Transurban Group
Annual Report 2014

Plain-text annual report

2014 TRANSURBAN ANNUAL REPORT 2 0 1 4 T r a n s u r b a n A n n u a l R e p o r t Contents Financial Statements Transurban Holdings Limited and Controlled Entities Transurban Holding Trust and Controlled Entities Transurban International Limited and Controlled Entities Security Holder Information Corporate Governance Statement 1 149 251 359 Transurban’s 2014 Corporate Governance Statement is located at transurban.com/files/2014_Corporate_Governance_Statement.pdf 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 2014 1 2014 Transurban Annual ReportTransurban Holdings Limited ABN 86 098 143 429 Annual report - 30 June 2014 Contents Directors' report Auditor's independence declaration Financial statements Directors' declaration Independent auditor's report to the members Page 3 55 56 146 147 2 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 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 2014. 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", or the "Transurban Group" or "Transurban"), notwithstanding that none of the entities controls any of the others. The financial statements have been aggregated in recognition 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 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: Non-executive Directors Lindsay Maxsted Neil Chatfield Robert Edgar Samantha Mostyn Christine O'Reilly Rodney Slater Ian Smith Executive Director Scott Charlton Result The consolidated net profit for the year ended 30 June 2014 for the Group was $252 million (2013: $175 million). The profit attributable to ordinary equity holders of the Group was $282 million (2013: $172 million). Principal activities The principal activities of the Group during the financial year were the development, operation and maintenance of toll roads. 3 3 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) Distributions Distributions paid to the ordinary equity holders of the Group during the financial year were as follows: 2014 $M 2013 $M Distribution payable Final distribution for 2014 financial year payable and recognised as a liability: 18.0 cents (2013: 15.5 cents) per fully paid Stapled Security payable 14 August 2014 Fully franked final dividend based on tax paid at 30% - 1 cent (2013: 3.5 cents) per fully paid Stapled Security Unfranked final distribution – 14.5 cents (2013: 12.0 cents) per fully paid Stapled Security Fully franked (2013: nil) final distribution based on tax paid at 30% - 2.5 cents (2013: nil) per fully paid Stapled Security Distributions paid during the year Final distribution for 2013 financial year of 15.5 cents (2012: 15.0 cents) per fully paid Stapled Security paid 14 August 2013 Fully franked dividend based on tax paid at 30% - 3.5 cents (2012: 3.5 cents) per fully paid Stapled Security Unfranked final distribution - 12 cents (2012: 11.5 cents) per fully paid Stapled Security Interim distribution for 2014 financial year of 17.0 cents (2013: 15.5 cents) per fully paid Stapled Security paid 14 February 2014 Fully franked interim dividend based on tax paid at 30% - 3.5 cents (2013: 3.5 cents) per fully paid Stapled Security Unfranked interim distribution - 13.5 cents (2013: 12.0 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 Paid in cash Satisfied by issue of Stapled Securities 19 275 47 341 52 178 230 52 201 253 483 418 65 483 52 178 - 230 51 168 219 51 176 227 446 411 35 446 4 4 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) Operating and Financial Review – Year ended 30 June 2014 Business review Transurban manages and develops urban toll road networks in Australia and the United States of America. Transurban is listed on the Australian Securities Exchange (ASX) and has been in business since 1996. Transurban has a stake in fourteen roads in Melbourne, Sydney, Brisbane and in Virginia: Melbourne, Australia CityLink Sydney, Australia Hills M2 Lane Cove Tunnel Cross City Tunnel (concession asset acquired on 26 June 2014) Eastern Distributor (Airport Motorway Group) Westlink M7 M5 South West Brisbane, Australia (acquired on 2 July 2014) Gateway Motorway Logan Motorway CLEM7 Go Between Bridge Legacy Way (under construction) Virginia, USA Pocahontas 895 (transferred to project lenders on 14 May 2014) 495 Express Lanes 95 Express Lanes (under construction) Ownership 2014 2013 100% 100% 100% 100% 100%* 75.1% 50% 50% 62.5% 62.5% 62.5% 62.5% 62.5% 0% 94% 77.5% 100% 100% N/A 75.1% 50% 50% N/A N/A N/A N/A N/A 75% 67.5% 67.5% *On 30 December 2013, the Group gained control of the Cross City Tunnel by acquiring 100% of the senior debt exposure from Royal Bank of Scotland. Between 30 December 2013 and 26 June 2014 the Group had control, but with a nil% interest (100% non-controlling interest). The Group subsequently purchased the concession asset from the receivers and managers on 26 June 2014, holding a 100% interest thereafter. 5 5 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) Operating and Financial Review – Year ended 30 June 2014 (continued) In the year ended 30 June 2014 Transurban expanded its portfolio of assets with the acquisition of Cross City Tunnel in Sydney. Transurban also increased its interests in 495 Express Lanes and 95 Express Lanes in the US. Subsequent to year-end, a Transurban led consortium acquired Queensland Motorways in Brisbane, comprising four operating assets and the Legacy Way Tunnel which is currently under construction. Having reached agreement with the New South Wales Government in May 2013 to work together to procure the design and construction price, Transurban announced the preferred contractor for the NorthConnex project in NSW. Transurban also announced an in-principle agreement with the Victorian Government under the Government’s Unsolicited Proposals framework for a major co-ordinated upgrade to the western section of CityLink, the Bolte Bridge-West Gate Freeway interchange and the Tullamarine Freeway. In addition, Pocahontas 895 was transferred to the project lenders in May 2014 and Transurban no longer has any operational or financial interest in the asset. Business Framework and Strategy At the heart of our business strategy is our desire to be a ‘partner of choice’ for our government clients and an organisation that meets the needs of our customers. To do that, we have to provide and be part of effective transportation solutions to support the growth and well-being of our cities. At Transurban we do this through the effective management of our existing road networks, through our active involvement in the transport policy debate, and by applying our unique skills to the infrastructure challenges in our markets. In delivering on this objective our business has fostered core capabilities in the following areas:  Network planning and forecasting  Operations and customer management  Project development and delivery  Application of technology, and  Community engagement. Transurban's target markets are the eastern seaboard of Australia and Virginia in the USA, part of the Washington, DC metro area. Value drivers The investment proposition for high quality toll road assets is access to long dated, predictable, growing cash flows generated over the life of the concessions through effective management and development of the road corridors these concessions govern. The organic growth in the business, which is derived from traffic growth and inflation linked toll escalation across the portfolio of assets, is supported by effective maintenance of operations and customers. It is further enhanced by the effective application of technology in key areas including traffic management and tolling. In addition, value can be unlocked through the development of the portfolio through a range of activities including asset enhancements such as Sydney’s Hills M2 Upgrade and M5 West Widening, and new projects negotiated with governments such as the NorthConnex project in Sydney and the upgrade to the western section of CityLink in Melbourne. Financial performance Performance indicators Underlying proportional EBITDA (earnings before interest, tax, depreciation and amortisation) is the primary measure the Transurban Board uses to assess the operating performance of Transurban, with an aim to focus on operating results and associated cash generation. It reflects the contribution from individual assets to Transurban’s operating performance and permits a meaningful assessment of the underlying performance of Transurban’s assets. 6 6 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) Operating and Financial Review – Year ended 30 June 2014 (continued) To arrive at the proportional result, non-controlling interests in Transurban’s controlled roads are removed and Transurban’s interests in non-controlled assets are included, in proportion to Transurban’s ownership. Free cash is the primary measure used to assess Transurban’s cash generation. Free cash represents the cash available for distribution to security holders. Year ended 30 June 2014 Highlights Transurban’s net profit for the year ended 30 June 2014 was $252 million. Toll revenue increased by 13.1 per cent to $906 million. The increase in toll revenue was driven by traffic and toll price growth across most of the asset portfolio, most notably Hills M2 following the completion of the Hills M2 Upgrade, and on CityLink. The transfer of Pocahontas 895 to lenders resulted in a net after tax gain of $103.1 million, being Transurban’s share of the profit recognised from the write-off of loans, offset by previously unrecognised losses. Key highlights include:  Transfer of Pocahontas 895 to project lenders in May 2014  495 Express Lanes re-capitalisation  Completion of Hills M2 Upgrade in August 2013  Acquisition of Cross City Tunnel  Re-sheeting of CityLink’s Burnley and Domain tunnels in late December and early January. Subsequent to year end, on 2 July 2014, Transurban completed the acquisition of Queensland Motorways. Financial position Transurban has a market capitalisation of approximately $14.5 billion and at 30 June 2014, 1,896 million stapled securities were on issue. During the year, Transurban issued 405 million stapled securities as part of the capital raising to fund the acquisition of Queensland Motorways. Transurban’s operating assets are primarily long-life intangible assets, representing the provision by State Governments of the right to toll customers for the use of the assets. The concession assets represent 68.0 per cent of the total assets of Transurban. The duration of the asset concessions range from around 30 years to 80 years and for accounting purposes, the carrying values are amortised on a straight line basis over the duration of the concession. Transurban’s cash and cash equivalents balance at 30 June 2014 included funds raised through capital raising activities and held for the purpose of purchasing the Queensland Motorways, which was completed on 2 July 2014. Operations and performance of Transurban’s portfolio of assets – Year ended 30 June 2014 Transurban considers the primary measure of operating performance to be its underlying proportional EBITDA. To determine the proportional EBITDA, non-controlling interests are removed from the statutory result and Transurban’s interests in non-controlled assets are included in proportion to our ownership. Note 2 to the statutory accounts (Segment Information) presents the proportional result for the Transurban Group, including reconciliations to the statutory result. While management considers proportional EBITDA to be the best indicator of asset performance, interest expense and revenue, depreciation and income tax are also included in the Segment Information disclosure. Underlying traffic and toll revenue performance The following shows traffic and toll revenue performance of all operating assets for the year ended 30 June 2014. This is shown for 100 per cent of each asset. The review of costs and revenue in the commentary below also refers to 100 per cent of the asset. 7 7 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) Operating and Financial Review – Year ended 30 June 2014 (continued) Asset (and ownership %) CityLink (100%) Hills M2 (100%) Cross City Tunnel (100%) Lane Cove Tunnel / MRE (100%) M1 Eastern Distributor (75.1%) Westlink M7 (50%) Traffic growth (%) 1.6% 13.8% N/A 8.9% 2.3% 8.1% M5 South West Motorway (50%) (1.2%) Pocahontas (75%) ($’USD) N/A 495 Express Lanes (94%) ($’USD) 32.0% CityLink (Melbourne) Toll revenue 2014 $’m Toll revenue 2013 $’m Variance $’m Variance % % of proportional toll revenue $535 $193 $1 $69 $105 $231 $187 $14 $24 $496 $143 $0 $62 $100 $210 $189 $16 $7 $39 $50 $1 $7 $5 $21 ($2) ($2) $17 8.0% 34.7% N/A 12.0% 4.8% 10.2% (0.7%) (11.0%) 234.6% 47.9% 17.3% 0.1% 6.2% 7.1% 10.3% 8.4% 1.0% 1.7% CityLink had continued traffic growth on all parts of the Asset. Toll revenue increased by 7.9 per cent, driven by a 1.6 per cent increase in traffic and a 4.7 per cent increase in toll prices. Western Link performed particularly well, seeing growth of 2.1 per cent, however both sections of the Asset were mildly affected by the re-sheeting of the Domain and Burnley tunnels in late December and early January, which required the closure of those tunnels during works. Changes to the operational structure of the call centre, and a shift to electronic channels for communications led to a reduction in tolling expenses and direct employee costs. Total CityLink costs have increased by $4 million to $105 million. CityLink’s EBITDA margin continued to improve from 89.0 per cent to 90.3 per cent. Hills M2 (Sydney) The M2 Upgrade project was completed in August 2013 and resulted in a significant uplift in traffic year-on-year. The completion of the M2 Upgrade saw the majority of the Hills M2 return to normal lane configurations and operational status which contributed to overall traffic growth across the Hills M2. In addition to the M2 Upgrade, works were commenced on the maintenance of the Vimiera Road Embankment and construction of the Lane Cove Road eastbound on-ramp. Year on year traffic growth on the Hills M2 was 13.8 per cent, which included traffic growth following completion of the M2 Upgrade project. This traffic increase, in addition to the toll price increase of 19.3 per cent effected on completion of the upgrade on the asset, resulted in a toll revenue increase of $50 million. Costs on the Hills M2 increased in comparison to the previous year, however the asset’s EBITDA margin increased to 84.1 per cent. 8 8 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) Operating and Financial Review – Year ended 30 June 2014 (continued) Lane Cove Tunnel / MRE (Sydney) Lane Cove Tunnel has observed strong traffic growth during the financial year as the constraints from the ongoing upgrade works on the connecting Hills M2 Motorway dissipated following completion of the M2 Upgrade Project. Traffic growth for the tunnel was 9.6 per cent compared to the prior corresponding period, and 6.6 per cent on the Military Road e-Ramps, resulting in a $7 million increase in toll revenue in 2014. Tollaust Pty Limited (a Group company) continued to provide Operations and Maintenance services to Lane Cove Tunnel, and since April 2014 has taken on the role of Operator, using in-house resources. The EBITDA margin on Lane Cove Tunnel increased from 60.0 per cent to 73.0 per cent. Cross City Tunnel (Sydney) On 30 December 2013 Transurban acquired the senior debt exposure of the Cross City Tunnel Group which was in receivership. As a result of the debt acquisition Transurban was deemed to have gained control of the Cross City Tunnel Group and its controlled entities. The acquisition reached financial close on 26 June 2014, when Transurban purchased the Cross City Tunnel concession asset from the receivers and managers. Transurban acquired this concession for $475 million plus stamp duty and transaction costs totalling $27 million. As at the end of the financial year work was well advanced on the integration of this asset into the broader Transurban portfolio. Statewide Roads / M4 (Sydney) In the year ended 30 June 2014 Statewide Roads contributed $2 million to the Group’s EBITDA through rental income generated from service centre tenants. Statewide Roads is required to maintain the service centres and in the current year there was no significant maintenance expenditure of a capital nature. M1 Eastern Distributor (Sydney) The Eastern Distributor commenced three major capital works projects in 2014, which has resulted in elevated levels of maintenance capital expenditure on the asset: 1) New Roadside Tolling Equipment was installed during 2014 and user acceptance testing of this equipment commenced; 2) Resurfacing of the motorway, which was commenced as a part of a two year program of resurfacing works; and 3) Upgrade of the Operations Management and Control System (“OMCS”). The OMCS upgrade is scheduled for completion in 2016. On 4 November 2013, the Eastern Distributor moved to quarterly integer tolling increases (previously 50 cent increments). This has contributed to an increase in toll revenue of $5 million. M5 South West Motorway (Sydney) The motorway’s performance has been impacted in the current year by ongoing widening works. Traffic decreased compared to the prior year by 1.2 per cent, resulting in a decrease in revenue of 0.7 per cent to $187 million. Despite traffic disruption during the widening, the EBITDA margin increased from 93.1 per cent to 94.9 per cent for the year ended 30 June 2014. The M5 removed cash tolling on 1 July 2013 and now operates on fully electronic tolling. 9 9 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) Operating and Financial Review – Year ended 30 June 2014 (continued) Westlink M7 (Sydney) The performance of Westlink M7, particularly the northern section, has improved in 2014 due to the completion of the M2 Upgrade, with an increase in traffic of 8.1 per cent and an increase in revenue of $21 million to $231 million. The M7’s EBITDA margin increased from 81.0 per cent to 83.6 per cent. Pocahontas 895 (Virginia USA) Transurban transferred ownership of Pocahontas 895 to lenders on 14 May 2014 and now has no financial or operational interests in the asset. 495 Express Lanes (Virginia USA) The 495 Express Lanes traffic performance and share of corridor volume continued to increase over the year. Average workday revenue for the month of June 2014 increased 98.8 per cent over the month of June 2013. The average daily toll revenue for the year grew 105.4 per cent from the prior year. Average daily trips increased 32.0 per cent for the same period. The average dynamic toll charged increased by 56.3 per cent from US$1.51 in 2013 to US$2.36 for 2014. The maximum dynamic toll charged during the year was US$11.85 to travel the full length of the Express Lanes. On 29 May 2014, the 495 Express Lanes achieved record daily toll revenue. Free cash and cash flows from operations Free cash is calculated as: Cash flow from operations of 100 per cent owned assets and operating companies (CityLink, Hills M2, Lane Cove Tunnel / MRE, Cross City Tunnel, Statewide Roads, Roam Tolling, Tollaust and Transurban corporate); Excluding Payments for Maintenance of Intangible Assets (concession assets); Excluding Interest received from Term Loan Notes (Westlink M7 & M5 South West Motorway Investment returns captured as interest payments); Plus distributions received from non-100 per cent owned assets (M5 South West Motorway, M1 Eastern Distributor) Plus Term Loan Note repayments from Westlink M7 and M5 South West Motorway (as 50 per cent equity accounted investments) Less Provision for Maintenance of Intangible Assets and payments for e-TAGs. Free cash for the year ended 30 June 2014 was $572 million. Free cash per security was 33.9 cents. The calculation of free cash can be found at note 22 to the statutory accounts. Free cash per security was impacted in the year by the issue of new securities to fund the acquisition of Queensland Motorways. All securities issued are entitled to the full final distribution and this dilutes the free cash. The distribution of 35 cent per security is 96.9 per cent cash covered for the year. Business development activities Acquisition of Queensland Motorways In April 2014, a Transurban-led consortium (62.5 per cent Transurban, 25 per cent AustralianSuper and 12.5 per cent Tawreed, a wholly-owned subsidiary of the Abu Dhabi Investment Authority) reached agreement to acquire Queensland Motorways for $6,673 million, plus stamp duty and transaction costs totalling $447 million. Transurban will operate the network on behalf of the owners. Financial close was achieved on 2 July 2014. Acquisition of Cross City Tunnel The process to acquire Cross City Tunnel began when Transurban acquired the secured senior debt of the Cross City Tunnel Group from Royal Bank of Scotland in December 2013. Cross City Tunnel was in receivership at the time, with receivers and managers appointed to conduct a sale process. The debt acquisition gave Transurban the right to remove and appoint the receivers and managers and therefore significant rights over the relevant activities of the Cross City Tunnel entities. In May 2014, Transurban entered into an agreement with members of the Cross City Tunnel Group (subject to deeds of company arrangement) (CCT Vendors), acting by their Receivers and Managers, to acquire CCT for approximately $475 million plus stamp duty and transaction costs. Financial close was achieved on 26 June 2014. 10 10 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) Operating and Financial Review – Year ended 30 June 2014 (continued) 95 Express Lanes (Virginia USA) Construction on the project, which connects to the 495 Express Lanes, is now 85.0 per cent complete (US$594 million costs incurred to date), with the 95 Express Lanes due to open at the end of calendar year 2014. The 95 Express Lanes have a 75 year operating concession and the project represents a 29-mile extension to the 495 Express Lanes. Once complete the 95 and 495 Express Lanes network will include more than 40 miles of Express Lanes. On 11 April 2014, Transurban acquired Fluor Enterprises Inc.’s 10 per cent interest in 95 Express Lanes LLC. After this acquisition, Transurban owns 77.5 per cent of 95 Express Lanes LLC. 495 Express Lanes (Virginia USA) A review of the project was completed during the year, which resulted in downward adjustments to traffic and revenue projections. As a result, Transurban and Capital Beltway Express LLC worked with key stakeholders, including lenders, to implement changes to the capital structure to ensure it could be supported by the emerging revenue profile. On 11 April 2014, during the process to change the capital structure, Transurban acquired Fluor Enterprises Inc.’s 10 per cent interest in Capital Beltway LLC. On 4 June 2014, Capital Beltway Express LLC repaid US$433 million of debt and associated swap termination costs through US$281 million of additional equity investment from Transurban and the release of US$151 million of existing finance reserves. After this acquisition and the capital injection, Transurban owns 94 per cent of Capital Beltway Express LLC. M5 South West Motorway Widening Construction work on the M5 widening, which will expand the M5 South West Motorway from two to three lanes in each direction from King Georges Road, Beverly Hills to Camden Valley Way, Prestons, is now 80 per cent complete and is expected to be completed by December 2014. NorthConnex Having reached agreement with the New South Wales Government in May 2013 to work together to procure the design and construction price, in March 2014 Transurban announced the preferred contractor for the NorthConnex project. This project has now moved into the planning approval stage with the public display of the Environmental Impact Assessment. If approved, it is expected that work on NorthConnex would begin in 2015 with the project open for use in 2019. CityLink – Tullamarine Widening In April 2014, Transurban announced an in-principle agreement with the Victorian Government under the Government’s Unsolicited Proposals framework for a major co-ordinated upgrade to the western section of CityLink, the Bolte Bridge-West Gate Freeway interchange and the Tullamarine Freeway (“CityLink – Tulla Widening”). The project is subject to the State and Transurban reaching final agreement on terms (including scope) and documentation (expected by late 2014). Acquisition of TransLink Operations (TLO) On 1 May 2014, the Group successfully acquired TransLink Operations (“TLO”). TLO manages the CityLink Traffic Control Room as well as other key aspects of CityLink operations, including incident response. 