payable at the end of the year Directors of the group C Lynch 1,785,615 715,024 (458,162) (25,559) 2,016,918 Other key management personnel of the Group K Daley A Head S Hogg T Honan M Kulper E Mildwater 223,297 181,525 136,569 545,513 401,033 186,359 128,294 107,766 101,320 171,058 159,286 107,766 (63,602) (44,054) (22,027) (220,267) (137,736) (27,534) (3,549) (2,458) (1,229) (496,304) (7,686) (1,536) 284,440 242,779 214,633 - 414,897 265,055 - - - - - - - 2011 Balance at start of the year Granted during the year as remuneration Matured and paid during the year Other changes during the year Balance at end of the year Matured and payable at the end of the year Directors of the group C Lynch 1,100,932 684,683 - - 1,785,615 Other key management personnel of the Group B Bourke K Daley M Fletcher A Head S Hogg T Honan M Kulper E Mildwater 194,515 178,427 82,362 105,859 70,734 380,926 307,378 95,836 13,233 123,441 5,761 90,523 65,835 164,587 170,433 90,523 (39,204) (33,173) (4,704) (6,273) - - (32,416) - (168,544) (45,398) (83,419) (8,584) - - (44,362) - - 223,297 - 181,525 136,569 545,513 401,033 186,359 - - - - - - - - - 310 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 29 Key management personnel disclosures (continued) Equity instrument disclosures relating to key management personnel (continued) Stapled security holdings The number of Stapled Securities held during the financial year by each director of TIL and other key management personnel of the Group, including their personally-related parties, are set out below. 2012 Directors of the group L Maxsted N Chatfield R Edgar S Mostyn R Officer C O'Reilly R Slater I Smith J Eve J Keyes C Lynch Other key management personnel of the Group K Daley A Head S Hogg T Honan M Kulper E Mildwater 2011 Directors of the group L Maxsted J Eve J Keyes C Lynch Other key management personnel of the Group B Bourke K Daley M Fletcher A Head S Hogg T Honan M Kulper E Mildwater Balance at start of the year Other changes during the year Balance at end of the year 30,000 - - - - - - - - - 255,401 384,678 21,112 15,616 94,820 103,944 27,098 - 30,910 23,733 10,300 20,115 - - 70,000 - - 458,162 - (18,071) (14,063) (94,820) (23,944) 28,968 30,000 30,910 23,733 10,300 20,115 - - 70,000 - - 713,563 384,678 3,041 1,553 - 80,000 56,066 Balance at start of the year Other changes during the year Balance at end of the year 12,000 - - 254,966 460,251 384,678 34,491 23,842 15,516 93,574 103,944 25,196 18,000 - - 435 (460,251) - (34,491) (2,730) 100 1,246 - 1,902 30,000 - - 255,401 - 384,678 - 21,112 15,616 94,820 103,944 27,098 311 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 29 Key management personnel disclosures (continued) Executive Equity Plan (EEP) 2012 Balance at start of the year Granted during the year as remuneration Matured and paid during the year Other changes during the year Balance at end of the year Matured and payable at the end of the year Directors of the group C Lynch 79,647 - (79,647) Other key management personnel of the Group K Daley A Head S Hogg T Honan M Kulper E Mildwater 19,146 19,146 15,316 85,474 23,944 19,146 - - - - - - (19,146) (19,146) (15,316) (85,474) (23,944) (19,146) - - - - - - - - - - - - - - - - - - - - - 2011 Balance at start of the year Granted during the year as remuneration Matured and paid during the year Other changes during the year Balance at end of the year Matured and payable at the end of the year Directors of the group C Lynch 79,647 - - Other key management personnel of the Group B Bourke K Daley M Fletcher A Head S Hogg T Honan M Kulper E Mildwater 19,146 19,146 19,146 19,146 15,316 85,474 23,944 19,146 - - - - - - - - (19,146) - (19,146) - - - - - - - - - - - - - - 79,647 - 19,146 - 19,146 15,316 85,474 23,944 19,146 - - - - - - - - - 312 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 29 Key management personnel disclosures (continued) Performance Rights Plan (PRP) 2011 Balance at start of the year Granted during the year as remuneration Matured and paid during the year Other changes during the year Balance at end of the year Matured and payable at the end of the year Other key management personnel of the Group B Bourke K Daley M Fletcher A Head M Kulper 92,857 78,571 11,142 14,857 76,778 - - - - - (39,204) (33,173) (4,704) (6,273) (32,416) (53,653) (45,398) (6,438) (8,584) (44,362) - - - - - - - - - - Other transactions with key management personnel Ms Jennifer is an associate with Appleby. During the year Transurban utilised Appleby for various legal services. these services are based on normal commercial terms. 313 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 30 Critical accounting estimates and judgements Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that may have a financial impact on the Group and that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are disclosed below. Income taxes The Group is subject to income taxes in the USA. Significant judgment is required in determining the provision for income taxes. There are many transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain. The Group recognises liabilities for anticipated tax audit issues based on whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact current and deferred tax assets and liabilities in the period in which such determination is made. Estimated impairment of the investment of equity in DRIVe The Group tests whether the investment of equity in DRIVe has suffered any impairment, in accordance with the accounting policy stated in note 1(i). 