11 11 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) Operating and Financial Review – Year ended 30 June 2014 (continued) Financing activities Transurban continued to have success in financing activities in the year ended 30 June 2014. August 2013 Refinanced $250 million corporate working capital facilities. September 2013 Replaced $60 million corporate credit facilities. October 2013 Raised Euro 500 million corporate bonds under Transurban’s existing EMTN programme. December 2013 Refinanced tranche A of Airport Motorway’s bank debt with $300 million domestic MTNs. April / May 2014 Raised A$175 million and US$93 million corporate bank facilities. June 2014 Raised A$277 million non-recourse debt on Cross City Tunnel. On 2 July 2014, the Group raised $2,900 million in non-recourse debt to fund the acquisition of Queensland Motorways, of which $2,500 million was drawn on that date. Debt maturity profiles The following charts show the Group’s current debt maturity profile. The charts show the debt in the financial year it matures and in the case of the asset level debt, the full value of the debt facilities has been shown as this is the value of debt for refinancing purposes. The debt values are shown at 30 June 2014 and Canadian dollar and US dollar debt has been converted at the hedged rate where cross currency swaps are in place. Unhedged US dollar debt has been converted to Australian dollars at spot exchange rate ($0.94 at 30 June 2014). Corporate debt maturity profile 1,000 1,000 800 900 800 133 133 206 206 700 600 500 400 n 600 o i l l i m 400 D U A 300 136 500 500 450 450 300 300 129 136 129 200 200 100 215 215 275 259 275 165 165 259 60 2017 60 2017 125 125 - 2018 2018 2015 2016 2016 254 254 722 722 233 233 219 219 2019 2019 - 2020 2020 2021 2021 172 172 - 2022 2022 - 2023 2023 2024 2024 2025 2025 2026 2026 94 94 2027 2027 - 2028 2028 A$ Notes A$ notes US Private Placement US private placement Working capital facilities Working capital facilities Syndicated facilities Syndicated facilities Letters of credit Letters of credit EMTN EMTN 12 - 0 2015 12 2014 Transurban Annual Report Operating and Financial Review – Year ended 30 June 2014 (continued) Operating and Financial Review – Year ended 30 June 2014 (continued) Operating and Financial Review – Year ended 30 June 2014 (continued) Operating and Financial Review – Year ended 30 June 2014 (continued) Asset level debt maturity profile at 30 June 2014 Asset level debt maturity profile at 30 June 2014 Asset level debt maturity profile at 30 June 2014 Asset level debt maturity profile at 30 June 2014 Transurban Holdings Limited Transurban Holdings Limited Transurban Holdings Limited Transurban Holdings Limited Directors' report Directors' report Directors' report Directors' report 30 June 2014 30 June 2014 30 June 2014 30 June 2014 (continued) (continued) (continued) (continued) 1,200 1,400 1,400 1,400 1,400 1,000 1,200 1,200 1,200 1,200 800 1,000 1,000 1,000 1,000 600 800 800 800 800 400 600 600 600 600 200 400 400 400 400 n o i l l i m n o n n n $ i l o o o l A i i i i m l l l l l l i i i m m m $ A $ $ $ A A A 7 7 2 7 4 4 - - - - 7 7 7 7 7 2 7 7 7 2 2 2 0 4 3 7 4 7 7 7 4 4 4 4 4 4 4 0 0 4 0 0 5 0 0 0 0 0 4 0 0 0 4 4 4 0 4 0 0 0 3 4 4 4 3 3 3 8 8 2 5 0 5 0 0 0 0 0 5 0 0 0 5 5 5 8 8 8 8 8 2 8 8 8 2 2 2 5 5 2 0 6 2 0 0 3 5 2 2 8 3 2 5 0 5 5 5 5 0 0 0 5 5 5 2016 - - - - 2019 - - - - - - - - - 5 5 5 5 5 2 5 5 5 2 2 2 - - - 5 2 5 5 5 2 2 2 2 2 2 2 2017 8 3 8 8 8 2 3 3 3 2 2 2 2018 0 6 0 0 0 2 6 6 6 2 2 2 - - 0 200 200 200 200 2015 - - - - 2020 2021 2022 0 0 0 0 0 3 0 0 0 3 3 3 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 - - Cross City Tunnel - - - - - - - - - - - - M1 Hills M2 8 1 3 8 1 8 8 8 3 1 1 1 3 3 3 5 2 6 5 2 5 5 5 6 2 2 2 6 6 6 8 3 2 6 6 7 7 1 8 1 2038 2033 2037 2035 2034 2036 76 76 76 76 M5 South West 2042 2043 2044 2045 2046 2047 2039 2040 2041 1 8 1 1 1 1 8 8 8 1 1 1 Westlink M7 2049 2048 8 3 8 8 8 2 3 3 3 2 2 2 - - - - - - - - - - - - Lane Cove Tunnel 495 Express Lanes TIFIA funding Cross City Tunnel M5 Cross City Tunnel Cross City Tunnel Cross City Tunnel M7 Westlink M5 M5 M5 95 Express Lanes TIFIA Funding M7 Westlink M7 Westlink M7 Westlink 495 Express Lanes TIFIA Funding 95 Express Lanes TIFIA Funding 95 Express Lanes TIFIA Funding 95 Express Lanes TIFIA Funding 495 Express Lanes Letter of Credit 495 Express Lanes TIFIA Funding 495 Express Lanes TIFIA Funding 495 Express Lanes TIFIA Funding 495 Express Lanes Letter of Credit 495 Express Lanes Letter of Credit 495 Express Lanes Letter of Credit 95 Express Lanes TIFIA funding 95 Express Lanes private activity bonds 495 Express Lanes private activity bonds 495 Express Lanes letter of credit M2 Hills Lane Cove Tunnel M2 Hills M2 Hills M2 Hills M1 Lane Cove Tunnel Lane Cove Tunnel Lane Cove Tunnel 95 Express Lanes Private Activity Bonds M1 M1 M1 495 Express Lanes Private Activity Bonds 95 Express Lanes Private Activity Bonds 95 Express Lanes Private Activity Bonds 95 Express Lanes Private Activity Bonds 495 Express Lanes Private Activity Bonds 495 Express Lanes Private Activity Bonds 495 Express Lanes Private Activity Bonds Financial risk management Financial risk management Financial risk management Financial risk management Transurban Group’s exposure to financial risk management and its policies for managing that risk can be found in Transurban Group’s exposure to financial risk management and its policies for managing that risk can be found in Transurban Group’s exposure to financial risk management and its policies for managing that risk can be found in Transurban Group’s exposure to financial risk management and its policies for managing that risk can be found in the Financial Risk Management notes of the attached accounts (note 40). That note discusses Transurban’s the Financial Risk Management notes of the attached accounts (note 40). That note discusses Transurban’s the Financial Risk Management notes of the attached accounts (note 40). That note discusses Transurban’s the Financial Risk Management notes of the attached accounts (note 40). That note discusses Transurban’s hedging policies, credit risk, interest rate risk and liquidity and funding policies. hedging policies, credit risk, interest rate risk and liquidity and funding policies. hedging policies, credit risk, interest rate risk and liquidity and funding policies. hedging policies, credit risk, interest rate risk and liquidity and funding policies. Corporate activities Corporate activities Corporate activities Corporate activities Equity entitlement offer and share placement Equity entitlement offer and share placement Equity entitlement offer and share placement Equity entitlement offer and share placement In May 2014, Transurban completed a fully underwritten accelerated renounceable entitlement offer. In May 2014, Transurban completed a fully underwritten accelerated renounceable entitlement offer. In May 2014, Transurban completed a fully underwritten accelerated renounceable entitlement offer. In May 2014, Transurban completed a fully underwritten accelerated renounceable entitlement offer. The Institutional Entitlement Offer raised gross proceeds of approximately $1.8 billion and resulted in the issue of The Institutional Entitlement Offer raised gross proceeds of approximately $1.8 billion and resulted in the issue of The Institutional Entitlement Offer raised gross proceeds of approximately $1.8 billion and resulted in the issue of The Institutional Entitlement Offer raised gross proceeds of approximately $1.8 billion and resulted in the issue of approximately 264 million new Transurban stapled securities. Entitlements not taken up by eligible institutional approximately 264 million new Transurban stapled securities. Entitlements not taken up by eligible institutional approximately 264 million new Transurban stapled securities. Entitlements not taken up by eligible institutional approximately 264 million new Transurban stapled securities. Entitlements not taken up by eligible institutional security holders and entitlements of ineligible institutional security holders were sold and cleared in the security holders and entitlements of ineligible institutional security holders were sold and cleared in the security holders and entitlements of ineligible institutional security holders were sold and cleared in the security holders and entitlements of ineligible institutional security holders were sold and cleared in the institutional shortfall book build at $7.00 per security, a $0.25 per security premium over the offer price of $6.75 institutional shortfall book build at $7.00 per security, a $0.25 per security premium over the offer price of $6.75 institutional shortfall book build at $7.00 per security, a $0.25 per security premium over the offer price of $6.75 institutional shortfall book build at $7.00 per security, a $0.25 per security premium over the offer price of $6.75 and a 2.4 per cent discount to the theoretical ex-rights price as of 23 April 2014 of $7.17 per security. and a 2.4 per cent discount to the theoretical ex-rights price as of 23 April 2014 of $7.17 per security. and a 2.4 per cent discount to the theoretical ex-rights price as of 23 April 2014 of $7.17 per security. and a 2.4 per cent discount to the theoretical ex-rights price as of 23 April 2014 of $7.17 per security. The Retail Entitlement Offer raised gross proceeds of approximately $557 million from the issue of approximately The Retail Entitlement Offer raised gross proceeds of approximately $557 million from the issue of approximately The Retail Entitlement Offer raised gross proceeds of approximately $557 million from the issue of approximately The Retail Entitlement Offer raised gross proceeds of approximately $557 million from the issue of approximately 83 million new securities at an issue price of $6.75 per security. Approximately 28.6 million of these new 83 million new securities at an issue price of $6.75 per security. Approximately 28.6 million of these new 83 million new securities at an issue price of $6.75 per security. Approximately 28.6 million of these new 83 million new securities at an issue price of $6.75 per security. Approximately 28.6 million of these new securities were sold in the bookbuild at a price of $7.21 per security, a $0.46 per security premium over the issue securities were sold in the bookbuild at a price of $7.21 per security, a $0.46 per security premium over the issue securities were sold in the bookbuild at a price of $7.21 per security, a $0.46 per security premium over the issue securities were sold in the bookbuild at a price of $7.21 per security, a $0.46 per security premium over the issue price of $6.75, a $0.21 per security premium over the institutional bookbuild price of $7.00, and a $0.10 per price of $6.75, a $0.21 per security premium over the institutional bookbuild price of $7.00, and a $0.10 per price of $6.75, a $0.21 per security premium over the institutional bookbuild price of $7.00, and a $0.10 per price of $6.75, a $0.21 per security premium over the institutional bookbuild price of $7.00, and a $0.10 per security discount to the last traded price of $7.31 per security. security discount to the last traded price of $7.31 per security. security discount to the last traded price of $7.31 per security. security discount to the last traded price of $7.31 per security. A further $400 million was raised from placement of 58 million securities at a price of $6.95 per security to A further $400 million was raised from placement of 58 million securities at a price of $6.95 per security to A further $400 million was raised from placement of 58 million securities at a price of $6.95 per security to A further $400 million was raised from placement of 58 million securities at a price of $6.95 per security to AustralianSuper and Tawreed. AustralianSuper and Tawreed. AustralianSuper and Tawreed. AustralianSuper and Tawreed. 13 13 13 13 13 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) Operating and Financial Review – Year ended 30 June 2014 (continued) Changes in Executive Management On 4 June 2014, Transurban appointed Wes Ballantine, Group General Manager, Strategy, to the role of Group General Manager, Queensland On 14 July 2014, Samantha Hogg, Chief Financial Officer, left Transurban. Until a permanent replacement is appointed, Leigh Petschel, currently General Manager, Finance, will serve as Acting Chief Financial Officer. Tim Steinhilber, Group General Manager, Project Delivery and Operational Excellence, transferred back to the USA in July 2014 and will support the delivery of the I95 project that is scheduled for completion at the end of 2014. Tony Adams, previously Vice President, Infrastructure, Major Projects, and based in the USA, will transfer to Australia as he assumed the role of Group General Manager, Project Delivery and Operational Excellence in July 2014. People Transurban’s People Strategy focuses on the four areas of Leadership, Capability, Performance, and Wellbeing. These areas are underpinned by the Group values, as well as safety, diversity and sustainability. Leadership Transurban conducts a bi-annual talent review with the Executive team. This review helps identify high potential individuals who may have the ability to move into a Senior Leadership or Executive role, or those who may be able to move laterally outside of their area of technical expertise. It also identifies successors for the Executive team and other future leaders. Development activities for this group are monitored throughout the year. Senior Leaders participated in a three day offsite in February 2014. The key theme of the program was driving for high performance and it is intended that this will become an annual event for the leadership group. There has been a focus on building greater leadership capability through the middle management group during the reporting period. Activities to support this include the implementation of a Group Coaching program; cascading of activities from the Senior Leadership Program and the continuation of the Coaching and Mentoring program for female managers. Capability A framework identifying both behavioural and technical capabilities has been developed and is being used to assist in identifying key talent for future roles and determining potential gaps. This assists in developing strategies to build future capability. A technical career pathway program has also been developed. One area of continued focus is the Traffic Forecasting Group which is deemed fundamental to the ongoing success of the Group. Steps to enhance capability in this area have progressed. Performance Changes were made to the Short Term Incentive program aimed at enhancing this through increased performance differentiation, the introduction of formal performance comparisons against peers, and strengthening the link between individual and Group performance. A review of the Group’s Benefits program was also undertaken, benchmarking current programs against market practice. Wellbeing A new Wellbeing framework has been developed, identifying the key areas of health; work; financial; values and staying connected. A suite of initiatives to support the framework are being introduced across Transurban. An employee volunteer program has been launched which includes the introduction of volunteer leave for all employees. 14 14 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) Operating and Financial Review – Year ended 30 June 2014 (continued) Office moves in Melbourne and Sydney occurred with a focus on increasing collaboration and ensuring a healthier workspace. Activity based working was also introduced as part of this, which enables greater flexibility for employees in the way in which they work. It has been twelve months since the launch of the refreshed Vision and Values. A Group wide Values Health Check was rolled out to see how and where teams are using the values and to ensure that behaviours continue to be aligned. This provided positive feedback as did the Employee pulse survey that was conducted in May 2014. Sustainability Transurban is committed to taking a sustainable approach to its operations, projects and business practices to create the best outcomes for its government clients, communities and customers. Transurban’s Sustainability Strategy highlights three key focus areas: be good neighbours, use less, and think long term. By adopting and working to these principles, Transurban reinforces its ‘licence to operate’ and strengthens its ability to deliver efficient and integrated transport networks that support productivity and the wellbeing of its communities. During the period, Transurban put into action the Sustainability Strategy. Some important highlights include developing a community investment strategy which saw the launch of the first corporate grants program, embedding sustainability requirements in the NorthConnex tender process and committing to reduce operational energy consumption by 10 per cent by 2023. Transurban provides regular progress reports to the Board on the focus areas. The annual Sustainability Report summarises the year’s activities, while also outlining commitments for the coming years. The 2014 Sustainability Report will be published in October. Business risks and opportunities The following are key opportunities that may impact Transurban’s financial and operating result in future periods:  Negotiation of new business opportunities to develop projects and enhance the motorway networks in Transurban’s target markets  Higher traffic volumes across Transurban’s assets resulting in stronger cashflows across the Group  Integration of technology and systems across Transurban assets, including tolling systems, to leverage economies of scale available from Transurban’s network footprint.  Policy change in approach to network pricing to drive efficiencies and improvements in capacity utilisation on Transurban’s assets  Development of connecting infrastructure to drive improved traffic volumes on Transurban’s assets  Realisation of benefits associated with financing arrangements and financial transactions, including sourcing new financing, the refinancing of existing indebtedness and credit exposures on transactions with financial counterparties. 15 15 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) Operating and Financial Review – Year ended 30 June 2014 (continued) The following are key risks that may impact Transurban’s financial and operating result in future periods:  Reduced traffic volumes or an inability to grow traffic volumes  The loss of a toll road concession for non-performance or default under a concession agreement financing arrangement or as a result of government action  Existence and development of, or changes to, competing roads, feeder roads and other means of transport  A failure of key operating systems, including tolling systems, which impacts the ability to collect revenue  Changes in law or regulation, including the imposition of new or increased taxes or other governmental charges or levies  Adverse tax developments, including as a result of legislative change or interpretation, and changes to accounting standards  Dependency on the services of key contractors and counterparties for development and construction activities and for the provision of tolling, customer services, operations and maintenance services, road management and control systems  Exposure to risks associated with financing arrangements and financial transactions, including sourcing new financing, the refinancing of existing indebtedness and credit exposures on transactions with financial counterparties  Risks of accidents, incidents and other events relating to the assets and insurance policies not providing adequate protection against those risks  Potential for involvement in legal, regulatory and other proceedings and disputes arising from business and operations; and  Reliance on dividends, interest on and repayments of shareholder loans from joint ventures and subsidiaries for funding. Risk Management Managing risk is an essential part of our business. Key risks are regularly reviewed by the Board, the Audit and Risk Committee and our Executive Committee. Transurban has a business-wide risk framework to help create a consistent and rigorous approach to identifying, analysing and evaluating risks. This framework has various policies, standards and guidelines attached to it, including the Risk Management Policy which can be found in the Corporate Governance section of our website (www.transurban.com). The framework is overseen by the Audit and Risk Committee and is actively managed by the Executive Committee. It is consistent with AS/NZ31000:2009 and is subject to regular review by internal audit. Our Audit and Risk Committee Charter is also available in the Corporate Governance section of our website. Significant changes in the entity’s state of affairs Other than those matters already discussed in the operating and financial review, no other significant changes have occurred in Transurban’s state of affairs in the year ended 30 June 2014. Matters subsequent to the end of the financial year On 2 July 2014, the Group announced that the consortium comprising Transurban (62.5 per cent), AustralianSuper (25 per cent) and Tawreed Investments Limited (a wholly-owned subsidiary of the Abu Dhabi Investment Authority) (12.5 per cent) had reached financial close on the acquisition of Queensland Motorways for $6,673 million, plus stamp duty and transaction costs of $447 million. As at the date of this report the Directors are not aware of any other circumstances that have arisen since 30 June 2014 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, that have not otherwise been disclosed in the financial report. Likely developments in future financial years and the expected results of operations Other than matters already discussed above, any other potential 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. 16 16 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) Operating and Financial Review – Year ended 30 June 2014 (continued) 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. 17 17 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) Information on Directors Lindsay Maxsted Chair and independent Non-executive Director Dip Bus, FCA, FAICD 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 a partner of KPMG Australia and was the CEO of that firm from 2001 to 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. As at the date of this report, Lindsay holds interests in 66,559 Stapled Securities. Transurban Board Committee membership Chairman of the Nomination Committee and a member of the Audit and Risk Committee. Scott Charlton Chief Executive Officer and Executive Director BSci, MBA (Texas) Term of office Director since 16 July 2012. CEO since 16 July 2012. Scott joined Transurban from Lend Lease, where he was Group COO (from November 2011) and Group Director of Operations (from March 2010). Prior to this, Scott held several senior appointments across a range of infrastructure entities and financial institutions, including as CFO of Leighton Holdings Limited (2007 to 2009) and as Managing Director of Deutsche Bank in Australia and Hong Kong (1995 to 2003). As at the date of this report, Scott holds interests in 213,374 Stapled Securities, 909,444 performance awards (unlisted) and 108,486 STI deferred awards (unlisted). 18 18 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) Information on Directors (continued) Neil Chatfield M.Bus, FCPA, FAICD Independent Non-executive Director Term of office Director since 18 February 2009. Neil is an established Executive and Non-executive Director with extensive experience across all facets of company management, and with specific expertise in financial management, capital markets, mergers and acquisitions, and risk management. Neil is currently the Chairman of Virgin Australia Holdings Limited and of Seek Limited, and a Non-executive Director of Recall Holdings Limited. Neil is also Honorary Chairman of HomeGround Services. He was previously a Non-executive Director of Grange Resources Limited (to April 2014) and of Whitehaven Coal Limited (to May 2012). Neil previously served as Executive Director and the CFO of Toll Holdings (from 1997 to 2008). As at the date of this report, Neil holds interests in 50,424 Stapled Securities. Transurban Board Committee membership Chairman of the Audit and Risk Committee and a member of the Nomination, and Remuneration and Human Resources 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 Federation Centres 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 (to March 2012), AMMB Holdings Berhad, Shanghai Rural Commercial Bank and of the Bank of Tianjin. As at the date of this report, Bob holds interests in 30,324 Stapled Securities. Transurban Board Committee membership Chairman of the Remuneration and Human Resources Committee and member of the Audit and Risk, and Nomination Committees. 19 19 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) Information on Directors (continued) Samantha Mostyn Independent Non-executive Director BA, LLB Term of office Director since 8 December 2010. Sam has significant experience in the Australian corporate sector both in Executive and Non-executive capacities, in particular in the areas of human resources, corporate and government affairs, sustainability management, and diversity. Sam is currently a Non-executive Director of Virgin Australia Holdings Limited, Citigroup Pty Ltd, and Cover- More Group Limited. She is President of the Australian Council for International Development. She is also a Director of Australian Volunteers International, Australia Council for the Arts, Carriageworks, St James Ethics Centre Foundation, and the NSW Climate Change Council. Sam is currently Deputy Chair of the Diversity Council Australia, and is a member of the advisory boards of ClimateWorks Australia and the Crawford School of Government and Economics, ANU. She is also a Commissioner of the Australian Football League. Sam has previously held senior executive positions at IAG, Optus and Cable & Wireless plc. As at the date of this report, Sam holds interests in 17,256 Stapled Securities. Transurban Board Committee membership Member of the Remuneration and Human Resources and Nomination Committees. Christine O'Reilly Independent Non-executive Director BBus Term of office Director since 12 April 2012. Christine has over 30 years’ experience in the finance and infrastructure sectors in various roles including as Co- Head of Unlisted Infrastructure at Colonial First State Global Asset Management and as CEO of the GasNet Australia Group. Christine is currently a Non-executive Director of CSL Limited, EnergyAustralia Holdings Pty Ltd, Medibank Private, and Baker IDI, and is the Deputy Chair of CARE Australia. As at the date of this report, Christine holds interests in 13,972 Stapled Securities. Transurban Board Committee membership Member of the Audit and Risk and Nomination Committees. 20 20 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) Information on Directors (continued) Rodney Slater Independent Non-executive Director J.D., BS Term of office Director since 22 June 2009. Rodney is a partner in the public policy practice group of Washington DC firm Squire Patton Boggs (US) LLP, 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. As at the date of this report, Rodney does not hold interests in any Stapled Securities. Transurban Board Committee membership Member of the Nomination Committee. Ian Smith Independent Non-executive Director BE Mining (Hons), BFin Admin Term of office Director since 1 January 2012. Ian is currently the Managing Director and CEO of Orica Limited and serves as President of The Australian Mines and Metals Association. Previously, Ian was the Managing Director and CEO of Newcrest Mining, the Global Head of Operational and Technical Excellence at Rio Tinto, based in London, and Managing Director of Comalco Aluminium Smelting within the Rio Tinto Group. Prior to this, Ian held senior operational and project management roles with WMC Resources, Pasminco Limited and CRA Limited. Ian was previously the Chairman of the Minerals Council of Australia and a Director of the Australian Chamber of Commerce and Industry. Ian is a Fellow of both the Institute of Engineers Australia and the Australasian Institute of Mining and Metallurgy - from which he was awarded its highest honour, the Institute Medal, in June 2012. As at the date of this report, Ian holds interests in 92,742 Stapled Securities. Company Secretaries LLB (Hons), BComm Amanda Street 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 14 years of legal, company secretariat and other relevant experience. Prior to her in-house work, Amanda was a solicitor specialising in M&A work with Australian law firm King & Wood Mallesons. 21 21 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) Information on Directors (continued) Julie Galligan Julie joined Transurban in November 2008 and was appointed as General Counsel in February 2012. Julie has over 14 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. LLB, BA Meetings of Directors The number of meetings of the Boards of Directors of THL, TIML and TIL held during the year ended 30 June 2014, and the number of meetings attended by each Director are set out in the following tables. Meetings of the Boards of Directors of THL, TIML and TIL were held jointly. Lindsay Maxsted Scott Charlton Neil Chatfield Robert Edgar Samantha Mostyn Christine O'Reilly Rodney Slater Ian Smith Board of Directors Board of Directors Board of Directors THL TIML TIL Attended Held Attended Held Attended Held 13 13 13 13 13 13 13 12 13 13 13 13 13 13 13 13 13 13 13 13 13 13 13 12 13 13 13 13 13 13 13 13 13 13 13 13 13 13 13 12 13 13 13 13 13 13 13 13 The number of meetings of each Board Committee held during the year ended 30 June 2014, and the number of meetings attended by each Director, are set out in the following table. Audit and Risk Committee(1) Remuneration and Human Resources Committee(2) Nomination Committee(3) Special purpose Sub- committees(4) Attended Held Attended Held Attended Held Attended Held 6 6 6 6 * 6 * 1 6 * 6 6 * 6 * * 5 5 5 5 5 3 * 2 * * 5 5 5 * * * 2 2 2 2 2 2 2 1 2 * 2 2 2 2 2 * 12 12 11 * * 11 * * 12 12 12 * * 11 * * Lindsay Maxsted Scott Charlton Neil Chatfield Robert Edgar Samantha Mostyn Christine O'Reilly Rodney Slater Ian Smith * = Not a member of the relevant Committee (1) Scott Charlton and Ian Smith were not members of the Audit and Risk Committee but attended meetings during the year. (2) Lindsay Maxsted, Scott Charlton, Christine O'Reilly and Ian Smith were not members of the Remuneration and Human Resources Committee but attended meetings during the year. Scott Charlton was excluded from discussions involving his remuneration during meetings which he attended. (3) Scott Charlton and Ian Smith were not members of the Nomination Committee but attended meetings during the year. (4) Special purpose sub-committees were formed during the year to deal with matters relating to the Queensland Motorways bid submission and the due diligence process undertaken in connection with the equity raising for the acquisition of Queensland Motorways. 22 22 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) 2014 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 were the 'key management personnel' (KMP) of the Transurban Group (Group) during the year ended 30 June 2014 (FY2014). The KMP disclosed in this report are listed in the table below: Current Non-executive Directors Lindsay Maxsted, Chair Neil Chatfield Robert Edgar Samantha Mostyn Christine O'Reilly Rodney Slater Ian Smith Current Senior Executives Scott Charlton, Executive Director and Chief Executive Officer (CEO) Jennifer Aument, Group General Manager, North America Wesley Ballantine, Group General Manager, Queensland (from 4 June 2014, formerly Group General Manager, Strategy) Andrew Head, Group General Manager, New South Wales Samantha Hogg, Chief Financial Officer (1) Sue Johnson, Group General Manager, Human Resources Tim Steinhilber, Group General Manager, Delivery and Operational Excellence (1) Lisa Tobin, Group General Manager, Technology Vin Vassallo, Group General Manager, Victoria Former Senior Executives Michael Kulper, President North America (departed 3 September 2013) (1) On 14 July 2014, the Group announced changes to KMP. Samantha Hogg departed the Group and Tim Steinhilber has transferred back to the USA. Refer to section 1B for further details. Contents 1 Remuneration snapshot 2 Remuneration governance 3 Remuneration in context 4 CEO / Senior Executive remuneration for FY2014 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. 23 24 26 27 28 48 50 23 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) Remuneration report (continued) 1 Remuneration snapshot The Transurban Board is committed to an executive remuneration framework that is focused on driving a performance culture and linking pay to the achievement of the Group’s strategy and business objectives and, ultimately, generating security holder value. Transurban’s remuneration framework is reviewed annually taking into consideration security holder and other stakeholder feedback, market expectations and regulatory developments. At the 2013 Annual General Meeting (AGM), the framework received strong support from security holders, with a 98.8 per cent vote in favour of the resolution to adopt the 2013 Remuneration Report. There were no substantive changes to the framework in FY2014, but some refinements were made to further align remuneration with the creation of sustainable security holder value, business outcomes, and the Group’s organisational values: integrity, collaboration, accountability, ingenuity and respect. In particular, changes were made to the Short Term Incentive (STI) program for all eligible employees, which were aimed at enhancing this variable pay element through increased performance differentiation, the introduction of formal performance comparisons against peers, and strengthening the link between individual and Group performance. A TRANSURBAN’S REMUNERATION FRAMEWORK The key elements of the remuneration framework for the CEO and other Senior Executives for FY2014 were as follows: Remuneration mix The remuneration of the CEO and other Senior Executives was structured as a mix of fixed remuneration and variable ('at risk') remuneration through short term and long term incentive components. The relative weightings of the three components were as follows: Total remuneration % (annualised at target) Fixed TEC Variable (performance based) CEO Senior Executives 40 45 STI 30 (50% deferred) 30 (50% deferred) LTI 30 25 * All Senior Executives moved to 50% STI deferral effective 1 July 2013. Fixed total employment cost (TEC) Fixed TEC was set with reference to the market median, using the ASX 20-50 as the primary reference, with consideration also given to the ASX 100. Remuneration packages (including TEC levels) are reviewed annually by the Remuneration and Human Resources Committee with reference to an individual's role, experience and performance, as well as relevant comparative market data provided by an independent remuneration consultant. TEC levels are also reviewed on a change in role. 24 24 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) Remuneration report (continued) Short term incentive (STI) During FY2014, changes were made to the STI program to achieve greater performance differentiation. The link between Group and individual performance was also strengthened by using individual performance as a multiplier when calculating reward for Group performance. Group performance measures under the new STI program were again linked to growth in proportional EBITDA, cost management based on proportional net costs, and safety. See section 4(D) for further details. Individual performance continues to be measured against key performance indicators (KPIs). Under the new STI program, each individual’s assessment will be used in determining a rating relative to peers. The overall rating will derive an individual’s STI using a payment schedule as determined by the Board designed to encourage high performance. During FY2014, the proportion of the STI award subject to mandatory deferral was aligned for the CEO and all Senior Executives, so that all members of KMP now have 50 per cent of their STI award deferred for two years. Increasing the level of STI deferral (from 30 per cent when it was first introduced in FY2012) strengthens the link between KMP performance and security holder value and provides a greater retention element. For Australian Senior Executives, STI deferral is into securities. Due to legal restrictions on the issue of securities to USA residents, the USA resident 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) For FY2014, LTI performance measures 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, telecommunications and construction Global Industry Classification Standards (GICS) sectors of the ASX 150; and  50 per cent Free Cash Flow (FCF) per security, reflecting the Group's focus on the maximising free cash flow to drive security holder return. The definition of FCF per security is set out on page 37. The FCF calculation is included in note 22 of the audited financial statements. B OTHER EVENTS / ACTIONS IMPACTING REMUNERATION IN FY2014 USA restructure As previously disclosed, the Group’s New York office was closed in FY2014. As a consequence, it was determined that the position of President, North America was no longer required. As no suitable positions were available for Michael Kulper (the incumbent), his employment with the Group ceased on 3 September 2013. On ceasing employment as President, North America, Michael Kulper received a sum equivalent to 3 months TEC as a payment in lieu of notice (USD 247,450), and he was paid (USD 304,554) (equivalent to 16 weeks TEC) severance payment. The following arrangements also applied to Michael Kulper:  he retained the deferred securities granted to him under the FY2012 and FY2013 STI plans in accordance with their original terms; and  he retained a pro-rated proportion of his LTI awards granted to him under the FY2011 (161,103 Performance Awards), FY2012 (111,721 Performance Awards) and FY2013 (65,293 Performance Awards) LTI plans 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. Michael Kulper was not eligible to participate in the FY2014 LTI plan. 25 25 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) Remuneration report (continued) Queensland Motorways In April 2014, a Transurban-led consortium was announced as the successful bidder for Queensland Motorways, which operates a network of toll roads in and around Brisbane. Financial close was achieved on 2 July 2014. Wesley Ballantine, Group General Manager, Strategy, was appointed to the position of Group General Manager, Queensland on 4 June 2014. Wesley Ballantine has been employed by the Group since 2006. Wesley Ballantine’s remuneration was reviewed on this change in role, taking into account benchmark data and internal relativities. Refer to section 4. Changes to KMP On 14 July 2014, Transurban announced changes to its Executive Committee. Samantha Hogg, Chief Financial Officer, left the Group on 14 July 2014 after six years with the business. Tim Steinhilber, Group General Manager, Project Delivery and Operational Excellence, transferred back to the USA to support the delivery of the I95 project that is scheduled for completion at the end of 2014. The remuneration arrangements applying to Samantha Hogg on her departure, will be disclosed in the 2015 report. Anthony Adams, currently Vice President, Infrastructure, Major Projects, and based in the USA, will transfer back to Australia to assume the role of Group General Manager, Project Delivery and Operational Excellence. Anthony joined Transurban in June 2003. Leigh Petschel, currently General Manager, Finance, is Acting Chief Financial Officer. Leigh joined Transurban in October 2013. 2 Remuneration governance A BOARD AND REMUNERATION AND HUMAN RESOURCES COMMITTEE RESPONSIBILITY The Remuneration and Human Resources 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. It is critical that the Remuneration and Human Resources 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, the CEO and the Group General Manager, Human Resources attend Committee meetings, however they do not participate in formal decision making. The membership of the Remuneration and Human Resources Committee was unchanged in FY2014. The members of the Committee continue to be Robert Edgar (Chair), Samantha Mostyn and Neil Chatfield. Further details regarding the Committee are set out in the Directors’ report. The Remuneration and Human Resources Committee reviews gender pay equity annually. The Group has focused on achieving pay equity at all work levels in the organisation and the FY2014 outcomes indicate that this objective has substantially been achieved. 26 26 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) Remuneration report (continued) B ENGAGEMENT OF REMUNERATION CONSULTANTS To ensure that the Remuneration and Human Resources Committee has all relevant information at its disposal when making remuneration decisions, it 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 by Directors. Those consultants who provided the Remuneration and Human Resources Committee with a remuneration recommendation relating to KMP during FY2014, and who have been deemed by the Group to be ‘remuneration consultants’, are listed below: Consultant Fees for remuneration recommendations Fees for other advice provided to the Group during FY20141 Ernst & Young $10,000 $768,079 1 Fees for other advice includes the review of USA tax returns, expatriate taxation requirements, audit of various undertakings and general consulting Ernst & Young was selected by the Remuneration and Human Resources 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 their recommendations, both a declaration of independence from the KMP to whom their recommendations related, and also confirmation of 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. that Ernst & Young provide, with terms also required 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. 3 Remuneration in context Transurban is a top 20 Australian Securities Exchange listed business and is the largest transport infrastructure entity in Australia, and one of the largest toll road entities in the world. Transurban is focused on providing effective and innovative urban transport solutions in road infrastructure, through the management and development of urban networks of toll road concessions. The effective management of toll road concessions involves leveraging a network footprint in our markets, taking a leading role in shaping policy, and utilising our core capabilities in the following areas:  Network planning and forecasting;  Operations and customer management;  Project development and delivery;  Application of technology; and  Community engagement. 27 27 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) Remuneration report (continued) The investment proposition for high quality toll road assets lies in providing investors with access to long dated, predictable, growing cash flows generated over the life of the concessions through effective management and development of the road corridors they govern. The Board and management are focused on ensuring security holder value is enhanced through the strong performance of the Group’s asset portfolio. Development activities also provide opportunities to further expand the portfolio and unlock further value in the concessions. 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 the Hills M2, Lane Cove Tunnel and Cross City 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) and, from 2 July 2014, Queensland Motorways in Brisbane (62.5 per cent). In North America, the Group currently has interests in two assets, the 495 Express Lanes (94.0 per cent), and the 95 Express Lanes project (77.5 per cent), which is currently under construction and remains on schedule for completion in late 2014. 4 CEO / Senior Executive remuneration for FY2014 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. 28 28 2014 Transurban Annual Report Remuneration report (continued) The Group's remuneration strategy and policy as set by the Board is summarised below: Transurban Holdings Limited Directors' report 30 June 2014 (continued) Creating Security Holder Value  Remuneration Strategy Attract, retain, motivate and reward executives 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  Remuneration Structure Fixed remuneration Total Employment Cost (TEC):  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 ('at risk') remuneration Short term incentive (STI):  Annual rewards tied to pre-determined individual and Group performance measures, and includes a deferred element (into securities)   Individual performance against targets and comparable performance against peers are used to determine an outcome Individual targets reflect individual specific accountabilities and key drivers for growth and success  Group performance targets linked to earnings, cost management and safety  Individual performance outcome provides a multiplier for the Group performance element (linking the two elements)  Maximum potential STI is capped at 150 per cent Long term incentive (LTI):  Equity rewards to align executive and security holder interests (using indeterminate rights)  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  Maximum LTI opportunity is capped at 100% 29 29 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) Remuneration report (continued) B REMUNERATION MIX For FY2014, 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 components were determined by the Board (on the recommendation of the Remuneration and Human Resources Committee) and are set out in the table below: Total remuneration % (annualised at target)* Fixed TEC Variable (performance based) CEO Senior Executives 40 45 STI** 30 (50% deferred) 30 (50% deferred) LTI 30 25 * These figures may not necessarily reflect the relative value derived from each of the components, which depends on actual performance against targets for the variable components. The STI percentages are based on achieving the relevant performance targets. The 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. **All Senior Executives moved to 50% STI deferral for grants made in FY2014. C FIXED REMUNERATION - TOTAL EMPLOYMENT COST (TEC) What is TEC? Fixed remuneration is represented by total employment cost comprising base salary and superannuation contributions (or pension plans in the case of USA based employees). 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 TEC increases in the service agreement of the CEO or any Senior Executive. How is TEC determined? Remuneration packages (including TEC levels) are reviewed annually by the Remuneration and Human Resources 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 levels are also reviewed on a change in role. Any changes to TEC levels recommended by the Committee must be approved by the Board. The CEO's and other Senior Executives' TEC is determined with reference to the market median. The primary reference for determining the market median is the ASX 20-50, with consideration also given to the ASX 100. Consideration is given to sizing factors including market capitalisation and revenue. A range around the median provides flexibility to recognise individual experience and capabilities. D SHORT TERM INCENTIVE (STI) How does the STI plan operate? Eligible 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 corporate objectives. This aligns employee interests with the Group's financial performance, as well as the Group’s organisational values. 30 30 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) Remuneration report (continued) For FY2014, the CEO and other Senior Executives had a target STI opportunity of 30 per cent of their total remuneration package. Mandatory STI deferral of 50 per cent of the overall STI award now applies for all grants to the CEO and other Senior Executives. STI payouts can vary between zero (if targets are not met) and 150 per cent (for exceptional outperformance). The deferral period is two years. For Australian Senior Executives, deferral is into securities. Due to legal restrictions on the issue of securities to USA residents, the USA resident Senior Executives receive deferred cash awards. STI deferral grants are made in the form of awards. Each award is an entitlement to receive a fully paid security, or an equivalent cash payment, on terms and conditions determined by the Board. This 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). What were the STI performance measures for FY2014? The STI performance measures for the CEO and other Senior Executives for the year ended 30 June 2014 were chosen to provide a balance between corporate, individual, operational, strategic, financial and non-financial aspects of performance and are described below: Measure Group performance target (1) Growth in proportional EBITDA (20% weighting) The proportional EBITDA targets were set against the previous year's results and the Group's FY2014 budget. The EBITDA target excluded the 495 Express Lanes. Proportional EBITDA result % STI that vests^ Less than 10% above underlying result for FY2013 10% above underlying result for FY2013 Budget EBITDA for FY2014 ($926 million) 16% above underlying result for FY2013 ^ Straight line vesting applies between 50-100% and 100-150%. zero 50 100 150 (2) Cost management based on proportional net costs (20% weighting) The proportional net costs targets were set against the previous year’s results and the Group’s FY2014 budget. The proportional net costs target included the 495 Express Lanes. Proportional net costs result Over FY2014 budget FY2014 budget ($201 million) FY2014 budget less $5 million FY2014 budget less $15 million % STI that vests^ zero 50 100 150 ^ Straight line vesting applies between 50-100% and 100-150%. (3) Safety targets (10% weighting) The safety target was a lead indicator that required the completion of safety development action plans. The is split with equal weighting between employee/contractor (5%) and customer (5%) safety targets. target Safety target result Less than 60% safety action plan items implemented % STI that vests^ zero 60% safety action plan items implemented 75% safety action plan items implemented 90% safety action plan items implemented 50 100 150 Individual key performance indicators (KPIs) ^ Straight line vesting applies between 50-100% and 100-150%. Individual KPIs (50% weighting), were unique individual's area of accountability, and in FY2014 related to critical business sustainability measures, including: operational excellence, strategy, people and leadership, operational performance, cost reduction, customer satisfaction, project outcomes, succession planning, risk management, growth and business plan implementation. Individuals have a clear line of sight to KPIs and are able to directly affect outcomes through their own actions. the to 31 31 2014 Transurban Annual Report Remuneration report (continued) Who sets the STI performance measures? Transurban Holdings Limited Directors' report 30 June 2014 (continued) 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 is it used as an STI performance measure? EBITDA (earnings before interest, taxes, depreciation and amortisation) 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. The Board believes 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 for FY2014 does not include the EBITDA contribution for those assets which are equity accounted (M5 and M7). DRIVe’s EBITDA is also excluded from the statutory results for the period that it was equity accounted (1 July 2013 to 4 June 2014). 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 from proportional EBITDA to provide an underlying result when determining performance incentives. For FY2014, the Board resolved to exclude the 495 Express Lanes from the proportional EBITDA measure as this is a period of ramp-up for this asset. The 495 Express Lanes opened to traffic in November 2012 giving the Group limited toll revenue historical data when setting targets for FY2014. Proportional EBITDA has been used by the Group as an STI performance measure since 2009. What are proportional net costs and why is this used as a performance measure? Proportional net costs are calculated as fee and other revenue less total costs of the Group. Costs after fee and other revenues encourage and allows management to incur additional costs where these are justified by increased revenue results. The use of a cost related STI performance measure reflects management’s 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 have been used by the Group as an STI performance measure since 2010. The proportional net costs measure for FY2014 includes costs associated with 495 Express Lanes, as there is a known cost base to work from and drive efficiencies. 32 32 2014 Transurban Annual Report Remuneration report (continued) Transurban Holdings Limited Directors' report 30 June 2014 (continued) What were the changes to the STI program introduced in FY2014? The STI program was reviewed in FY2014 and changes implemented to achieve a program that provides greater performance differentiation between participants. The link between Group and individual performance has been strengthened by using individual performance as a multiplier when calculating reward for Group performance. In FY2014, Group performance measures under the new STI program were again linked to growth in proportional EBITDA, cost management based on proportional net costs, and safety. Individual performance continues to be measured against KPIs, with an overall outcome reached for each participant against target. Under the new program, this information is used to assist with providing a rating which will consider performance comparative both to peers and against the Group’s values. The overall rating will derive a STI using a payment schedule as determined by the Board designed to encourage and reward high performance. 