314 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 31 Financial risk management The Group’s activities expose it to a variety of financial risks: market risk (including currency risk and interest rate risk), credit risk and liquidity risk. The financial risk management function is carried out centrally by the Transurban Group treasury team (Treasury) under policies approved by the Board. Treasury work closely with the Group's operating units to actively identify and monitor all financial risks, and put hedging in place where appropriate. The Board are informed on a regular basis of any material exposures to financial risks. Market risk Foreign exchange risk The Group operates internationally and is exposed primarily to foreign exchange risk arising from currency exposures to the Australian dollar. Foreign exchange risk arises when future commercial transactions and recognised assets and liabilities are denominated in a currency that is not the entity’s functional currency. The risk is measured using cash flow forecasting. The Group's exposure to foreign currency risk at the end of the reporting date, expressed in Australian dollar, was as follows: Receivables Payables Net exposure 30 June 2012 30 June 2011 AUD $'000 AUD $'000 363 (4,736) (4,373) 319 (2,625) (2,306) The above table is presented in the currency in which the exposure exists. The Australian dollar exposure exists in the US dollar functional currency entities. Sensitivity Based on the financial instruments held at end of the period, had the U.S. dollar strengthened/weakened by 10 cents against the Australian dollar with all other variables held constant, the Group’s post-tax loss for the year would have been $251,000 lower (2011: $146,000 lower) or $308,000 higher (2011: $182,000 higher), as a result of foreign exchange gains/losses on translation of Australian dollar denominated financial instruments as detailed in the above table. Cash flow interest rate risk The Group's main exposure to interest rate risk arises from long-term intercompany borrowings and funds on deposit. As at the reporting period, the Group had the following variable rate borrowings outstanding. An analysis of maturities is provided in liquidity risk below: 30 June 2012 30 June 2011 Weighted average interest rate % Balance $'000 Weighted average interest rate % Balance $'000 Cash and cash equivalents Net exposure to cash flow interest rate risk -% 9,186 9,186 -% 6,574 6,574 315 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 31 Financial risk management (continued) Market risk (continued) Cash flow interest rate risk (continued) Sensitivity At 30 June 2012, if interest rates had changed by +100 basis points from the year-end rates with all other variables held constant, post-tax loss for the year would have been $56,000 lower (2011: $40,000 lower). Credit risk The Group has no significant concentrations of credit risk from operating activities and has policies in place to ensure that transactions are made with commercial customers with an appropriate credit history. Treasury assesses the credit strength of potential financial counterparties using objective ratings provided by multiple independent rating agencies. Board approved limit allocation rules ensure higher limits are granted to higher rated counterparties. The Group also seeks to mitigate its total credit exposure to counterparties by only dealing with credit worthy counterparties, limiting the exposure to any one counterparty, minimising the size of the exposure where possible through netting offsetting exposures, diversifying exposures across counterparties, closely monitoring changes in total credit exposures and changes in credit status, and taking mitigating action when necessary. Liquidity risk The Group maintains sufficient cash to maintain short-term flexibility and enable the Group to meet financial commitments in a timely manner. Treasury assesses liquidity over the short term (up to 12 months) and medium term (1 - 5 years) by maintaining accurate forecasts of operating expenses, committed capital expenditure and payments to security holders. Long term liquidity requirements are reviewed as part of the annual strategic planning process. Short term liquidity is managed by maintaining a strategic liquidity reserve. This reserve is based on the Group's forecast annual operating costs and certain risk exposure scenarios as maintained by the Group's strategic risk register, and is maintained as cash. The reserve is maintained on a rolling 12 month basis. Medium term liquidity forecasting is maintained on a 5 year horizon. 316 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Notes to the consolidated financial statements 30 June 2012 (continued) 31 Financial risk management (continued) Liquidity risk (continued) Maturities of financial liabilities The tables below analyse the Group’s financial liabilities into relevant maturity groupings based on their contractual maturities. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances as the impact of discounting is not significant. Contractual maturities of financial liabilities 1 year or less Over 1 to 2 years Over 2 to 3 years Over 3 to 4 years Over 5 years Total contractual cash flows Carrying amount (assets)/ liabilities At 30 June 2012 $'000 $'000 $'000 $'000 $'000 $'000 $'000 Non-derivatives Non-interest bearing Fixed rate Total non-derivatives 10,481 255,079 265,560 - - - - - - - - - - - - 10,481 255,079 265,560 10,481 240,868 251,349 At 30 June 2011 1 year or less Over 1 to 2 years Over 2 to 3 years Over 3 to 4 years Over 5 years Total contractual cash flows Carrying amount (assets)/ liabilities $'000 $'000 $'000 $'000 $'000 $'000 $'000 Non-derivatives Non-interest bearing Fixed rate Total non-derivatives 6,882 206,335 213,217 - - - - - - - - - - - - 6,882 206,335 213,217 6,882 194,839 201,721 There is no liquidity risk exposure to the Group in the current or prior periods other than as shown above. 317 TRANSURBAN ANNUAL REPORT 2012 Transurban International Limited Directors' declaration 30 June 2012 In the Directors' opinion: (a) the financial statements and notes set out on pages 265 to 317 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 Group's financial position as at 30 June 2012 and of its performance for the year ended on that date, and (b) there are reasonable grounds to believe that the Group will be able to pay its debts as and when they become due and payable. Note 1(a) confirms that the financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. The Directors have been given the declarations by the Chief Executive Officer and Chief Financial Officer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the Directors. Lindsay Maxsted Director Scott Charlton Director Melbourne 7 August 2012 318 TRANSURBAN ANNUAL REPORT 2012 319 TRANSURBAN ANNUAL REPORT 2012 320 TRANSURBAN ANNUAL REPORT 2012 Security holder information The security holder information set out below was applicable as at 3 August 2012. Distribution of stapled securities The number of holders of stapled securities, which comprise one share in Transurban Holdings Limited, one share in Transurban International Limited and one unit in Transurban Holding Trust, was 60,535. The voting rights are one vote per stapled security. The percentage of total holdings held by or on behalf of the 20 largest holders of these securities was 80.03 per cent. The distribution of holders was as follows: Security grouping Total holders Stapled securities 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 - 999,999,999 Total 21,564 28,082 6,778 3,895 216 60,535 8,614,941 71,069,657 48,782,501 83,407,678 1,246,446,335 1,458,321,112 % of issued stapled securities 0.59 4.87 3.35 5.72 85.47 100.00 There were 4,384 holders of less than a marketable parcel of stapled securities. There were 1,458,321,112 stapled securities on issue. 20 largest holders of stapled securities Name HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED NATIONAL NOMINEES LIMITED J P MORGAN NOMINEES AUSTRALIA LIMITED CITICORP NOMINEES PTY LIMITED COGENT NOMINEES PTY LIMITED CITICORP NOMINEES PTY LIMITED AUSTRALIAN FOUNDATION INVESTMENT COMPANY LIMITED AMP LIFE LIMITED JP MORGAN NOMINEES AUSTRALIA LIMITED UBS WEALTH MANAGEMENT AUSTRALIA NOMINEES PTY LTD QUEENSLAND INVESTMENT CORPORATION RBC DEXIA INVESTOR SERVICES AUSTRALIA NOMINEES PTY LIMITED COGENT NOMINEES PTY LIMITED COGENT NOMINEES PTY LTD HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED COGENT NOMINEES PTY LIMITED DJERRIWARRH INVESTMENTS LIMITED UBS NOMINEES PTY LTD RBC DEXIA INVESTOR SERVICES AUSTRALIA NOMINEES PTY LIMITED RBC DEXIA INVESTOR SERVICES AUSTRALIA NOMINEES PTY LTD Number of stapled securities held 422,934,041 % of issued stapled securities 29.00 285,045,346 266,427,289 43,685,631 30,195,345 20,224,655 16,025,348 13,243,281 12,118,092 9,963,514 7,602,587 6,710,523 5,771,213 4,836,208 4,260,492 4,456,126 4,270,000 4,242,542 3,857,858 3,311,375 19.55 18.27 3.00 2.07 1.39 1.10 0.91 0.83 0.68 0.52 0.46 0.40 0.33 0.29 0.31 0.29 0.29 0.27 0.23 Total 1,167,021,501 80.03 Substantial holders Substantial security holders as at 3 August 2012 were as follows: Name Treasury Group Rare Infrastructure Future Fund Number of stapled securities held 123,924,947 102,126,158 98,867,357 % of issued stapled securities 8.50 7.00 6.78 321 TRANSURBAN ANNUAL REPORT 2012 322 TRANSURBAN ANNUAL REPORT 2012 323 TRANSURBAN ANNUAL REPORT 2012 324 TRANSURBAN ANNUAL REPORT 2012 eNqUirieS ANd iNforMAtioN eNqUirieS ABoUt yoUr trANSUrBAN StApLed SecUritieS The stapled securities register is maintained by Computershare Investor Services Pty Ltd. If you have a question about your Transurban securities or distributions please contact: Computershare Yarra Falls 452 Johnston Street Abbotsford Victoria 3067 Australia MAiL The Registrar Computershare Investor Services Pty Limited GPO Box 2975 Melbourne VIC 3001 Australia (Australia) 1300 555 159 (Overseas) +61 3 9415 4062 trANSUrBAN GroUp australia melbourne (head office) Level 3, 505 Little Collins Street Melbourne Victoria Phone +61 (0) 3 8656 8900 sydney Level 5, 50 Pitt Street Sydney NSW 2000 Australia united states new York 589 Eighth Avenue, 21st Floor New York, NY 10018 Phone: +1 646 278 0870 Washington dC area 6440 General Green Way Alexandria VA 22312 United States Phone: +1 571 419 6100 325 TRANSURBAN ANNUAL REPORT 2012 ANNUAL report 2012 t r A N S U r B A N A N N U A L r e p o r t 2 0 1 2 Guidance of 31¢ 29.5¢ 27¢ 24¢ 22¢ DISTRIBUTION 2009 2010 2011 2012 2013 www.transurban.com 

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