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 and Human Resources 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 considers the appropriate rating for each Senior Executive, taking into account their comparable performance and behaviours against the Group’s values. The Board then approves STI awards. STI cash awards for FY2014 will be paid in August 2014. The STI deferred component for FY2014 will be awarded in August 2014 and will vest, subject to continuity of employment (unless otherwise determined by the Board) and clawback provisions, on 1 July 2016. The Board believes the method of assessment is rigorous and provides a balanced evaluation of the performance of the CEO and each other Senior Executive. What if a Senior Executive ceases employment before the STI targets are assessed? Under the service agreements for the CEO and other Senior Executives, if the CEO or other Senior Executive ceases employment with the Group before performance against STI targets is assessed, they would generally not be entitled to receive any STI award, unless otherwise determined by the Board. How is the annual STI pool determined? The Board approves a pool to be distributed for the annual STI program (cash and deferred securities/cash). The pool is the sum of all eligible employee’s possible STI outcomes at 100 per cent target (TEC multiplied by their STI opportunity). This value is divided by two and each half is treated as follows: one half represents the individual component of the STI and is capped at 100 per cent, the second half is multiplied by the Group’s performance outcome to represent the Group’s performance component and is capped at 150 per cent. The overall pool is capped at 125 per cent. The Board has discretion as to the proportion of the pool that will be distributed in any given year. What is the maximum and minimum payment an individual can receive under the STI plan? The minimum payment an individual can receive is nil per cent and the maximum is 150 per cent of their STI opportunity. What were the changes to the STI deferral? During FY2014, those Senior Executives who had been on the old arrangement of 30 per cent deferral (S Hogg and A Head) were moved to 50 per cent deferral. This applies for grants made from 1 July 2013 onwards. 33 33 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) Remuneration report (continued) What were the Group STI performance outcomes for FY2014? Group performance in respect of the proportional EBITDA, proportional net costs and safety STI performance measures for FY2014 was assessed by the Board as 125.5 per cent of the possible STI opportunity. It should be noted that the transaction costs associated with the acquisition of Queensland Motorways ($5.9 million) and Cross City Tunnel ($3.1 million) were included in both the proportional EBITDA and proportional net cost outcomes. Measure Proportional EBITDA Proportional net costs Safety action plan items implemented Overall Group Performance Performance $931.2 million1 $182.6 million 76% - 1 For FY2014 the 495 Express Lanes are excluded from the Proportional EBITDA measure. Outcome 113.7% 150.0% 100.0% 125.5% What were the individual STI performance outcomes and awards for the CEO and Senior Executives for FY2014? 1 STI outcome (%) Actual STI awarded1 ($) Current Senior Executives O n - t a r g e t S Charlton J Aument W Ballantine A Head S Hogg S Johnson T Steinhilber 1 1 L Tobin V Vassallo Individual KPIs Group performance2 131.0 90.0 131.0 125.0 50.0 88.0 75.0 88.0 115.0 164.4 113.0 164.4 156.9 62.8 110.4 94.1 110.4 144.3 Total 147.7 101.5 147.7 140.9 56.4 99.2 84.6 99.2 129.7 Cash3 1,039,250 Deferred into securities 1,039,250 162,394 207,225 294,000 131,100 136,800 145,700 174,675 228,275 162,394 207,225 294,000 131,100 136,800 145,700 174,675 228,275 STI forfeited (%) - - - - 43.6 0.8 15.4 0.8 - FY2014 was nil. O 1 On-target performance must be achieved before any STI is awarded. Therefore, the minimum potential value of the STI in respect of n-target performance must be achieved before any STI is awarded. Therefore, the minimum potential value of the STI in respect of FY2014 was nil. 2 The Group performance outcome is determined by multiplying the individual percentage outcome by the Group’s percentage outcome 2 The Group performance outcome is determined by multiplying the individual percentage outcome by the Group’s percentage outcome of 125.5%. of 125.5%. 3 The cash STI payments will be paid in August 2014. The STI deferred component (50 per cent of the STI awarded) will vest, subject to 3 The cash STI payments will be paid in August 2014. The STI deferred component (50 per cent of the STI awarded) will vest, subject to continuity of employment (unless otherwise determined by the Board) and clawback provisions, on 1 July 2016. continuity of employment (unless otherwise determined by the Board) and clawback provisions, on 1 July 2016. 34 34 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) Remuneration report (continued) What was the grant and movement in the number of STI deferred awards? Mandatory STI deferral was introduced in FY2012, with the first grant of awards made in August 2012. Grants were also made in August 2013 as detailed below: Balance at start of year Granted during year as remuneration Matured and paid during year Forfeited during the year Balance at the end of year Current Senior Executives* S Charlton1 J Aument W Ballantine A Head S Hogg S Johnson - 14,789 15,212 22,449 18,973 16,540 108,486 14,282 17,328 15,202 17,944 21,288 - - - - - - - - - - - - 108,486 29,071 32,540 37,651 36,917 37,828 - - 21,192 19,356 T Steinhilber L Tobin1 V Vassallo1 Former Senior Executives M Kulper2 1 Scott Charlton, Lisa Tobin and Vin Vassallo had a zero opening balance at the beginning of FY2014, as they joined the Group after the FY2012 STI performance period and therefore were not entitled to receive an STI deferred award in respect of that period. They all received a grant during FY2014, in respect of the FY2013 performance period. 2 M Kulper was employed for the full FY2013 performance year, and received 22,813 awards in respect of that period. He has retained his deferred cash awards in the STI plans in accordance with their original terms. 36,464 22,813 40,548 59,277 6,612 6,612 6,612 6,612 - - - - - - - - E 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 offered to the CEO and other Senior Executives, and certain other employees nominated by the CEO and approved by the Board. For FY2014, the CEO was offered an LTI grant equivalent to 30 per cent of his total remuneration package. Other eligible Senior Executives were offered grants equivalent to 25 per cent of their total remuneration package. LTI grants are made in the form of performance awards under the Group’s Performance Awards Plan (PAP) at no cost to the recipient. Each performance award is an entitlement to receive a fully paid security, or an equivalent cash payment, on terms and conditions determined by the Board, subject to the achievement of certain vesting conditions linked to performance over a three year period. LTI grants are generally made twice per annum – once following the annual performance review (August) for Senior Executives excluding the CEO, and at a later date in November for the CEO. This is to allow the CEO’s grant of performance awards to be put to security holder vote at the AGM. Two performance measures are used to determine the number of performance awards that will vest at the end of the performance period. Total Shareholder Return (TSR) provides a comparison for Transurban’s performance against those companies with which the Group competes for capital. Additionally, growth in Free Cash Flow (FCF) helps to retain a focus on maximisation of free cash. The maximum opportunity following these tests is capped at 100 per cent. 35 35 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) Remuneration report (continued) The performance awards will, subject to achievement of the two performance measures against the vesting schedules, vest and be automatically exercised at the vesting date with no exercise price payable by the recipient. The Board will determine in its absolute discretion whether the performance awards will be settled in securities or a cash payment of equivalent value. Due to legal restrictions on the issue of securities to USA residents, the USA Senior Executive receives a cash payment upon vesting. 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. What is the Group’s LTI allocation valuation methodology? A fair value approach is applied for the TSR allocation. The Group is currently transitioning to a face value approach (discounted for distributions) for the FCF component. The transition is over 3 years and all things being equal there will be a decrease in the number of awards recipients receive until the new methodology is achieved. This transition will be completed for grants made during FY2016. What were the LTI performance measures for FY2014? Performance awards granted during the FY2014 are subject to a three year performance period and the following dual performance measures over that period: Measure Description of measure Relative TSR (50% weighting) Relative TSR is measured against a bespoke comparator group comprising companies in the transport, utilities, real estate, telecommunications and construction Global Industry Classification Standards (GICS) sectors of the ASX 150. The 42 companies in this group are: Abacus Property Group, AGL Energy Limited, Auckland International Airport Limited, Asciano Limited, Australand Property Group, APA Group, Aurizon Holdings Limited, BWP Trust, CFS Retail Property Trust Group, Charter Hall Group, Commonwealth Property Office Fund, Charter Hall Retail REIT, DUET Group, Dexus Property Group, Envestra Limited, Federation Centres Limited, Goodman Group, GPT Group, iiNet Limited, Investa Office Fund, Leighton Holdings Limited, Lend Lease Group, Mirvac Group, Monadelphous Group Limited, Macquarie Atlas Roads Limited, M2 Telecommunications Group Limited, Qantas Airways Limited, Qube Logistics Holdings Limited, Shopping Centres Australasia Property Group, Stockland, Spark Infrastructure Group, SP AusNet, Sydney Airport, Transurban Group, Telecom Corporation of New Zealand Limited, Telstra Corporation Limited, Toll Holdings Limited, TPG Telecom Limited, UGL Limited, Virgin Australia Holdings Limited, Westfield Group, Westfield Retail Trust. 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 2014, 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 the 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 % of performance awards that vest Nil Straight line vesting between 50 and 100 At or above the 75th percentile 100 36 36 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) Remuneration report (continued) Measure Description of measure Growth in FCF per security (50% weighting) Within Transurban, Free Cash Flow (FCF) per security is defined as:  The Group’s cash flow from operating activities;  less: cash flows from operating activities of non 100% owned 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 22 of the audited financial statements. For performance awards granted during the year ended 30 June 2014, the FCF per security component will vest based on the Group's compound annual growth targets translated into annual FCF per security over the three year performance period, as set out below: Growth in FCF per security vesting schedule: % annual growth in FCF per security % of performance awards that vest Less than 12% Nil Between 12% and 15% Straight line vesting between 50 and 100 15% or more 100 For performance awards granted during FY2015, the performance target range for growth in FCF per security is between 10.0 per cent and 13.0 per cent per annum. This is calculated from a base of 35.0 cents per security for FY2014, which is aligned to the FY2014 distributions paid. The Board has determined to use this base due to significant shifts in equity issued by the Group during the period, in particular 404.5 million securities issued in May 2014 associated with the Queensland Motorways acquisition. The 35.0 cent per security base is considered the best point of alignment with security holders’ expectation for growth in free cash. 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. The vesting schedule applied is in line with market practice, with straight line vesting between 50% and 100% for performance above the 50th percentile up to the 75th percentile for performance against the comparator group. Growth in FCF per security reflects the Group’s continuing focus on the maximisation of free cash, and has been used as an LTI performance measure since FY2013. Why has the FCF target for FY2014 of 12-15% increased from 6-9% in FY2013? Transurban regularly updates its corporate model to reflect the latest assumptions regarding traffic, operating costs, maintenance costs, discount rates, etc. The Transurban Board considers the Group’s potential performance over any given three year period and relates remuneration incentives to these expectations. Most importantly, it is the Board’s role to assess the realistic nature of cash flow expectations and set challenging but realistic targets. One target may be appropriate one year, but not so another year. The completion of construction for the M2 was a contributing factor for the change in the FCF target from FY2013 to FY2014. 37 37 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) Remuneration report (continued) Why is a three year performance period used for LTIs? The three year performance period for LTI has been set in line with market practice. The Board continues to monitor market practice in this regard. 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 20 trading days up to and including the testing date is used in the calculation of TSR. 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 will be calculated based on the FCF per security 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 the CEO and other Senior Executives, if the CEO or other Senior Executive ceases employment with the Group before the performance measures are tested, their unvested performance awards would generally lapse, unless otherwise determined by the Board. 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 FY2014 will be subject to the incumbent Board's discretion. 38 38 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) Remuneration report (continued) What was the grant, and movement in the number and value, of performance awards during FY2014? Eligible Senior Executives (excluding the CEO) received performance awards with a grant date of 15 August 2013. Following the receipt of security holder approval at the 2013 AGM, the CEO received performance awards with a grant date of 1 November 2013. All performance awards granted in FY2014 vest subject to a performance period from 1 July 2013 through to 30 June 2016. The relevant values of the grants are as follows: Recipient Grant date Fair value of awards at grant date1($) Closing security price at grant date Relative TSR FCF per security Eligible Senior Executives 15 August 2013 CEO 1 November 2013 $3.24 $3.13 $6.07 $6.21 $6.89 $6.97 1 An explanation of the pricing model used to calculate these values is set out in note 36 to the audited financial statements. Performance awards granted in FY2014 Name Current Senior Executives S Charlton1 J Aument W Ballantine A Head S Hogg S Johnson T Steinhilber L Tobin V Vassallo Number of performance awards granted2 Value at grant date ($) Maximum total value of grant yet to vest3($) 382,292 74,494 62,630 94,767 105,633 62,630 78,267 79,980 79,980 1,713,466 1,713,466 334,159 280,940 425,098 473,841 280,941 351,084 358,768 358,768 334,159 280,940 425,098 473,841 280,941 351,084 358,768 358,768 1 The grant made to the CEO constituted his LTI entitlement for FY2014 and was made following security holder approval at the 2013 AGM on the terms summarised above. Performance awards vest subject to performance over the period from 1 July 2013 through to 30 June 2016. 2 The grants made to Senior Executives assume full vesting of their full LTI entitlement for FY2014 and were made on the terms summarised above. Performance awards vest subject to performance testing over the period from 1 July 2013 through to 30 June 2016. 3 The maximum value of the grant has been estimated based on the fair value per award at date of grant. The minimum total value of the grant, if the applicable performance measures are not met, is nil. 39 39 2014 Transurban Annual Report Remuneration report (continued) F LEGACY LTI PLANS Transurban Holdings Limited Directors' report 30 June 2014 (continued) The Group has a number of LTI plans that were offered in previous years, as detailed below: Plan Grant date FY2013 PAP 15 Aug 2012 FY2012 PAP 26 Sep 2011 FY2011 PAP 1 Nov 2010 19 Oct 2012 (CEO only) 11 Nov 2011 (CEO only) Performance period External performance measure (50% of grant) Comparator group 1 Jul 2012 – 30 Jun 2015 1 Jul 2011 - 30 Jun 2014 TSR : 1 Nov 2010 - 1 Nov 2013 EBITDA : 1 Jul 2010 - 30 Jun 2013 Relative TSR Relative TSR Relative TSR 37 companies within a bespoke comparator group within the ASX150 33 companies within a bespoke comparator group within the ASX150 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) Growth in free cash flow (FCF) per security Growth in free cash flow (FCF) per security Group's annual growth in proportional EBITDA From 6% - 9% From 7% - 10% From 7% - 11% Compound Growth % of performance awards that vest Vesting schedule At target 50% vests From target % to stretch % Straight line vesting between 50% -100% At or above stretch % 100% vests Current status To be tested after 30 Jun 2015 TESTED 71.59% vested on 30 Jun 2014 TESTED 86.51% vested on 1 Nov 2013 Awards on issue 814,965 – – Value of performance awards vested and lapsed in FY2014 The FY2011 PAP vested on 1 November 2013. The outcome of the performance tests were as follows: Test type TSR Result of test % units vest Transurban ranked 33 out of 93 companies (65.21%) 80.42% 92.60% 86.51% Proportional EBITDA 85% of the target EBITDA range was achieved Overall vesting 40 40 2014 Transurban Annual Report Remuneration report (continued) Current Senior Executives J Aument2 W Ballantine2 A Head S Hogg S Johnson2 T Steinhilber2 Former Senior Executives Transurban Holdings Limited Directors' report 30 June 2014 (continued) FY2011 PAP - Lapsed FY2011 PAP - Vested Number Value ($)1 Number Value ($)1 2,913 3,297 12,211 8,881 3,996 3,879 10,535 11,922 44,156 32,113 14,451 14,026 18,684 21,144 78,312 56,954 25,630 24,876 74,331 84,119 311,555 226,585 101,964 98,967 M Kulper 21,732 78,583 139,371 554,471 1 Based on the fair value at date of grant. 2 Awards granted prior to the Senior Executive becoming a member of KMP. Awards vested while the Senior Executive was a member of KMP. The FY2012 PAP vested on 30 June 2014. The outcome of the performance tests were as follows: Test type TSR Free Cash Flow Overall vesting Result of test Transurban ranked 14 out of 31 companies (56.66%) % units vest 63.32% 93.8 cents adjusted to 97.9 cents 79.86% 71.59% Current Senior Executives A Head S Hogg Former Senior Executives FY2012 PAP - Lapsed FY2012 PAP – Vested Number Value ($)1 Number Value ($)1 30,616 28,785 116,784 109,799 77,150 72,535 314,102 295,314 M Kulper 31,739 121,070 79,982 325,629 1 Based on the fair value at date of grant. The Board exercised its discretion to ensure that participants in the FY2012 PAP were neither advantaged nor disadvantaged as a result of the Queensland Motorways (QM) acquisition and associated capital raising. The issuance of 404.5 million new securities in May 2014 associated with the funding of the QM acquisition occurred in FY2014, while financial close of the QM acquisition occurred in FY2015. The Board exercised its discretion to, in effect, exclude the new securities issued to fund the QM acquisition from the number of securities used to calculate the FY2014 Free Cash Flow (FCF) per security for the purposes of calculating the FCF outcome for the FY2012 PAP. Interest income on the equity raised prior to year end was similarly excluded from the calculation. The targets set at the beginning of the performance period (1 July 2011) were not adjusted. 41 41 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) Remuneration report (continued) Number of performance awards on issue as at 30 June 2014 The number of performance awards held by members of KMP as at 30 June 2014 is provided below. Comparative data is shown for those Senior Executives who were members of KMP during both FY2014 and FY2013. Balance at start of year Granted during year as remuneration Matured and paid during year Lapsed or forfeited during year Balance at the end of year Current Senior Executives* S Charlton 2014 2013 J Aument 2014 2013 W Ballantine 2014 2013 A Head 2014 2013 S Hogg 2014 2013 S Johnson 2014 2013 T Steinhilber 2014 2013 L Tobin 2014 2013 V Vassallo 2014 2013 Former Senior Executives M Kulper 2014 2013 684,6561 – 382,292 684,6561 (78,752) – – – 988,196 684,6561 21,597 39,3652 24,441 44,4712 311,043 257,636 292,851 214,633 29,626 52,7712 28,755 53,7712 – – – – 508,549 491,675 74,494 – 62,630 – (18,684) (17,768)3 (21,144) (20,030)3 (2,913) – (3,297) – 74,494 21,597 62,630 24,441 94,767 (155,462) (42,827) 112,754 (59,347) – 207,521 311,043 105,633 125,754 (129,489) (37,666) (47,478) – 231,329 292,851 62,630 – 78,267 – 79,980 – 79,980 – – (25,630) (23,145)3 (24,876) (25,022)3 – – – – (3,996) – (3,879) – – – – – (219,353) (223,903)4 178,830 (161,956) – 62,630 29,626 78,267 28,755 79,980 – 79,980 – 65,293 508,549 All Performance Awards granted or matured in FY14 (where applicable) in the table above were issued by Transurban and resulted or will result in one ordinary Transurban stapled security (or cash equivalent, as determined by the Board) per Performance Award granted or matured. * Lisa Tobin and Vin Vassallo joined the Group in February 2013 and did not receive a pro rata LTI grant in respect of FY2013. 1 Scott Charlton’s number of performance awards granted during FY2013 includes 236,256 performance awards granted in September 2012 as a sign-on award, to vest, subject to his continued employment, in three equal tranches on the first, second and third anniversaries of his commencement with the Group. The first tranche (78,752) awards vested on 16 July 2013, and a second tranche (78,752) awards vested on 16 July 2014. Therefore as at the date of this report, Scott Charlton has 909,444 performance awards yet to vest of which 78,752 awards relate to his sign-on award. 2 Opening balance held prior to the Senior Executive becoming a member of KMP. 3 Awards matured and paid during the year occurred prior to the Senior Executive becoming a member of KMP. 4 Awards lapsed/forfeited includes pro rata forfeiture of grants made in FY2011, FY2012 and FY2013 in line with good leaver treatment. 42 42 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) Remuneration report (continued) G REMUNERATION PAID TO THE CEO AND OTHER SENIOR EXECUTIVES Short-term employee benefits Cash salary and fees Cash STI2 Non- monetary benefits3 Deferred STI4 Post- employment benefits Termination benefits Super- annuation Shared based benefits5 Total Long- term benefits Long service leave Current CEO S Charlton 2014 2013 1,858,493 1,039,250 7,042 492,200 17,774 1,789,850 738,300 22,379 246,100 15,098 Current Other Senior Executives J Aument1 2014 516,456 244,487 1,250 126,054 11,274 2013 W Ballantine1 2014 2013 A Head 2014 2013 S Hogg 2014 2013 S Johnson1 2014 2013 T Steinhilber1 2014 2013 L Tobin1 2014 2013 V Vassallo1 2014 2013 27,260 10,775 – 5,204 916 393,737 207,225 1,462 107,433 230,757 81,150 3,398 44,498 604,875 294,000 2,418 111,497 589,279 241,395 2,366 77,012 676,275 131,100 2,018 117,353 656,561 284,935 2,030 76,648 423,737 136,800 1,496 127,917 280,971 112,325 3,823 60,277 572,856 309,886 30,165 177,462 269,441 259,550 52,658 53,001 507,741 174,675 1,753 30,000 185,869 – 710 15,000 507,741 228,275 1,753 30,000 176,134 – 710 15,000 17,774 9,836 17,774 16,470 17,774 16,470 17,774 12,043 17,774 6,388 17,774 6,863 17,774 6,863 – – – – – – – – – – – – – – – – – – – – – – 1,484,748 4,899,507 1,302,848 4,114,575 192,748 1,092,269 3,534 47,689 21,430 15,368 96,404 26,851 845,465 411,858 13,053 12,696 474,344 1,517,961 441,434 1,380,652 21,368 13,674 485,938 1,451,826 407,426 1,457,744 8,661 23,829 98,710 38,665 815,095 531,933 8,531 208,931 1,325,605 – – – – – 58,491 699,529 109,235 841,178 – 208,442 109,235 894,778 – 198,707 43 43 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) Remuneration report (continued) Short-term employee benefits Cash salary and fees Cash STI2 Non- monetary benefits3 Deferred STI4 Post- employment benefits Termination benefits Super- annuation Shared based benefits5 Total Long- term benefits Long service leave Former CEO C Lynch 2014 2013 – – – – – 144,951 178,652 555 504,275 5,490 Former Other Senior Executives – - – – – – (62,121) 6,103,665(6) – 6,875,467 – – – 8,346 (341,435) 499,569 K Daley 2014 2013 M Kulper 2014 2013 E Mildwater 2014 2013 – 816,330 583,403 – – – – – – 53,262 (50,659) 13,725 2,912 300,6297 2,791 333,356 – 385,1687 1,608,259 1,067,296 362,264 15,482 120,168 10,997 – 485,161 – – – – – 1,525 (37,627) 13,725 – – - 28,977 1,441,431 3,046,615 – – – (15,434) (274,631) 172,719 1 The dates on which the Senior Executives who were promoted or appointed during FY2013 are the dates that those Senior Executives commenced being a KMP. Their remuneration for the period during which they were members of KMP is disclosed in the table only. 2 The amount represents the cash STI payment to the Senior Executive for FY2014, which will be paid in August 2014. Jennifer Aument and Tim Steinhilber also received a second and final payment in relation to the successful delivery of the 495 Express Lanes of $82,093 and $164,186 respectively (paid in August 2013). 3 Non-monetary benefits include Group insurance and expatriate allowances (where relevant). 4 A component of STI award is deferred into securities. In accordance with Accounting Standards, the deferred component will be recognised over the three year service period. The amount recognised in this table is the FY2014 accounting charge for unvested grants. 5 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 36 to the audited financial statements. 6 The value for share based benefits for C Lynch includes all unvested LTI awards. In accordance with Accounting Standard AASB 2, these have been accounted as an acceleration of vesting. The amount that would have been recognised for services received from Chris Lynch as CEO of the Group over the remainder of the vesting period has been included in the table above. These awards will continue on foot in accordance with the original terms, with the applicable measures for each grant to be tested at the end of the applicable original performance period. These LTI awards may or may not vest. Also included is a cash payment of $1,060,000 which was made to Chris Lynch in lieu of an LTI earned but not received for a six month period during his tenure in line with his contractual entitlement to receive an LTI award for every day employed by the Group. This payment was made in cash in August 2012. 7The value for Deferred STI and share based benefits for M Kulper includes all unvested awards. In accordance with Accounting Standard AASB 2, these have been accounted as an acceleration of vesting. The amount that would have been recognised for services received from M Kulper as President, North America of the Group over the remainder of the vesting period has been included in the table above. These awards will continue on foot in accordance with the original terms. The LTI awards may or may not vest. 44 44 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) Remuneration report (continued) H 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. Under these agreements, the CEO and other Senior Executives are eligible to participate in STI and LTI plans. Some other key aspects of the agreements in place for FY2014 are outlined below: Period of notice to terminate (Executive) Period of notice to terminate (the Group*) CEO Other Senior Executives 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. I ADDITIONAL REMUNERATION INFORMATION Employee Security Plans The Group operated the following broad employee based security plans in FY2014. ShareLink Incentive Plan Under the ShareLink Incentive Plan, subject to Board approval, an allocation of Transurban securities 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 21 February 2014. Due to legal restrictions on the issue of securities to USA residents, eligible employees in the USA 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. Securities granted under the plan carry a three year holding lock from the grant date and can only be traded once the holding lock expires or when employment with the Group ceases, whichever is earlier. 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 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. 45 45 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) Remuneration report (continued) Dealing 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. Securities held by Senior Executives as at 30 June 2014 The number of securities held by members of KMP as at 30 June 2014 is provided below. Comparative data is shown for those Senior Executives who were members of KMP during both FY2014 and FY2013. Current Senior Executives Balance at start of year Changes during year Balance at end of year S Charlton 2014 2013 J Aument 2014 2013 W Ballantine 2014 2013 A Head 2014 2013 S Hogg 2014 2013 S Johnson 2014 2013 T Steinhilber 2014 2013 L Tobin 2014 2013 V Vassallo 2014 2013 Former Senior Executives M Kulper 2014 2013 10,000 – – – 3,988 2,8891 3,041 3,041 11,553 1,553 29,596 19,1291 – – – – 10,538 10,0181 80,000 80,000 124,622 10,000 – – 697 1,099 84,7193 – 129,4893 10,000 14,167 10,467 – – – – 510 520 (80,000)2 – 134,622 10,000 – – 4,685 3,988 87,760 3,041 141,042 11,553 43,763 29,596 – – – – 11,048 10,538 – 80,000 1 Opening balance held prior to the Senior Executive becoming a member of KMP. 2 Balance removed on departure from the Group during FY2014. 3 Includes the FY2012 PAP awards which vested 30 June 2014. Refer section 4F. 46 46 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) Remuneration report (continued) Securities held by Non-executive Directors as at 30 June 2014 Current Non-executive Directors Balance at start of year Changes during year Balance at end of year L Maxsted 2014 2013 N Chatfield 2014 2013 R Edgar 2014 2013 S Mostyn 2014 2013 C O'Reilly 2014 2013 R Slater 2014 2013 I Smith 2014 2013 Former Non-executive Directors R Officer 2014 2013 30,000 30,000 30,910 20,910 24,590 23,733 14,000 10,300 4,363 – – – 71,772 70,000 – 20,115 36,559 – 19,514 10,000 5,734 857 3,256 3,700 9,609 4,363 – – 20,970 1,772 – (20,115)1 66,559 30,000 50,424 30,910 30,324 24,590 17,256 14,000 13,972 4,363 – – 92,742 71,772 – – 1 Balance removed on resignation as a Director during the relevant year. 47 47 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (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 2014, 20 per cent of the STI award was 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. STI is an ‘at risk’ component of remuneration – payments are determined based on the following three measures, and could result in zero payout if targets are not met. The maximum payment available to any Senior Executive is 150 per cent of target. Proportional EBITDA The proportional EBITDA result for FY2014 was $934.1 million. Excluding the effect of 495 Express Lanes, this resulted in the payment of 113.7 per cent of STIs attributable to proportional EBITDA. The growth in EBITDA was driven by the completion of the Hills M2 Upgrade in August 2013 and continued cost and revenue recovery initiatives across all assets in the portfolio. Proportional net costs The proportional net costs result for the year ended 30 June 2014 was $182.6 million, an 11.8 per cent increase from the prior year result. This resulted in the payment of 150 per cent of STIs attributable to proportional net costs. On an underlying basis, shown in the table below, net costs increased 7.5 per cent from the prior year result. The increase includes the impact of project development and acquisitions work in the current financial year. Net costs as reported Prior year one-off items TTMS impact – both periods Safety FY14 182.6 – 4.2 FY13 163.4 1.0 9.4 % increase 11.8% 186.9 173.8 7.5% For the year ended 30 June 2014, the safety performance measure resulted in a 100 per cent STI outcome. The target was a lead indicator that required the completion of safety development action plans. The target was split with equal weighting between employee/contractor (5 per cent) and customer (5 per cent) safety targets. The Group achieved the completion of 76 per cent of the defined safety development action plans. 48 48 2014 Transurban Annual Report Remuneration report (continued) B GROUP PERFORMANCE AND LTI Transurban Holdings Limited Directors' report 30 June 2014 (continued) For the year ended 30 June 2014, LTIs were linked to relative TSR and FCF per security. Relative TSR Relative TSR for the year ended 30 June 2014 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. FCF per security The performance target for performance awards granted during the year ended 30 June 2014 was a range for compound growth in FCF per security of between 12 per cent and 15 per cent per annum over three years. It was 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 2015, the performance target range for compound growth in FCF per security per annum is between 10.0 per cent and 13.0 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 2010, Transurban’s distribution policy has been to align distributions with 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. Group Performance Measure Security price at year end Distribution paid per security Underlying proportional EBITDA - $m1 TSR performance2 TSR rank position3 FCF per security performance - weighted average 2014 $7.39 35.0c 934.1 17% 2013 $6.76 31.0c 828.0 25% 33 / 934 14 / 315 12 / 896 2012 $5.69 29.5c 784.0 15% 35 / 86 6 / 86 19 / 867 2011 $5.23 27.0c 718.7 32% 2010 $4.24 24.0c 635.4 10% n/a n/a 33.9 30.1c 29.8c 27.5c 27.4c 1 In the current and prior year, LTIs were linked to relative TSR and FCF per security. In earlier years, LTIs were linked to relative TSR and proportional EBITDA. 2 The TSR performance is the total security holder return for that financial year 3 This is the TSR ranking position for the LTI that vests during the financial year 4 FY2011 PAP that vested 1 November 2013 5 FY2012 PAP that vested 30 June 2014 6 FY2010 PAP that vested November 2012 (testing as at 30 June 2012) 7 FY2009 PAP tested in three tranches 49 49 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) Remuneration report (continued) 6 Non-executive director remuneration A REMUNERATION POLICY The diagram below sets out the key objectives of the Group’s Non-executive Director remuneration policy and how they are achieved 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 and workload expected, the Director’s experience and expertise, and market benchmark data provided by remuneration consultants Director remuneration consists of base (Director) fees and Committee fees. No element of Director remuneration is 'at risk' (i.e. 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 Annual General Meeting. No change to this amount is proposed for FY2015. The aggregate fee pool and the manner in which it is apportioned amongst Non-executive Directors are reviewed annually. The Remuneration and Human Resources Committee undertakes this review and makes recommendations to the Board. In conducting the review, the Committee considers market benchmark data from independent remuneration consultants. Non-executive Director fees for FY2014 Non-executive Director (base) fees have not increased since 2010. Current base fees and Committee fees per year are set out below: Board Audit and Risk Committee Nomination Committee Remuneration and Human Resources Committee Chair fee $ Member fee $ 455,000 40,000 10,000 30,000 170,000 20,000 10,000 20,000 The Chair of the Board does not receive any additional fees for Committee responsibilities. The Chair of each Committee only receives the Chair fee (and not a member fee). Non-executive Directors are permitted to be paid additional fees for special duties or exertions. No such fees were paid during FY2014. 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. 50 50 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) Remuneration report (continued) Retirement benefits Non-executive Directors are not entitled to any retirement benefits. 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 each year. No securities were issued to Non-executive Directors under the plan during FY2014. C REMUNERATION PAID TO NON-EXECUTIVE DIRECTORS Non-executive Director remuneration for FY2014 and FY2013 is set out below: Short-term benefits Fees Post-employment benefits Superannuation1 Current Non-executive Directors L Maxsted 2014 2013 N Chatfield 2014 2013 R Edgar 2014 2013 S Mostyn 2014 2013 C O'Reilly 2014 2013 R Slater 2014 2013 I Smith 2014 2013 Former Non-executive Directors R Officer (resigned 7 August 2012) 2014 2013 Total 2014 2013 437,925 438,716 222,825 223,625 212,825 211,119 183,570 183,608 183,570 181,229 197,023 194,070 155,973 155,967 - 18,832 1,593,711 1,607,166 17,774 16,470 17,774 16,470 17,774 16,470 16,980 16,470 16,980 16,247 - - 14,427 14,037 - 1,695 101,709 97,859 Total 455,699 455,186 240,599 240,095 230,599 227,589 200,550 200,078 200,550 197,476 197,023 194,070 170,400 170,004 - 20,527 1,695,420 1,705,025 1 Superannuation contributions made on behalf of Non-executive Directors to satisfy the Group’s obligations under applicable superannuation guarantee legislation. 51 51 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) Remuneration report (continued) D NON-EXECUTIVE DIRECTOR RELATED PARTY INFORMATION Rodney Slater is a partner in the public policy practice group of Squire Patton Boggs (US) LLP. Transurban used Squire Patton Boggs (US) LLP during the year ended 30 June 2014 for various lobbying activities in the USA. This relationship is based on normal commercial terms. US$180,144 was paid to Squire Patton Boggs (US) LLP during FY2014. Lindsay Maxsted is Chairman and 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. Neil Chatfield is Chairman and a Non-executive Director of Seek Limited. Seek provides employment advisory services to Transurban. This relationship is based on normal commercial terms. Neil Chatfield is also Chairman of, and Samantha 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. Christine O’Reilly is a Non-executive Director of Energy Australia. Energy Australia is one of Transurban’s electricity providers in NSW and Queensland. This relationship is based on normal commercial terms. 52 52 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) Non-audit services The Company 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 judgment or independence. The external auditor will only provide a permissible non-audit service where there is a compelling reason for it to do so. 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 during the period 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 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 2014 $ 2013 $ 1,337,000 594,000 1,931,000 1,100,000 124,800 1,224,800 1,931,000 1,224,800 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 55. 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 million, or in certain cases, to the nearest dollar. 53 53 2014 Transurban Annual Report Transurban Holdings Limited Directors' report 30 June 2014 (continued) 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 5 August 2014 54 54 2014 Transurban Annual Report 55 2014 Transurban Annual ReportTransurban Holdings Limited ABN 86 098 143 429 Annual report - 30 June 2014 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 57 58 59 60 62 63 146 147 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 23 727 Collins Street Docklands VIC 3008 The financial report was authorised for issue by the Directors on 5 August 2014. The Directors have the power to amend and reissue the financial report. 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 56 56 2014 Transurban Annual Report Continuing operations Revenue Toll, fee and other road revenue Construction revenue Management, 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 profits (losses) of equity accounted investments Profit before income tax Income tax benefit Profit from continuing operations Discontinued operation Profit from discontinued operation, net of tax Profit for the year Profit is attributable to: Ordinary equity holders of the stapled group Non-controlling interests Earnings per security attributable to ordinary equity holders of the stapled group: Basic earnings per stapled security Diluted earnings per stapled security Transurban Holdings Limited Consolidated income statement For the year ended 30 June 2014 Notes 2014 $M 2013 $M 1,001 110 39 1,150 (214) (43) (29) (105) (391) 759 (330) 125 (470) (345) 115 199 45 244 8 252 282 (30) 252 887 267 41 1,195 (198) (41) (24) (256) (519) 676 (312) 108 (345) (237) (10) 117 58 175 - 175 172 3 175 Cents Cents 18.3 18.3 11.7 11.7 4 5 6 10 7 29 34 34 The above consolidated income statement should be read in conjunction with the accompanying notes. 57 57 2014 Transurban Annual Report Transurban Holdings Limited Consolidated statement of comprehensive income For the year ended 30 June 2014 Profit for the year Other comprehensive income Items that may be reclassified to profit or loss Changes in the fair value of cash flow hedges, net of tax Exchange differences on translation of foreign operations, net of tax Blank Other comprehensive income for the year, net of tax Total comprehensive income for the year Total comprehensive income for the year is attributable to: Members of Transurban Holdings Limited Non-controlling interests 2014 $M 252 26 (3) 23 275 284 (9) 275 2013 $M 175 64 (23) 41 216 256 (40) 216 The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. 58 58 2014 Transurban Annual Report Transurban Holdings Limited Consolidated balance sheet As at 30 June 2014 Notes 2014 $M 2013 $M 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 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 - Other Total equity 8 9 12 10 11 12 13 14 15 16 17 12 18 19 17 14 18 12 19 20 21 21 29 2,879 84 - 2,963 268 945 16 226 64 10,386 11,905 14,868 181 721 35 480 76 1,493 6,077 664 217 398 57 7,413 8,906 5,962 10,680 (79) (4,801) (96) 258 5,962 The above consolidated balance sheet should be read in conjunction with the accompanying notes. 59 259 89 1 349 532 863 10 180 9 8,129 9,723 10,072 106 438 7 334 72 957 4,499 630 202 358 60 5,749 6,706 3,366 7,976 (104) (4,469) (183) 146 3,366 59 2014 Transurban Annual Report Transurban Holdings Limited Consolidated statement of changes in equity For the year ended 30 June 2014 Attributable to members of Transurban Holdings Limited Notes Contributed equity $M Reserves $M Accumulated losses $M Total $M Non- controlling interests - TIL $M Non- controlling interests - Other $M Total equity $M 7,848 (138) (4,232) 3,478 (148) 158 3,488 - - - 92 32 3 1 - - - 128 - 37 37 - - - (2) - (1) - (3) 219 219 - 37 219 256 (49) 4 (45) - - - - 92 32 3 (1) (456) (456) - - (1) - 8 2 - - - - - (456) (331) 10 5 - 5 - - - - - (2) (15) (17) 175 41 216 100 34 3 (1) (456) (3) (15) (338) 20 20 20 21 22 Balance at 1 July 2012 Comprehensive income Profit (loss) for the year Other comprehensive income (loss) Total comprehensive income Transactions with owners in their capacity as owners: Contributions of equity, net of transaction costs Distribution reinvestment plan Deferred short term incentives issued Changes in value of share- based payment reserve Distributions provided for or paid Acquisition of non- controlling interest Distributions to non- controlling interest Balance at 30 June 2013 7,976 (104) (4,469) 3,403 (183) 146 3,366 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 60 60 2014 Transurban Annual Report Transurban Holdings Limited Consolidated statement of changes in equity For the year ended 30 June 2014 (continued) Attributable to members of Transurban Holdings Limited Contributed equity $M Reserves $M Accumulated losses $M Total $M Notes Non- controlling interests - TIL $M Non- controlling interests - Other $M Total equity $M 7,976 (104) (4,469) 3,403 (183) 146 3,366 Balance at 1 July 2013 Comprehensive income Profit (loss) for the year Other comprehensive income (loss) Total comprehensive income Transactions with owners in their capacity as owners: Contributions of equity, net of transaction costs Distribution reinvestment plan Deferred short term incentives issued Changes in value of share- based payment reserve Distributions provided for or paid Distributions to non- controlling interest Transactions with NCI Equity contribution from non-controlling interests - - - 2,636 64 2 2 - - - - - 14 14 - - - 4 - - 7 - 20 20 20 21 22 20 262 262 - 14 262 276 20 7 27 (30) 252 2 23 (28) 275 2,636 60 - - - - 64 2 6 (594) (594) - - - - 7 - - - - - - (14) (7) 161 140 2,696 64 2 6 (594) (14) - 161 2,321 258 5,962 - - - - - - - 60 (96) Balance at 30 June 2014 10,680 (79) (4,801) 5,800 2,704 11 (594) 2,121 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 61 61 2014 Transurban Annual Report 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 Payment for acquisition of non-controlling interest 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 Payments for business combination, net of cash Net cash (outflow) from investing activities Cash flows from financing activities Proceeds from issues of stapled securities Proceeds from borrowings (net of costs) Repayment of borrowings Dividends and distributions paid to the Group's security holders Distributions paid to non-controlling interests Net cash inflow (outflow) from financing activities Net increase (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 Transurban Holdings Limited Consolidated statement of cash flows For the year ended 30 June 2014 Notes 33 22 8 2014 $M 1,116 (379) (36) 99 68 (344) (3) 521 - (27) (39) (112) (73) 57 (709) (903) 2,696 2,465 (1,730) (418) (9) 3,004 2,622 259 (2) 2,879 2013 $M 976 (353) (10) 67 57 (314) (12) 411 (3) (22) (208) (235) (17) 50 - (435) 100 597 (312) (411) (10) (36) (60) 318 1 259 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. 62 62 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 Contents of the notes to the consolidated financial statements Summary of significant accounting policies Segment information Business combinations Revenue Expenses Net finance costs Income tax benefit Current assets - Cash and cash equivalents Current assets - Trade and other receivables Equity accounted investments 1 2 3 4 5 6 7 8 9 10 11 Non-current assets - Held-to-maturity investments 12 Derivative financial instruments 13 Non-current assets - Property, plant and equipment 14 Deferred tax assets and liabilities 15 Non-current assets - Intangible assets 16 Current liabilities - Trade and other payables 17 Borrowings Provisions 18 19 Other liabilities 20 Contributed equity 21 Reserves and accumulated losses 22 Distributions 23 Remuneration of auditors 24 Contingencies 25 26 Commitments 27 Related party transactions 28 29 Non-controlling interests 30 31 Deed of cross guarantee 32 33 Reconciliation of profit after income tax to net cash inflow from operating activities 34 35 Net tangible asset backing 36 Share-based payments Key management personnel compensation 37 38 Non-cash investing and financing activities 39 Critical accounting estimates and judgements 40 Events occurring after the reporting period Parent entity financial information Earnings per stapled security Financial risk management Intra-group Guarantees Subsidiaries 63 Page 64 80 85 91 92 93 93 95 95 96 100 101 102 103 104 108 109 114 115 116 118 121 123 123 123 124 125 126 127 128 129 130 131 131 133 133 136 138 138 140 63 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (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" or the "Transurban Group" or "Transurban"), 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 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 assets (which include $2,314 million of cash held on hand to be used to complete the acquisition of Queensland Motorways on 2 July 2014) exceed its current liabilities by $1,470 million as at 30 June 2014. 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 as at 30 June 2014 there is $721 million in borrowings classified as current which is planned to be refinanced in the upcoming financial year. In addition, at 30 June 2014 the Group has available a total of $493.4 million of undrawn borrowing facilities across a number of banks. Compliance with International Financial Reporting Standards (IFRS) The consolidated financial statements of Transurban Holdings Limited also comply with IFRS as issued by the International Accounting Standards Board (IASB). New and amended standards adopted by the Group The Group has amended some of its accounting policies as the result of new or revised accounting standards which became effective for the annual reporting period commencing on 1 July 2013. The affected policies and standards are: (i) AASB 2012-2 Amendments to Australian Accounting Standards - Disclosures - Offsetting Financial Assets and Financial Liabilities. AASB 2012-2 resulted in amendments being made to AASB 7 Financial Instruments - Disclosure requiring additional disclosures when entities offset financial assets and liabilities within their financial statements. As a result of this amendment to AASB 7 the Group has expanded its disclosures about the offsetting of financial assets and liabilities (see note 12). 64 64 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 1 Summary of significant accounting policies (continued) (a) Basis of preparation (continued) New and amended standards adopted by the group (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, AASB 128 Investments in Associates and Joint Ventures, AASB 2011-7 Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements Standards and AASB 2012-10 Amendments to Australian Accounting Standards – Transition Guidance and Other Amendments. 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. In accordance with the transitional provisions of AASB 10, the Group reassessed the control conclusions for its investments at 1 July 2013. Based on this reassessment no changes have been made regarding the Group’s assessment of control over any entities where the Group has an equity interest. 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. The Group has re-evaluated its involvement in its joint arrangements at 1 July 2013 and has re-classified its investments from jointly controlled entities to joint ventures. Notwithstanding the reclassification, these investments continue to be accounted for using the equity method and accordingly there has been no impact on the recognised assets, liabilities and comprehensive income of the Group. 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. As a result of AASB 12, the Group has expanded its disclosures about its interests in subsidiaries (see note 28) and equity accounted investees (see note 10). Amendments to AASB 128 provide clarification that an entity continues to apply the equity method and does not re-measure 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 has determined that these amendments have no impact on the financial statements of the Group. 65 65 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 1 Summary of significant accounting policies (continued) (a) Basis of preparation (continued) New and amended standards adopted by the group (continued) (iii) AASB 13 Fair Value Measurement and AASB 2011-8 Amendments to Australian Accounting Standards arising from AASB 13 AASB 13 establishes a single framework for measuring fair value and making disclosures about fair value measurements, when such measurements are required or permitted by other AASBs. In particular, it unifies the definition of fair value as the price at which an orderly transaction to sell an asset or to transfer a liability would take place between market participants at the measurement date. It also replaces and expands the disclosure requirements about fair value measurements in other AASBs, including AASB 7 Financial Instruments: Disclosures. As a result, the Group has included additional disclosures in this regard. In accordance with the transitional provisions of AASB 13, the Group has applied the new fair value measurement guidance prospectively, and has not provided any comparative information for new disclosures. Notwithstanding the above, the change has not had a material impact on the measurement of the Group’s assets and liabilities. (iv) AASB 2011-4 Amendments to Australian Accounting Standards to Remove Individual Key Management Personnel Disclosure Requirements The AASB has 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. This amendment has reduced the disclosures required in the notes to the financial statements however it has not affected any of the amounts recognised in the financial statements. Early adoption of standards The Group has elected to early adopt AASB 2013-3 Amendments to AASB 136 - Recoverable Amount Disclosures for Non-Financial Assets, which amends the disclosure requirements in AASB 136 Impairment of Assets. The amendments include the requirement to disclose additional information about the fair value measurement when the recoverable amount of impaired assets is based on fair value less costs of disposal, and may result in additional disclosures if the group recognises an impairment loss or the reversal of an impairment loss during the year. The application date for the Group would have been 1 July 2014, but the Group has early adopted as of 1 July 2013. The adoption of this new standard has not had a significant impact on the disclosure within the financial statements. 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 million dollars, or in certain cases, to the nearest dollar. (b) Principles of consolidation Subsidiaries Subsidiaries are all those entities which the Group controls. The Group controls an entity when the group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to govern the financial and operating policies of the entity. 66 66 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 1 Summary of significant accounting policies (continued) (b) Principles of consolidation (continued) Subsidiaries (continued) 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 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. Application of Class Order 13/1644 In August 2013 the Australian Securities and Investment Commission released Class Order 13/1050 which allowed the Stapled Security Groups who were applying AASB 10 for the first time to continue to prepare aggregated financial statements at 30 June 2013 on the same basis as previous financial reporting periods. In December 2013 Class Order 13/1644 was released which extended the applicability of Class Order 13/1050 indefinitely. The Transurban Group financial statements for the period ended 30 June 2014 have been prepared in accordance with Class Order 13/1050. 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 10). Under AASB 11 Joint Arrangements investments in joint arrangements are classified as either joint operations or joint ventures. The classification depends on the contractual rights and obligations of each investor, rather than the legal structure of the joint arrangement. The Group has joint ventures and does not have any joint operations. 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. 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 Financial results of the 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). This includes a proportional income statement per operating segment and consolidated financial statements for the Group. 67 67 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 1 Summary of significant accounting policies (continued) (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. 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 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. 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: 68 68 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 1 Summary of significant accounting policies (continued) (e) Revenue recognition (continued)  Toll charges and related fees are recognised when the charge is incurred by the user.  Business development revenue is recognised when earned, and to the extent of costs incurred and that these costs will be recovered.  Interest income is recognised using the effective interest rate method.  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 construction 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 Company 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 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. 69 69 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (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. 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 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 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. 70 70 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (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 purpose 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 9) in the consolidated balance sheet. 71 71 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (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. 72 72 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (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 12. Movements in the hedging reserve in shareholders' equity are shown in note 21. 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. 73 73 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (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). 74 74 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (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 15. 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 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 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. 75 75 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (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 measured at 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. 76 76 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (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 information for the parent entity, Transurban Holdings Limited, disclosed in note 30 has been prepared on the same basis as the consolidated financial statements, except as set out below. 77 77 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (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 2014 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 2017) AASB 9 Financial Instruments addresses the classification, measurement and derecognition of financial assets and financial liabilities. The standard is not applicable until 1 January 2017 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. 78 78 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 1 Summary of significant accounting policies (continued) (w) New accounting standards and interpretations (continued) (ii) IFRS 15 Revenue from Contracts with Customers (effective 1 January 2017) IFRS 15 establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. IFRS 15 supersedes: (a) IAS 11 Construction Contracts (b) IAS 18 Revenue (c) IFRIC 13 Customer Loyalty Programmes (d) IFRIC 15 Agreements for the Construction of Real Estate (e) IFRIC 18 Transfers of Assets from Customers (f) SIC-31 Revenue-Barter Transactions Involving Advertising Services The core principle of IFRS 15 is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity recognises revenue in accordance with that core principle by applying the following steps: Step 1: Identify the contract(s) with a customer Step 2: Identify the performance obligations in the contract Step 3: Determine the transaction price Step 4: Allocate the transaction price to the performance obligations in the contract Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation Although a formal assessment has not been completed, the impact of the application of the new standard is not expected to be material. There are no other standards that are not yet effective and that are expected to have a material impact on the entity in the current or future reporting periods and on foreseeable future transactions. 79 79 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 2 Segment information Segment information - Proportional Income Statement The segment information provided to the Executive Committee is presented on a proportional basis. The CEO and Executive Committee assess the performance of the operating segments based on a measure of underlying proportional EBITDA. EBITDA excludes the impact of interest income, interest, tax, depreciation and amortisation expenses 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 Group operates in one business sector only, being the development, operation and maintenance of toll roads, therefore it has been determined that the segment information provided to the CEO and Executive Committee shall be defined by geographical regions, being Victoria and New South Wales in Australia and the USA. The table below lists the assets included in each operating segment, together with the proportional ownership interests held by the Group for both the current and previous financial year: Proportional ownership % Segment Victoria, Australia New South Wales, Australia Assets CityLink Hills M2 Motorway 2014 100% 100% Lane Cove Tunnel 100% Cross City Tunnel 26 June to 30 June 2014 - 100% M1 Eastern Distributor 75.1% Equity investments in: M5 M7 USA Transurban DRIVe 50% 50% 75% Pocahontas 895 1 July 2013 to 14 May 2014 - 75% 15 May to 30 June 2014 - nil% 2013 100% 100% 100% N/A 75.1% 50% 50% 75% 75% 495 Express Lanes 1 July 2013 to 11 April 2014 - 67.5% 67.5% 12 April to 4 June 2014 - 77.5% 5 June to 30 June 2014 - 94% 95 Express Lanes 1 July 2013 to 11 April 2014 - 67.5% 67.5% 12 April to 30 June 2014 - 77.5% 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. 80 80 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 2 Segment information (continued) Segment information - Proportional Income Statement (continued) The Group's corporate function, which includes costs incurred in relation to the Queensland Motorways acquisition which did not complete until 2 July 2014, 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 their contribution to the business is closely monitored. As of 2 July 2014, the activities of Queensland Motorways will be disclosed as part of a Queensland geographical operating segment. The information for the operating segments for the year ended 30 June 2014 and 30 June 2013 is detailed in the following tables. The operating segments have been further broken down by asset to assist with external analysis of the financial statements. 81 81 2014 Transurban Annual Report l a t o T e t a r o p r o C l a t o T A S U 5 9 4 A S U A S U s e n a L 5 9 8 n a b r u s n a r T e t a r o p r o C s s e r p x E s a t n o h a c o P l a t o T W S N & m a o R t s u a l l o T 7 M 5 M r o t u b i r t s D i l e n n u T l e n n u T 2 M s l l i H 1 M n r e t s a E y t i C s s o r C e n a L e v o C i k n L y t i C s e l a W h t u o S w e N a i r o t c i V 7 1 1 , 1 5 1 1 2 3 2 , 1 4 3 9 7 2 1 ) 3 7 6 ( 0 5 2 ) 7 9 3 ( - 8 8 ) 0 2 ( 6 1 1 ) 1 3 2 ( - ) 1 2 ( 1 3 5 6 3 4 - ) 0 4 1 ( ) 6 1 ( 0 5 2 1 4 2 ) 6 5 1 ( 8 9 ) 6 2 1 ( 9 2 4 1 1 ) 4 6 3 , 1 ( 1 2 1 ) 7 2 1 ( ) 5 1 1 ( ) 7 1 ( ) 0 2 ( - - - ) 4 ( - ) 5 ( - - ) 9 ( 9 5 0 5 ) 0 5 ( 0 2 5 5 2 2 - ) 0 2 1 ( - ) 6 1 ( 1 1 - 1 1 6 - ) 5 1 ( - 0 5 2 1 5 5 9 4 0 0 6 6 6 4 6 ) 3 6 2 ( - ) 6 1 2 ( ) 4 3 1 ( 2 4 2 ) 7 ( - 9 0 1 ) 4 3 1 ( ) 4 7 1 ( 7 6 ) 9 7 ( 9 2 - 6 2 6 2 5 1 - - - ) 1 ( 4 1 ) 4 ( 0 1 ) 0 2 6 ( ) 5 3 ( 2 8 5 1 1 3 8 1 1 6 9 1 ) 3 5 1 ( - ) 4 3 ( 4 9 9 3 0 1 9 8 1 ) 4 1 ( - ) 4 3 ( 9 7 2 1 8 2 5 - ) 9 2 ( - ) 9 3 ( ) 0 9 ( 2 4 ) 6 1 ( 5 ) 5 8 ( ) 5 5 ( ) 0 2 ( 2 2 8 1 2 ) 5 2 1 ( ) 4 8 ( 1 - 1 1 2 - - - 3 ) 1 ( 2 ) 2 ( 9 6 3 2 7 1 5 1 ) 4 1 ( - ) 5 2 ( 3 1 ) 5 ( 8 3 9 1 6 9 9 1 2 6 1 1 ) 3 5 ( - ) 3 8 ( 7 2 6 1 3 4 ) 9 7 ( ) 2 4 2 ( 5 3 5 3 5 8 8 5 3 8 4 5 ) 9 3 ( - ) 4 4 1 ( 6 0 3 ) 0 5 ( 6 5 2 ) 3 4 8 ( 4 1 0 2 e n u J 0 3 M $ r e h t o 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 l a n o i t r o p o r P A D T B E I e u n e v e r t s e r e t n I e s n e p x e t s e r e t n I r e f s n a r t n o i n a G n o i t a s i t r o m a l a n o i t r o p o r P ) s s o l ( t i f o r p x a t e r o f e b t i f e n e b x a t e m o c n I ) e s n e p x e ( 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 d n a n o i t i a c e r p e D 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 ( 4 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 ( 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 2 ) 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 82 2014 Transurban Annual Report 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 ( 4 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 A S U s e l a W h t u o S w e N a i r o t c i V ) 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 2 ) 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 1 9 9 3 1 1 4 0 1 , 1 8 2 8 1 1 1 ) 9 3 5 ( ) 8 7 3 ( 2 2 2 7 4 9 ) 7 9 1 , 1 ( - 4 2 3 2 ) 2 ( 0 0 1 ) 1 8 1 ( ) 3 2 ( ) 6 0 1 ( 4 4 8 3 ) 2 6 ( 6 1 1 7 1 ) 3 ( 1 ) 4 4 ( ) 1 1 ( ) 7 5 ( 0 3 1 1 ) 7 2 ( - - - ) 4 ( - ) 2 ( - ) 6 ( 2 2 6 1 ) 5 1 ( 5 1 6 ) 5 ( 1 ) 8 2 ( ) 8 ( ) 0 4 ( - 4 3 ) 0 4 ( 1 1 - 1 1 6 - ) 4 1 ( ) 3 ( ) 1 1 ( 8 ) 3 ( ) 8 ( 9 7 4 2 4 1 2 5 2 9 3 5 ) 2 5 2 ( ) 7 9 1 ( ) 2 5 ( 0 3 ) 2 2 ( ) 9 9 4 ( - 6 2 6 2 1 1 - - ) 1 ( 0 1 ) 3 ( 7 ) 3 3 ( 3 8 5 0 1 2 7 0 1 5 8 2 ) 6 4 1 ( ) 4 3 ( ) 3 9 ( 2 1 ) 1 8 ( ) 6 2 ( 4 9 7 1 0 1 8 8 1 ) 5 1 ( ) 4 3 ( 0 4 ) 1 2 ( 9 1 5 7 - 5 7 4 5 - ) 3 3 ( ) 9 3 ( ) 8 1 ( - 8 1 2 6 2 4 6 7 3 1 ) 1 2 ( ) 5 2 ( ) 8 ( ) 1 ( ) 9 ( 3 4 1 5 8 4 1 7 1 1 1 ) 7 3 ( ) 4 6 ( 7 1 5 2 2 4 ) 0 2 1 ( ) 5 7 ( ) 5 5 ( ) 0 9 1 ( 6 9 4 6 4 2 4 5 1 4 4 5 ) 2 6 ( ) 7 4 1 ( 7 3 2 ) 2 3 ( 5 0 2 ) 7 4 7 ( A S U l a t o T n a b r u s n a r T A S U s e n a L 5 9 8 e t a r o p r o C s s e r p x E 5 9 4 s a t n o h a c o P l a t o T W S N & m a o R t s u a l l o T 7 M 5 M 1 M n r e t s a E e n a L e v o C r o t u b i r t s D i l e n n u T 2 M s l l i H i k n L y t i C 3 1 0 2 e n u J 0 3 M $ r e h t o 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 A D T B E I l a n o i t r o p o r P e u n e v e r t s e r e t n I e s n e p x e t s e r e t n I 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 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 ( 83 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (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 equity accounted assets Construction revenue recognised in accordance with AASB Interpretation 12 Service Concession Arrangements Business development revenue (offset against business development costs for proportional result) Other Total revenue (note 4) 2014 $M 1,232 27 (253) 106 35 3 1,150 Interest revenue Interest revenue is earned through bank interest revenue and held-to-maturity investment interest income. Interest revenue reconciles to total statutory finance income as follows: Total segment interest revenue (proportional) Less: Interest revenue of non-controlled assets Total statutory finance income (note 6) 2014 $M 127 (2) 125 2013 $M 1,104 25 (225) 256 30 5 1,195 2013 $M 111 (3) 108 84 84 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (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 (including M1 Eastern Distributor and 495 Express Lanes) attributable to non-controlling interest Less: Proportional EBITDA of M5 Less: Proportional EBITDA of M7 Less: Proportional EBITDA of Pocahontas Less: Proportional EBITDA of Capital Beltway (pre 4 June 2014) Less: Proportional EBITDA of 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 Profit from discontinued operations Profit for the year 3 Business combinations 2014 $M 934 14 (89) (96) (6) (1) 4 759 (345) (330) 115 45 244 8 252 2013 $M 828 17 (88) (85) (6) 5 4 676 (237) (312) (10) 58 175 - 175 During and subsequent to the end of the financial year the Group completed business acquisitions, details of which are set out below. (a) Cross City Tunnel On 30 December 2013 the Group acquired the secured senior debt of the Cross City Tunnel Group (CCT Group) which was in receivership. The receivers and managers subsequently conducted a sale process and at the time of the acquisition the assets and liabilities of the CCT Group were considered held-for-sale. Transurban subsequently purchased the concession asset on 26 June 2014. The operations of the CCT Group were presented as a discontinued operation for the period between the acquisition date and 26 June 2014. As a result of the debt acquisition the Group was deemed in accordance with AASB 10 Consolidated Financial Statements to have gained control of the CCT Group being Cross City Motorway Pty Ltd, CCT Motorway Finance Pty Limited, CM Holdings Trust Pty Limited, CCT Motorway Company Nominees Pty Limited, Cross City Motorway Nominees No. 2 Pty Ltd and CCT Motorway Group Holdings Pty Ltd, who collectively operate the Cross City Tunnel, a 2.1 kilometre toll road located in Sydney, Australia. The Group achieved control via the acquisition of 100 per cent of the senior secured debt to the CCT Group from The Royal Bank of Scotland plc., Australian Branch and The Royal Bank of Scotland N.V., Australian Branch (together RBS). At the time of the acquisition, receivers and managers had been appointed to each of the CCT Group entities by RBS. The Group’s acquisition of the senior secured debt gave it the right to remove and appoint the receivers and managers and therefore significant rights (power) in relation to the relevant activities of the CCT Group entities, notwithstanding that the Group had no equity ownership interest in the CCT Group entities. CCT Group has been treated as a controlled entity with a 100 per cent non-controlling interest from the date of acquisition. 85 85 2014 Transurban Annual Report 3 Business combinations (continued) (a) Cross City Tunnel (continued) (i) Purchase consideration Cash paid Contingent consideration Total purchase consideration Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) $M 491 - 491 In the event of material CCT Group traffic outperformance relative to the Transurban base case assumptions and if certain other conditions are satisfied, a further payment will be made to RBS over four years of up to $27.5 million (year four nominal dollars). As of 30 December 2013, a value of $nil has been ascribed to this contingent consideration. This assessment has not changed as at 30 June 2014. (ii) Purchase consideration – cash outflow Cash consideration Less: cash acquired Outflow of cash – investing activities $M 491 (16) 475 (iii) Acquisition related costs The Group incurred acquisition related costs of $3 million relating to external legal fees and due diligence costs. These costs have been included within business development costs in the Group’s Consolidated income statement. (iv) Identifiable assets acquired and liabilities assumed Cash and cash equivalents Trade and other receivables Intangible assets Trade and other payables Provisions Net identifiable assets acquired Fair Value $M 16 4 514 (4) (39) 491 At 31 December 2013 the assets and liabilities of the CCT Group entities were measured at fair value less costs to sell at the acquisition date with fair values having been determined on a provisional basis. No changes to the provisional fair values recorded at 31 December 2013 were made during the period and are deemed final. No goodwill has been recognised on the fair value of assets and liabilities acquired. 86 86 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 3 Business combinations (continued) (a) Cross City Tunnel (continued) (v) Revenue and profit contribution From 30 December 2013 (acquisition date) to 30 June 2014 the results of CCT Group have been classified as discontinued operations in the Group’s Income Statement. If the acquisition had occurred on 1 July 2013, consolidated revenue and loss before tax for the year ended 30 June 2014 would have been $52.9 million and $7.1 million respectively. These amounts have been calculated using the subsidiaries’ results and adjusting them for receiver costs and other one-offs not related to the ongoing operations of the business. (b) DRIVe, 495 Express Lanes and 95 Express Lanes Transurban DRIVe Holdings LLC (DRIVe) has historically been reported by the Group as an equity accounted investment. Transurban owns 75 per cent of DRIVe, but although the ownership represents greater than half of the voting rights of DRIVe, it was determined that Transurban did not have power to govern its key activities and it was therefore accounted for as a joint venture. At 1 July 2013 DRIVe owned 100 per cent of Pocahontas 895, 90 per cent of 495 Express Lanes and 90 per cent of 95 Express Lanes, all located in Virginia, USA. During the year several transactions have occurred impacting the investments held by DRIVe, resulting in a reassessment of control over the assets and DRIVe. (i) On 11 April 2014 Transurban purchased a 10 per cent interest directly in each of 495 Express Lanes and 95 Express Lanes from Fluor Enterprises LLC (ii) On 14 May 2014 Pocahontas was transferred to lenders (refer note 10) (iii) On 4 June 2014 Transurban contributed additional equity into Capital Beltway Express LLC, giving it an additional 66 per cent direct interest in 495 Express Lanes Transurban now holds 10 per cent of 95 Express Lanes and 76 per cent of 495 Express Lanes directly, and 67.5 per cent of 95 Express Lanes and 18 per cent of 495 Express Lanes through DRIVe, resulting in effective interests in 95 Express Lanes of 77.5 per cent and 495 Express Lanes of 94 per cent. The direct holding of 76 per cent gives Transurban power over all relevant activities of 495 Express Lanes. When 95 Express Lanes is complete, 495 Express Lanes and 95 Express Lanes will be directly connected and will be operated as if they were a single road. As a result, control of 495 Express Lanes has also given Transurban the power to direct the most significant activities of 95 Express Lanes. As DRIVe is primarily a holding entity for 95 Express Lanes and 495 Express Lanes, its relevant activities are identical to those of 95 Express Lanes and 495 Express Lanes. Therefore Transurban assumed control of DRIVe on 4 June 2014 and accounted for the acquisition of DRIVe, including 95 Express Lanes and 495 Express Lanes as a business combination on that date. (i) Purchase consideration Cash paid Fair value of DRIVe at 4 June 2014 Contingent consideration Total purchase consideration 87 $M 345 358 - 703 87 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 3 Business combinations (continued) (b) DRIVe, 495 Express Lanes and 95 Express Lanes (continued) (ii) Purchase consideration – cash outflow Cash consideration Less: cash acquired Outflow of cash – investing activities (iii) Acquisition-related costs $M 345 (113) 232 The Group did not incur any costs directly in the purchase of equity in either 495 Express Lanes or 95 Express Lanes during the year. (iv) Identifiable assets acquired and liabilities assumed 495 Express Lanes Cash and cash equivalents Trade and other receivables Intangible assets Other assets Trade and other payables Derivative financial instruments Provisions Deferred tax liabilities Borrowings Net identifiable assets Less: non-controlling interest share of net assets Net identifiable assets acquired DRIVe and 95 Express Lanes Cash and cash equivalents Intangible assets Held-to-maturity investments Deferred tax assets Other assets Trade and other payables Borrowings Provisions Deferred tax liabilities Net identifiable assets Less: non-controlling interest share of net assets Net identifiable assets acquired Fair Value $M 57 1 1,290 3 (25) (41) (10) (40) (828) 407 (98) 309 Fair Value $M 69 667 98 80 12 (56) (346) (2) (9) 513 (119) 394 At 4 June 2014 the assets and liabilities of the 495 Express Lanes and DRIVe / 95 Express Lanes were measured at fair value at the acquisition date with fair values having been determined on a provisional basis. No goodwill has been recognised on the fair value of assets and liabilities acquired. 88 88 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 3 Business combinations (continued) (b) DRIVe, 495 Express Lanes and 95 Express Lanes (continued) (v) Revenue and profit contribution From the date of acquisition to 30 June 2014, revenue of $4 million and a loss after taxation of $79.8 million was included in the Consolidated Income Statement with regards to DRIVe, 495 Express Lanes and 95 Express Lanes. The loss included $73.1 million of break costs incurred on early termination of swaps included in finance costs. If the acquisition had occurred on 1 July 2013, consolidated revenue and loss before tax for the year ended 30 June 2014 would have been $33.4 million and $166.5 million respectively. These values exclude the impact of Pocahontas 895 and change in investment values within DRIVe that do not relate to the ongoing operations of the business. (vi) Accounting policy for non-controlling interests The Group recognises non-controlling interests in an acquired entity either at fair value or at the non-controlling interests’ proportionate share of the acquired entity’s net identifiable assets. This decision is made on an acquisition by acquisition basis. For the non-controlling interest in DRIVe, 495 Express Lanes and 95 Express Lanes, the Group elected to recognise the non-controlling interests in its proportionate share of the acquired net identifiable assets. (c) Queensland Motorways (subsequent event) On 24 April 2014 the Group announced that a consortium (in which the Group holds a 62.5 per cent equity interest) had reached agreement to acquire Queensland Motorways through an all cash offer to the existing shareholder. Subsequent to year end the acquisition was completed on 2 July 2014. The Queensland Motorways portfolio is a motorway network in Brisbane comprising four concessions covering (i) the Logan and Gateway motorways, (ii) CLEM7, (iii) Go Between Bridge and (iv) Legacy Way, which is expected to open in the second half of financial year 2015. This urban motorway network is complementary to the Group’s existing networks in Sydney and Melbourne, and contributes additional scale, long dated concessions, investment potential and strategic value to the Group’s current portfolio. (i) Purchase consideration Cash paid Contingent consideration Total purchase consideration $M 6,403 - 6,403 (ii) Purchase consideration – cash outflow The consideration was paid on 2 July 2014 and will be reflected in the Group’s financial statements for the 2015 financial year. (iii) Acquisition related costs Acquisition costs included in the Group’s Consolidated Income Statement for the current year are $9.5 million. Acquisition related costs of $407.3 million are expected to be included in the Group’s financial results for the 2015 financial year, inclusive of $383.6 million of stamp duty. 89 89 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 3 Business combinations (continued) (c) Queensland Motorways (subsequent event) (continued) (iv) Identifiable assets acquired and liabilities assumed The provisionally determined fair values of the assets and liabilities of Queensland Motorways as at acquisition date are as follows: Cash and cash equivalents Trade and other receivables Other assets Property, plant and equipment Deferred tax assets Intangible assets Trade and other payables Provisions Borrowings Other liabilities Net identifiable assets Less: non-controlling interest share of net assets Net identifiable assets acquired (v) Fair values measured on a provisional basis Fair Value $M 22 14 4 168 548 6,733 (52) (732) (270) (32) 6,403 (2,401) 4,002 Due to the timing of the completion of the acquisition two days after the completion of the Group’s financial year, the Group has not yet completed its final assessment of the fair value of the assets and liabilities acquired. If new information is obtained within one year of the acquisition date about facts and circumstances that existed at the acquisition date that require adjustments to the above amounts, or any additional provisions to be recognised, then the accounting for the acquisition will be revised. (vi) Fair values measured on a provisional basis No goodwill has been recognised on the provisional fair value of assets and liabilities acquired. 90 90 2014 Transurban Annual Report 4 Revenue Toll revenue Fee revenue Other road revenue Total toll, fee and other road revenue Construction revenue Management and business development revenue Other revenue Total business development and other revenue Total revenue (a) Toll and fee revenue Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) Notes 4(a) 4(a) 4(b) 4(c) 4(d) 2014 $M 906 79 16 1,001 110 38 1 39 2013 $M 801 67 19 887 267 39 2 41 1,150 1,195 Toll revenue and associated fees are recognised when the charge is incurred by the user. (b) Other road revenue Other road revenue includes advertising, rental and other associated revenue. (c) Construction revenue Construction revenue is recognised during the construction phase of an intangible asset, and the development of assets for sale to third parties. (d) Management and business development revenue Management and business development revenue relates to the provision of management and development services to related and third parties. 91 91 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 5 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 Provision for maintenance recognised during the year Concession fees (road operating cost) are attributable to: Hills M2 Motorway M1 Eastern Distributor Depreciation and amortisation expense Road operating cost Corporate cost 2014 $M 2013 $M 1 4 96 5 7 32 2014 $M 2 2 4 307 23 330 1 4 91 4 7 22 2013 $M 2 2 4 290 22 312 92 92 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 6 Net finance costs Finance income Interest income on held-to-maturity investments Interest income on bank deposits Net foreign exchange gains Total finance income Finance costs Interest and finance charges paid/payable Unwind of discount on liabilities Total finance costs Net finance costs 7 Income tax benefit Income tax benefit Current tax Deferred tax Under provision in prior years Deferred income tax benefit included in income tax benefit comprises: (Increase) in deferred tax assets (note 14) (Decrease) in deferred tax liabilities (note 14) 93 2014 $M 106 18 1 125 (463) (7) (470) (345) 2014 $M (4) (44) 3 (45) (56) 12 (44) 2013 $M 98 10 - 108 (328) (17) (345) (237) 2013 $M 1 (61) 2 (58) (34) (27) (61) 93 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 7 Income tax benefit (continued) Numerical reconciliation of income tax benefit to prima facie tax payable Profit before income tax benefit Tax at the Australian tax rate of 30.0% (2013 - 30.0%) Tax effect of amounts which are not deductible (taxable) in calculating taxable income: Income not subject to tax Accounting depreciation on non tax depreciable assets Non-deductible interest Equity accounted results Sundry items Tax differential Under (over) provision in prior years Income tax benefit Tax expense (income) relating to items of other comprehensive income Cash flow hedges (note 21) Foreign currency translation (note 21) Tax consolidation legislation 2014 $M 199 - 60 (81) (1) 10 (47) (4) 15 (48) 3 (45) (154) (23) 2 (21) 2013 $M 117 - 35 (115) 6 7 3 4 - (60) 2 (58) (61) 6 1 7 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 is 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. 94 94 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 8 Current assets - Cash and cash equivalents Cash at bank and in hand All cash balances are interest bearing. 2014 $M 2,879 2,879 2013 $M 259 259 The cash at bank and in hand includes $2,314 million which has been used to complete the acquisition of Queensland Motorways on 2 July 2014. Funds not for general use The amount shown in Cash at Bank includes $124 million not available for general use at 30 June 2014 (2013: $66.2 million). This comprises amounts required to be held under maintenance and funding reserves, and prepaid tolls, which are restricted from general use. 9 Current assets - Trade and other receivables Trade receivables Provision for impairment of receivables Other receivables Prepayments 2014 $M 2013 $M 40 (1) 39 36 9 84 38 (1) 37 45 7 89 Provision for impaired trade and other receivables As at 30 June 2014 current trade receivables of the Group with a nominal value of $1 million (2013: $1 million) were considered impaired and accordingly the Group held a provision for impairment of $1 million (2013: $1 million). As at 30 June 2014, trade receivables of $6 million (2013: $6 million) were past due but not impaired. The ageing of these receivables is as follows: For the year ended 30 June 2014 Trade and other receivables Current (not past due) less than 30 days overdue more than 90 days overdue Not Impaired $M Impaired $M Allowance for Doubtful Debts $M 33 5 1 39 - - 1 1 - - 1 1 95 95 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 9 Current assets - Trade and other receivables (continued) Provision for impaired trade and other receivables (continued) For the year ended 30 June 2013 Trade and other receivables Current (not past due) less than 30 days overdue more than 90 days overdue Not Impaired $M Impaired $M Allowance for Doubtful Debts $M 31 5 1 37 - - 1 1 - - 1 1 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. 10 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 Carrying amounts 2014 % 50 50 50 50 50 75 325 2013 % 50 50 50 50 50 75 325 2014 $M - - - - 268 - 268 2013 $M - - - - 303 229 532 All entities listed above are incorporated in Australia with the exception of Transurban DRIVe which is incorporated in the United States of America. The amounts recognised in the income statement are as follows: Share of net profits (losses) of joint ventures For the year ended 30 June Total 2014 $M 115 115 2013 $M (10) (10) 96 96 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 10 Equity accounted investments (continued) (a) Joint ventures (i) 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. (ii) 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 following completion of the M5 widening 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. (iii) Transurban DRIVe On 14 May 2014, Pocahontas 895 was transferred to lenders. The non-cash profit realised on the transfer was A$103.1 million, inclusive of Transurban’s 75 per cent share of the profit after tax (US$128.1 million), unrecognised losses from operations (A$104.2 million), and unrecognised profits on the 2007 transfer of Pocahontas into the DRIVe vehicle (A$69.4 million). Tax losses in the Pocahontas Group were sufficient to offset the tax payable on the gain made on disposal. Until 4 June 2014 the Group equity accounted for its investment in DRIVe. On 4 June 2014 it was determined that the Group had control of DRIVe and from this date equity accounting ceased and DRIVe was consolidated by the Group (refer note 3). Post the cessation of equity accounting for DRIVe the Group’s investment in DRIVe was reduced to $nil. In addition, on consolidation of DRIVe as of 4 June 2014 (as disclosed in note 3) DRIVe’s cashflow hedge reserve and foreign currency translation reserve were required to be reversed to the Income Statement, resulting in a $15 million charge. Both of these items have been included within Share of net profits of equity accounted investments in the Income Statement. 97 97 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 10 Equity accounted investments (continued) (b) Summarised financial information of equity accounted investments Set out below is the summarised financial information for the Group’s investments accounted for using the equity method. Westlink M7 50% M5 Motorway 50% Transurban DRIVe 75% Total Summarised balance sheet Cash and cash equivalents Other current assets Non-current assets Held for sale assets Current financial liabilities Other current liabilities Non-current financial liabilities Other non-current liabilities Held for sale liabilities Net assets 2014 $M 86 8 1,798 - - (45) 2013 $M 74 9 1,856 - - (25) (3,139) (62) - (1,354) (3,056) (55) - (1,197) Summarised income statement Revenue Depreciation and amortisation Other expenses Gain on transfer of Pocahontas Interest expense Income tax expense Profit / (loss) Other comprehensive income Total comprehensive income Proportional total comprehensive income Amortisation of fair value uplift Group's share of comprehensive income Losses not recognised Unrecognised gain on transfer Transfer of reserves Group's recognised share of total comprehensive income Dividends received 98 2014 $M - - - - - - - - - - 42 (9) (32) 326 (69) (104) 154 37 191 143 - 143 (104) 70 (15) 94 - 2013 $M 357 1 1,916 370 - (78) 2014 $M 117 9 2,216 - (4) (127) 2013 $M 460 14 4,061 370 - (182) (1,434) (328) (544) 260 (3,925) (77) - (1,791) (5,140) (394) (544) (1,355) 23 (16) (27) - (57) 39 (38) (1) (39) (28) - (28) - - - (28) - 484 (94) (107) 326 (393) (134) 82 49 131 113 (27) 86 (26) 70 (15) 115 57 438 (99) (99) - (370) 24 (106) 13 (93) (56) (27) (83) 73 - - (10) 50 2014 $M 31 1 418 - (4) (82) (786) (15) - (437) 206 (15) (28) - (26) (41) 96 (1) 95 48 2013 $M 29 4 289 - - (79) (650) (11) - (418) 202 (13) (29) - (26) (42) 92 (1) 91 45 236 (70) (47) - (298) 11 (168) 213 (70) (43) - (287) 27 (160) 13 15 (155) (145) (78) (73) - (78) 78 - - - - - (27) (27) (73) 73 - - - - 18 - - - 18 50 21 - - - 21 57 98 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 10 Equity accounted investments (continued) (b) Summarised financial information of equity accounted investments (continued) Westlink M7 50% M5 Motorway 50% Transurban DRIVe 75% Total Reconciliation of summarised financial information 2014 $M 2013 $M 2014 $M 2013 $M Opening net assets on 1 July Investments in subsidiary Profit / (loss) for the period Other comprehensive income Foreign exchange differences Dividends paid Closing net assets Proportional interest in associates Uplift on acquisition Losses not recognised Cessation of equity accounting on gain of control Carrying value 2014 $M 2013 $M (1,198) - (169) (1,052) - (161) 2014 $M (418) - 96 2013 $M (409) - 92 13 15 (1) (1) - - (1,354) - - (1,198) (677) - 677 (599) - 599 - (114) (437) (218) 486 - - (100) (418) (209) 512 - 260 53 154 37 (26) - 478 358 - - - - - - - 268 - 303 (358) - Share of expenditure commitments Capital commitments Operating commitments - 182 182 - 186 186 Contingent liabilities Share of contingent liabilities incurred jointly with other investments - - - - 40 - 40 - - 108 - 108 - - - - - - - (41) 275 (37) 36 28 - 260 195 (70) 104 - 229 311 229 540 (1,356) 53 81 (1,502) 275 (106) 49 50 (26) (114) (1,313) 28 (100) (1,355) (537) 486 677 (358) 268 40 182 222 (613) 442 703 - 532 419 415 834 - - - - - - 99 99 2014 Transurban Annual Report 11 Non-current assets – Held-to-maturity investments Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) Term loan notes M5 debt notes (a) Term loan notes Notes 11(a) 11(b) 2014 $M 887 58 945 2013 $M 832 31 863 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) (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 2014 the Group capitalised interest of $55.0 million (2013: $49.0 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. 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. 100 100 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 12 Derivative financial instruments Current assets Forwards exchange contracts - cash flow hedges Non-current assets Cross-currency interest rate swap contracts - net investment hedge Forwards exchange contracts - cash flow hedges Total derivative financial instrument assets Current liabilities Interest rate swap contracts - cash flow hedges Cross-currency interest rate swap contracts - cash flow hedges Non-current liabilities Interest rate swap contracts - cash flow hedges Cross-currency interest rate swap contracts - cash flow hedges Total derivative financial instrument liabilities Instruments used by the Group 2014 $M 2013 $M - - 16 - 16 16 7 28 35 219 179 398 433 1 1 9 1 10 11 7 - 7 222 136 358 365 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 40). The instruments used by the Group are as follows: 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 3.4 per cent (2013: 3.9 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 93 per cent (2013: 96 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 6.1 per cent (2013: 6.6 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 Group's USD interest commitments. 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. 101 101 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 12 Derivative financial instruments (continued) Instruments used by the Group (continued) Cross-currency interest rate contracts - cash flow hedges The Group has raised fixed rate foreign currency debt through several U.S. Private Placements, a Maple Bond and a Euro Bond issue. It is the policy of the Group to protect foreign currency facilities from exposures 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 at fixed rates and pay AUD at either fixed or floating rates. The Group then uses interest rate swap contracts to convert the floating rate commitments back to fixed. A portion of the Euro bond was swapped into US dollars as part of the hedge of the net investment in the foreign entity. Offsetting financial assets and financial liabilities The Group has not settled any financial assets or financial liabilities on a net basis during the financial year. Currently there is no right or basis to present any financial assets or financial liabilities on a net basis, and as such no financial assets or financial liabilities have been presented on a net basis in the Group's balance sheet at the end of the financial year. 13 Non-current assets - Property, plant and equipment At 1 July 2012 Cost Accumulated depreciation Net book amount Year ended 30 June 2013 Opening net book amount Additions Depreciation charge Closing net book amount At 30 June 2013 Cost Accumulated depreciation Net book amount At 1 July 2013 Cost Accumulated depreciation Net book amount Year ended 30 June 2014 Opening net book amount Additions Depreciation charge Closing net book amount At 30 June 2014 Cost Accumulated depreciation Net book amount 102 102 Equipment, fittings and operating systems $M 352 (160) 192 192 17 (29) 180 368 (188) 180 368 (188) 180 180 73 (27) 226 441 (215) 226 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 14 Deferred tax assets and liabilities The balance comprises temporary differences attributable to: Accrued expenses Provisions Current and prior year losses Unearned income Fixed Assets/Intangibles Interest receivable Unrealised foreign exchange 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 to the income statement Credited/(charged) to equity Acquired on acquisition Foreign exchange movements Transfer from deferred tax assets/liabilities Closing balance at 30 June Deferred tax assets/(liabilities) to be recovered after more than 12 months Assets Liabilities Net 2014 $M 2013 $M 2014 $M 2013 $M 2014 $M 2013 $M 9 102 638 3 27 - 1 - - 118 2 900 (836) 64 770 56 4 80 (14) 4 900 2 82 565 2 17 - 9 - 1 90 2 770 (761) 9 769 34 (36) - - 3 770 - - - - (1,041) (2) (11) (13) (370) (69) 4 (1,500) 836 (664) (1,391) (11) (49) (49) 4 (4) (1,500) - - - - (963) (2) (10) (8) (344) (64) - (1,391) 761 (630) (1,443) 27 28 - - (3) (1,391) 9 102 638 3 (1,014) (2) (10) (13) (370) 49 6 (600) - (600) (621) 45 (45) 31 (10) - (600) 2 82 565 2 (946) (2) (1) (8) (343) 26 2 (621) - (621) (674) 61 (8) - - - (621) 900 770 (1,500) (1,391) (600) (621) 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. 103 103 2014 Transurban Annual Report 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 ( 4 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 M $ l a t o T 5 3 8 , 0 1 ) 1 6 6 , 2 ( 4 7 1 , 8 3 5 3 2 4 7 1 , 8 ) 3 8 2 ( 9 2 1 , 8 3 7 0 , 1 1 ) 4 4 9 , 2 ( 9 2 1 , 8 M $ - 1 2 4 1 2 4 - - 1 2 4 5 3 2 6 5 6 - 6 5 6 6 5 6 M $ 8 4 6 ) 6 4 ( 2 0 6 - - 2 0 6 ) 5 2 ( 7 7 5 8 4 6 ) 1 7 ( 7 7 5 2 2 - - - 2 9 7 1 ) 7 7 1 ( 2 9 7 1 ) 7 7 1 ( r e d n u s t e s s A e v o C e n a L 4 M n r e t s a E 1 M n o i t c u r t s n o c l e n n u T y a w r o t o M r o t u b i r t s i D M $ M $ M $ 2 M s l l i H y a w r o t o M 4 5 1 , 2 ) 6 7 2 ( 8 7 8 , 1 8 1 5 , 2 ) 2 8 5 ( 6 3 9 , 1 8 7 8 , 1 6 3 9 , 1 5 7 0 , 3 0 6 2 t n u o m a k o o b t e n g n n e p O i - - ) 2 5 ( 6 2 8 , 1 4 5 1 , 2 ) 8 2 3 ( 6 2 8 , 1 - - ) 4 6 ( 2 7 8 , 1 8 1 5 , 2 ) 6 4 6 ( 2 7 8 , 1 - 3 ) 2 4 1 ( 6 3 9 , 2 8 5 6 , 4 ) 2 2 7 , 1 ( 6 3 9 , 2 - - - 0 6 2 - 0 6 2 0 6 2 4 0 1 t n e m r i a p m i d n a n o i t a s i t r o m a l d e t a u m u c c A t n u o m a k o o b t e N t s o C t n u o m a k o o b t e n g n s o C l i e g r a h c n o i t a s i t r o m A s t n e m t s u d a j r e h O t s n o i t i d d A M $ 5 5 6 , 4 ) 0 8 5 , 1 ( 5 7 0 , 3 M $ - 0 6 2 0 6 2 t n e m r i a p m i d n a n o i t a s i t r o m a l d e t a u m u c c A t n u o m a k o o b t e N 2 1 0 2 y u J l 1 t A t s o C 3 1 0 2 e n u J 0 3 d e d n e r a e Y i k n L y t i C l l i w d o o G s t e s s a i e l b g n a t n I – s t e s s a t n e r r u c - n o N 5 1 104 2014 Transurban Annual Report 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 ( 4 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 M $ l a t o T - 9 2 1 , 8 2 0 1 ) 5 1 ( 1 7 4 , 2 ) 1 0 3 ( 6 8 3 , 0 1 M $ 2 8 6 5 6 7 6 6 1 - 0 1 8 ) 6 9 5 ( 1 3 6 , 3 1 ) 5 4 2 , 3 ( 6 8 3 , 0 1 - 0 1 8 0 1 8 r e d n u s t e s s A s s e r p x E y t i C 5 9 4 s s o r C e n a L e v o C 4 M n r e t s a E 1 M 2 M s l l i H n o i t c u r t s n o c s e n a L l e n n u T l e n n u T y a w r o t o M r o t u b i r t s i D y a w r o t o M i k n L y t i C l l i w d o o G ) d e u n i t n o c ( s t e s s a i e l b g n a t n I – s t e s s a t n e r r u c - n o N 5 1 M $ - - - - 0 9 2 , 1 ) 2 ( 8 8 2 , 1 ) 2 ( 0 9 2 , 1 8 8 2 , 1 M $ - 9 1 4 1 5 - - - 3 3 5 - 3 3 5 3 3 5 M $ 7 7 5 - - - - ) 4 2 ( 3 5 5 8 4 6 ) 5 9 ( 3 5 5 M $ M $ M $ M $ 2 - - - - 1 ) 1 ( 1 9 7 1 ) 8 7 1 ( 6 2 8 , 1 2 7 8 , 1 6 3 9 , 2 - - - - ) 2 5 ( 4 7 7 , 1 4 5 1 , 2 ) 0 8 3 ( 4 7 7 , 1 - - - 6 9 5 ) 2 8 ( 6 8 3 , 2 4 1 1 , 3 ) 8 2 7 ( 6 8 3 , 2 - - - ) 6 1 ( ) 0 4 1 ( 0 8 7 , 2 2 4 6 , 4 ) 2 6 8 , 1 ( 0 8 7 , 2 M $ 0 6 2 1 - - - - 1 6 2 - 1 6 2 1 6 2 t n e m r i a p m i d n a n o i t a s i t r o m a l d e t a u m u c c A t n u o m a k o o b t e N 4 1 0 2 e n u J 0 3 t A t s o C t n u o m a k o o b t e n g n s o C i l s t n e m t s u d a j r e h O t s r e f s n a r T e g r a h c n o i t a s i t r o m A i y r a d s b u s i f o n o i i t i s u q c A 4 1 0 2 e n u J 0 3 d e d n e r a e Y t n u o m a k o o b t e n g n n e p O i s n o i t i d d A 5 0 1 105 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 15 Non-current assets – Intangible assets (continued) Goodwill 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 Service Concession Arrangements have been accounted for in accordance with AASB Interpretation 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 on 14 January 2034. At the end of the concession period, all concession assets are to be returned to the Victorian State Government. 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. Hills M2 concession asset Transurban has the right to toll the Hills M2 Motorway until May 2046. At the end of the concession period, the concession asset will be returned to the New South Wales State Government. The Concession Deed requires Transurban to maintain the Motorway to specified conditions. 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. M1 Eastern Distributor concession asset Transurban has the right to toll the M1 Eastern Distributor (ED) until 24 July 2048. At the end of the concession period, all concession assets will be returned to the New South Wales State Government. The Concession Deed requires Transurban to maintain the Motorway to specified conditions. 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. M4 concession asset Transurban held an investment of 100 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 New South Wales State Government on 15 February 2010. The concession asset relating to the Group is the right to operate the service centres located on the M4 Motorway until December 2017, at which time the concession asset will be returned to the New South Wales State Government. 106 106 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 15 Non-current assets – Intangible assets (continued) Concession assets (continued) Lane Cove Tunnel Transurban has the right to toll the Lane Cove Tunnel until January 2037. At the end of the concession period, all concession assets will be returned to the New South Wales State Government. The Concession Deed requires Transurban to maintain the tunnel to specified conditions. Toll increases for the Lane Cove Tunnel are based on the maximum toll increase as defined in the Concession Deed, being a quarterly escalation of CPI. Cross City Tunnel During the year Transurban acquired the right to toll the Cross City Tunnel until December 2035. At the end of the concession period, the concession asset is returned to the New South Wales State Government. The Concession Deed requires Transurban to maintain the tunnel to specified conditions. Toll increases for the tunnel are based on a maximum toll increase as defined in the Concession Deed, being a quarterly escalation at the greater of quarterly CPI or 0.74 per cent until December 2017, and CPI thereafter. 495 Express Lanes Transurban has the right to toll the 495 Express Lanes on the Capital Beltway until December 2087. At the end of the concession period, the concession asset is returned to the Virginia State Government (USA). The Concession Deed requires Transurban to maintain and operate the 495 Express Lanes to specified conditions. Tolling for the 495 Express Lanes is variable, allowing the operator to adjust pricing to manage congestion and provide road users with predictable travel times. Assets under construction Assets under construction relate to the remaining upgrade work on the Lane Cove Road On-Ramps and the Vimiera Road embankment works in New South Wales, Australia, and the construction of the I95 Express Lanes in USA. Construction costs relating to completed works under the M2 Widening Project were transferred to the concession asset during the year. Remaining costs will be transferred to the concession asset upon final completion. The I95 Express Lanes are being constructed under a Concession Arrangement and are due to be completed in late 2014. 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. 107 107 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 15 Non-current assets – Intangible assets (continued) Impairment testing of goodwill and other intangible assets (continued) Key assumptions used for calculating the recoverable amount of goodwill The Group makes assumptions in calculating the recoverable amount of its goodwill, based on the greater of value-in-use and fair value less costs to sell calculations. These include assumptions around expected traffic flows and forecast operational costs. In performing the value in use calculation, the Group has applied a pre-tax discount rate of 8.2 per cent (2013: 8.2 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 Consumer Price Index (CPI) and Average Weekly Earnings (AWE) forecasts. A long term CPI rate of 2.5 per cent (2013: 2.5 per cent) and AWE of 3.0 per cent (2013: 4.0 per cent) have been used. Management does not consider that any reasonable possible change in the assumptions will result in the carrying value of a CGU exceeding its recoverable amount. 16 Current liabilities – Trade and other payables Trade payables and accruals 2014 $M 181 181 2013 $M 106 106 108 108 2014 Transurban Annual Report 17 Borrowings Current Capital markets debt Working capital facilities Term debt U.S. private placement Syndicated facilities Non-current Capital markets debt Working capital facilities Term debt U.S. private placement Syndicated facilities TIFIA Total borrowings Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) Notes 17(a) 17(b) 17(c) 17(d) 17(e) 17(a) 17(b) 17(c) 17(d) 17(e) 17(f) 2014 $M - - 400 106 215 721 2,550 245 1,095 1,126 383 678 6,077 6,798 2013 $M 250 188 - - - 438 1,048 97 1,505 1,250 599 - 4,499 4,937 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) Capital markets debt These facilities comprise the following:  $600.0 million credit wrapped floating rate bonds raised in November 2005 with terms of ten years ($300.0 million) and twelve years ($300.0 million) with interest currently payable at 3.0 per cent at 30 June 2014. These facilities are fully hedged with all-in rates of 7.4 and 5.0 per cent respectively. These facilities are secured by a first ranking charge over the cash flows of the Group.  $200.0 million fixed rate bonds raised in June 2011 with a term of five years. Interest is payable at 6.8 per cent. This facility is secured by a first ranking charge over the cash flows of the Group.  $300.0 million fixed rate bonds raised in November 2013 with a term of seven years. Interest is payable at 5.5 per cent. This facility is fully secured against the respective rights of Airport Motorway Limited and Airport Motorway Trust and their assets. The Group established a secured EMTN program in October 2011 with a program limit of US $2 billion. Under the program the Group may from time to time issue notes denominated in any currency. The Group has issued the following notes under the program:  $248.6 million of Canadian dollar denominated ($250.0 million 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 and swapped into Australian dollars with an all-in rate after hedging of 6.7 per cent. This facility is secured by a first ranking charge over the cash flows of the Group.  $724.0 million of € denominated (€500.0 million) secured fixed rate medium term notes raised in October 2013 with a term of seven years. Interest is payable at 2.5 per cent. This facility is fully hedged with €225.0 million swapped into US Dollars and €275.0 million into Australian dollars at all-in rates after hedging of 3.5 per cent and 5.8 per cent respectively. This facility is secured by a first ranking charge over the cash flows of the Group. 109 109 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 17 Borrowings (continued) (a) Capital markets debt (continued) The Group’s US entities have issued Private Activity Bonds (PABs) comprising the following:  $238.5 million of US dollar denominated ($224.7million USD) PABs raised by Capital Beltway Express LLC (CBE)  $256.8 million of US dollar denominated ($242.0million USD) PABs raised by 95 Express Lanes LLC (95 Express). The Capital Beltway Express LLC Private Activity Bonds (CBE PABs) were issued in June 2008 and mature in December 2047. They are marketed weekly on the SIFMA index at a variable interest rate. The Group has entered into interest rate hedging to provide protection from movements in the variable interest rate. The CBE PABs are supported by bank-issued irrevocable direct-pay letters of credit (maturing June 2016). Agreements are in place for the letter of credit issuers to purchase the bonds should they fail to market. The collateral against the bonds is a first ranking pledge of toll revenues generated from the operation of the 495 Express Lanes. The Virginia Small Business Financing Authority Senior Lien Revenue Bonds (95 Express Lanes LLC Project), Series 2012 PABs were issued in July 2012 at a fixed interest rate of 5 per cent. The term bonds mature July 1, 2034 ($71.7 million USD) and January 1, 2040 ($170.3 million USD). The collateral against the bonds is a first ranking pledge of toll revenues generated from the operation of the 95 Express Lanes. The above facilities have deferred borrowing costs of $18.0 million, which are amortised over the life of the facility on a straight line basis. (b) Working capital facilities The Group has the following facilities in place:  $125.0 million facility which is for a term of three years, maturing August 2016. At 30 June 2014, $115.7 million of the facility was drawn. Guarantees to the value of $0.3 million have also been issued under this multi-option facility.  $125.0 million facility which is for a term of three years, maturing August 2016. At 30 June 2014, letters of credit to the value of $22.7 million have been issued under this multi-option facility.  $100.0 million facility which is for a term of three years, maturing December 2016. At 30 June 2014, the facility was undrawn.  $150.0 million facility which is for a term of three years, maturing January 2016. At 30 June 2014, $131.2 million of the facility was drawn.  $50.0 million facility which is for a term of three years, maturing January 2016. At 30 June 2014, the facility was undrawn.  $75.0 million facility which is for a term of three years, maturing January 2016. At 30 June 2014, guarantees to the value of $33.7 million have been issued under this multi-option facility.  $100.0 million facility which is for a term of three years, maturing April 2017. At 30 June 2014, 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 $1.7 million. 110 110 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 17 Borrowings (continued) (c) Term debt The term debt facilities are comprised of:  A $225.0 million facility entered into by AMT Management Limited (as trustee for Airport Motorway Trust). The facility has deferred borrowing costs of $1.8 million.  A $740.0 million facility entered into by Hills Motorway Management Limited (as trustee for Hills Motorway Trust), of which $400 million is current. The facility has deferred borrowing costs of $1.4 million.  A $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 $1.1 million.  A $276.5 million facility entered into by Transurban CCT Nominees Pty Limited (as trustee for Transurban CCT Trust). The facility has deferred borrowing costs of $1.9 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 $225.0 million non- recourse syndicated facility with a term of seven years. The current floating interest rate applicable to the facility is 2.7 per cent (2013: 2.8 per cent). The facility is currently fully hedged to an all-in rate after hedging of 7.5 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 construction capex facility of $275.0 million with a term of six years. As at 30 June 2014, the construction capex facility was fully drawn. The current floating interest rate applicable to the total facility is 2.7 per cent (2013: 2.9 per cent). The total facility is currently 86 per cent hedged with an all-in rate after hedging of 7.1 per cent. The Lane Cove Tunnel facility was refinanced in June 2013 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 approximately three years. The current floating rate applicable to the facility is 2.7 per cent (2013: 2.9 per cent). The facility is currently fully hedged to an all-in rate after hedging of 4.2 per cent. The Cross City Tunnel facility was established in June 2014 to partially finance the acquisition of the Cross City Tunnel. The facility is fully secured against the respective rights of Transurban CCT Pty Limited and Transurban CCT 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 2.7 per cent. The facility is currently fully hedged to an all-in rate after hedging of 4.3 per cent. (d) U.S. private placement The composition of the three US Private Placements is outlined below: 111 111 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 17 Borrowings (continued) (d) U.S. private placement (continued) Fixed Interest Rate Current Dec 04 - Tranche A Non-current 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% 3.45% USD $M 100 39 109 98 125 157 57 182 162 67 AUD Maturity $M 106 Dec 2014 41 115 104 133 166 61 193 172 72 Dec 2016 Dec 2019 Aug 2015 Aug 2017 Aug 2020 Nov 2016 Nov 2018 Nov 2021 Nov 2026 Dec 2019 1,096 1,163 72 72 1,235 (3) 1,232 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 Group’s US denominated liabilities. Exchange differences arising on the revaluation of the USD liabilities are recognised in profit or loss in the separate financial report of Transurban Finance Company Pty Limited. In the consolidated financial report, such exchange 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 2014, the Group has deferred $50.5 million in gains (2013: $29.7 million). (e) Syndicated facility These facilities comprise syndicated bank debt issued by Transurban Finance Company Pty Limited. At 30 June 2014, the following amounts were drawn:  $215.0 million established in December 2011 which is for a term of circa three years, maturing February 2015.  $160.0 million established in December 2011 which is for a term of circa five years, maturing February 2017.  $125.0 million established in August 2007 which is for a term of ten years, maturing August 2017.  $98.5 million of US denominated ($92.8 million USD) established in May 2014 which is for a term of three years, maturing May 2017. Applicable interest rates on the Australian dollar facilities range between 3.3 and 4.5 per cent. These facilities are fully hedged with an all-in rate after hedging of 6.0 per cent. The current floating rate applicable to the US facility is 0.3 per cent. These facilities have deferred borrowing costs of $0.8 million and are secured by a first ranking charge over the cash flows of the Group. 112 112 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 17 Borrowings (continued) (f) Transportation Infrastructure Finance and Innovation Act (TIFIA) The TIFIA program provides US federal credit assistance to transport infrastructure projects in the form of secured loans from the United Stated Department of Transport. These facilities comprise the following:  $589.2 million of US dollar denominated (face value $686.2 million USD) TIFIA funding raised by Capital Beltway Express LLC (CBE). This debt has been recorded at fair value on acquisition on 4 June 2014 (refer note 3).  $88.7 million of US dollar denominated (face value $198.0 million USD) TIFIA funding raised by 95 Express Lanes LLC (95 Express). This debt has been recorded at fair value on acquisition on 4 June 2014 (refer note 3). The CBE TIFIA facility limit is $589.0 million USD (plus accreting interest), of which $589.0 million USD is drawn and $97.2 million USD of interest has accreted against the facility. Interest accrues at 4.45 per cent and is initially accretive until five years post substantial completion of the project construction. Substantial completion was achieved on 16 November 2012 per the Amended and Restated Comprehensive Agreement. The facility matures on 31 December 2047 and is second ranking in priority to the CBE PABs. The 95 Express TIFIA facility limit is $300 million USD (excluding capitalised interest). At 30 June 2014, $195.9 million USD is drawn and $2.1 million USD of interest has accreted against the facility. Interest accrues at 2.77 per cent and is accretive until five years post substantial completion of the project construction. The 95 Express TIFIA facility matures on 1 January 2048 and is second ranking in priority to the 95 Express PABs. Letters of credit and corporate credit facilities The Group has a $60 million letter of credit facility which is for a term of 3 years, maturing November 2016. As at 30 June 2014, letters of credit and bank guarantees to the value of $51.3 million have been issued under this facility. Additionally, letters of credit and bank guarantees to the value of $56.8 million have been issued under multi-option facilities (refer to note 17(b)). All letters of credit are currently undrawn and therefore no liability has been recorded. A $7.1 million general credit facility is in place covering corporate requirements including letters of credit, bank guarantees, credit card facilities, online banking and an overdraft facility. As at 30 June 2014, $5.1 million of bank guarantees have been issued. The six month facility matures December 2014. Covenants The Group's consolidated borrowings have the following Interest Coverage Ratio (ICR) default covenants:  CityLink - ICR greater than 1.1 times  Corporate – senior ICR greater than 1.25 times There have been no breaches of any of these covenants during the year. 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 2014, the Group's security price would need to close below $2.16 per Security for 20 consecutive business days to trigger this clause. In addition, the non-recourse debt at M1 Eastern Distributor, Hills M2 Motorway, Lane Cove Tunnel and Cross City Tunnel has the following default covenants:  M1 Eastern Distributor - ICR greater than 1.15 times  Hills M2 Motorway - ICR greater than 1.2 times  Lane Cove Tunnel - ICR greater than 1.15 times  Cross City Tunnel – ICR greater than 1.15 times 113 113 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 17 Borrowings (continued) Covenants (continued) In the United States, the non-recourse debt has the following default covenant ratios:   495 Express Lanes – senior DSCR greater than 1.15 times * 95 Express Lanes – non applicable * The first relevant calculation date for this ratio is 31 December 2015. 18 Provisions Current Employee benefits Onerous lease and restructuring 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 Notes 18(a) 18(b) 18(c) 18(c) 18(d) 18(a) 18(d) 18(e) 2014 $M 2013 $M 20 3 341 39 77 480 6 211 - 217 697 23 4 230 33 44 334 2 185 15 202 536 Movements in each class of provision during the financial year, other than employee benefits, are set out below: Current Non-current Onerous lease and restructuring provision $M Distribution to security holders $M Distributions to non-controlling interest in subsidiaries $M Current maintenance provision $M Non-current maintenance provision $M Provision for contingent consideration $M Consolidated - 2014 Balance at 1 July Acquisition of subsidiary Additional provision recognised Amounts paid/utilised Amounts unutilised Unwinding of discount Transfer Balance at 30 June 4 - 2 (3) - - - 3 230 - 594 (483) - - - 341 33 - 8 (2) - - - 39 44 30 32 (39) - - 10 77 185 23 - - - 13 (10) 211 15 - - - (15) - - - 114 114 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 18 Provisions (continued) (a) Employee benefits Employee benefits relate to the provision for annual leave, bonuses, long service leave and cash settled long term incentives. (b) Onerous lease and restructuring provision An onerous lease is recognised when the Group has lease commitments on property no longer used. A restructuring provision is recognised when the Group has a detailed formal plan for restructuring. (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 above the investment case for the project. Based on costs and reported toll revenue for the calculation period the revenue share amount under the agreement has not been triggered and the provision has been reduced to $nil at 30 June 2014. 19 Other liabilities Current Prepaid tolls Unearned income Other Non-current Concession and promissory notes Lease incentive Other Total other liabilities Notes 19(a) 19(b) 19(c) 2014 $M 2013 $M 67 9 - 76 55 1 1 57 133 63 6 3 72 58 1 1 60 132 115 115 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 19 Other liabilities (continued) (a) Prepaid tolls 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. (c) Concession and promissory notes M1 Eastern Distributor 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 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 2014 is $255.0 million (2013: $240.0 million). The net present value at 30 June 2014 of the redemption payments relating to these Concession Notes is $31.3 million (2013: $35.4 million). M2 Motorway The Hills Motorway Trust has entered into leases with the 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 trustee of the Hills Motorway, 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 2014 is $158.6 million (2013: $147.6 million). The net present value at 30 June 2014 of the redemption payments relating to these Promissory Notes is $24.6 million (2013: $22.9 million). 20 Contributed equity Share capital Fully paid stapled securities Fully paid stapled securities 116 2014 $M 10,680 10,680 2014 Number M 1,896 1,896 2013 $M 7,976 7,976 2013 Number M 1,482 1,482 116 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 20 Contributed equity (continued) Stapled securities The number of stapled securities on issue is 1,896,384,073 (2013: 1,481,594,818). Stapled securities entitle the holder to participate in distributions and on winding up of the 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 17. 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. Movements in ordinary share capital: Opening balance at 1 July 2012 Distribution reinvestment plan Transfer vesting portion of LTI from share-based payment reserve Purchase of Performance Awards Plan units Placement to Unisuper Limited Deferred Short Term Incentives issued Less: Amounts attributable to Transurban International Limited Closing balance at 30 June 2013 Opening balance at 1 July 2013 Distribution reinvestment plan Transfer vesting portion of LTI from share-based payment reserve Deferred Short Term Incentives issued Share placement (AustralianSuper / Tawreed) Share issue Less: Amounts attributable to Transurban International Limited Closing balance at 30 June 2014 Notes 20(a) 20(c) 20(d) 20(b) 20(a) 20(d) 20(e) 20(e) 20(b) Number of units M Consolidated $M 1,458 7,848 6 2 - 16 - - 1,482 1,482 9 - - 58 347 - 1,896 34 3 (1) 100 3 (11) 7,976 7,976 64 2 2 400 2,296 (60) 10,680 (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. 117 117 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 20 Contributed equity (continued) (b) 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. (c) Placement to Unisuper Limited On 7 January 2013 Transurban issued 16,260,163 ordinary stapled securities under a placement to Unisuper Limited (as trustee of the superannuation fund known as UniSuper). (d) Deferred Short Term Incentives Mandatory STI deferral of a portion of the overall STI award, as detailed in the Remuneration Report, was introduced for the CEO and other Senior Executives in the year ended 30 June 2012. For Australian Senior Executives deferral is into securities. (e) Institutional and retail entitlement offer and placement On 1 May 2014, the Group successfully completed the fully underwritten institutional component of its accelerated renounceable 10 for 43 pro rata entitlement offer at an offer price of $6.75, raising approximately $1.8 billion. The retail component of the offer was successfully completed on 29 May 2014 and raised gross proceeds of approximately $557 million. As part of the entitlement offer, the Group also completed a placement of securities to its Queensland Motorways consortium bid partners AustralianSuper and Tawreed, raising gross proceeds of approximately $400 million. The total gross proceeds from the entitlement offer and placement were approximately $2.7 billion, and were used to fund the Group’s equity contribution for the Queensland Motorways acquisition, which completed on 2 July 2014. 21 Reserves and accumulated losses Reserves Cash flow hedges Share-based payments Foreign currency translation Transactions with non-controlling interests 2014 $M (95) 7 8 1 (79) 2013 $M (95) 6 (9) (6) (104) 118 118 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 21 Reserves and accumulated losses (continued) Movements: Cash flow hedges Balance 1 July Revaluation - gross Deferred tax Amount attributable to non-controlling interest Movement in equity accounted investment's reserve Movement in equity accounted investment's reserve attributable to non- controlling interest Transfer to net profit Balance 30 June Share-based payments Balance 1 July Employee share plan expense Transfer vesting portion of LTI to contributed equity Deferred short term incentives Balance 30 June Foreign currency translation Balance 1 July Currency translation differences arising during the year Deferred tax (note 14) Currency translation differences arising during the year attributable to non- controlling interest Transfer to net profit Balance 30 June Transactions with non-controlling interests Balance 1 July Acquisition of additional ownership in subsidiary Transfer of values on acquisition Balance 30 June Accumulated losses Movements in (accumulated losses) were as follows: 2014 $M (95) 25 (23) (2) 40 (77) 37 (95) 6 7 (2) (4) 7 (9) (18) 22 35 (22) 8 (6) - 7 1 2013 $M (129) 42 (6) (2) 27 (27) - (95) 8 7 (6) (3) 6 (12) (22) (1) 26 - (9) (5) (1) - (6) Balance 1 July Profit attributable to ordinary equity holders of the stapled group Distributions to ordinary security holders Transfer of profit (loss) attributable to non-controlling interest - Transurban International Limited Balance 30 June 2014 $M (4,469) 282 (594) (20) (4,801) 2013 $M (4,232) 172 (456) 47 (4,469) 119 119 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 21 Reserves and accumulated losses (continued) 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, and the acquisition of the remainder of Statewide Roads Limited and Devome Pty Limited in prior years, as the Group uses the economic entity approach to transactions with non-controlling interests. 120 120 2014 Transurban Annual Report 22 Distributions Distribution payable Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 2014 $M 2013 $M Final distribution for 2014 financial year payable and recognised as a liability: 18.0 cents (2013: 15.5 cents) per fully paid Stapled Security payable 14 August 2014 Fully franked final dividend based on tax paid at 30% - 1 cent (2013: 3.5 cents) per fully paid Stapled Security Unfranked final distribution – 14.5 cents (2013: 12.0 cents) per fully paid Stapled Security Fully franked (2013: nil) final distribution based on tax paid at 30% - 2.5 cents (2013: nil) per fully paid Stapled Security Distributions paid during the year Final distribution for 2013 financial year of 15.5 cents (2012: 15.0 cents) per fully paid Stapled Security paid 14 August 2013 Fully franked dividend based on tax paid at 30% - 3.5 cents (2012: 3.5 cents) per fully paid Stapled Security Unfranked final distribution - 12 cents (2012: 11.5 cents) per fully paid Stapled Security Interim distribution for 2014 financial year of 17.0 cents (2013: 15.5 cents) per fully paid Stapled Security paid 14 February 2014 Fully franked interim dividend based on tax paid at 30% - 3.5 cents (2013: 3.5 cents) per fully paid Stapled Security Unfranked interim distribution - 13.5 cents (2013: 12.0 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 Paid in cash Satisfied by issue of Stapled Securities 19 275 47 341 52 178 230 52 201 253 483 418 65 483 121 52 178 - 230 51 168 219 51 176 227 446 411 35 446 121 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 22 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 M7 Term Loan Note interest received Less M5 Term Loan Note interest received Add back payments for maintenance and intangibles Less cash flows from operating activities – consolidated non 100 per cent owned entities Controlled cash Adjust: dividends and distributions received and maintenance expenditure M1 Eastern Distributor – Distribution M5 Interlink – Distribution M7 Term Loan Note interest M5 Term Loan Note interest Allowance for maintenance of capital expenditure for CityLink, Hills M2 and Lane Cove Tunnel and e-Tag expenditure 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 2014 $M 521 (47) (2) 36 (47) 461 26 57 47 2 (21) 572 1,690 33.9 33.9 1,896 30.2 30.2 2013 $M 411 (46) 10 (39) 336 30 50 46 (19) 443 1,470 30.1 30.1 1,482 29.9 29.9 * Weighted average securities on issue In calculating the weighted average securities on issue, securities issued on or before 31 December have been given 100 per cent weighting for the full financial year and securities issued after 31 December have been weighted for the second half of the financial year. Franking credits Franking credits available for subsequent reporting periods based on a tax rate of 30.0% (2013 - 30.0%) 259 307 122 122 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 23 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 24 Contingencies Contingent liabilities 2014 $ 2013 $ 1,337,000 594,000 1,931,000 1,931,000 1,100,000 124,800 1,224,800 1,224,800 As part of the Group’s acquisition of the senior secured debt exposure to the CCT Group in December 2013, the Group will make a further payment to the Royal Bank of Scotland in the event that CCT’s traffic performance materially exceeds the Group’s base case assumptions and if certain other conditions are met. The amount concerned is up to $27.5 million (year four nominal dollars) over four years. 25 Intra-group Guarantees As at 30 June 2014, 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. 123 123 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 26 Commitments Capital and operating commitments Expenditure contracted for at the reporting date but not recognised as liabilities is as follows: 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 2014 $M 52 92 297 441 152 - 152 2014 $M - 10 21 31 2013 $M 58 109 295 462 62 1 63 2013 $M 4 9 - 13 Promissory Notes Hills Motorway Management limited, as trustee 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 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 19. 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 ten years. The leases have varying terms, escalating clauses and renewal rights. On renewal, the terms of the leases are renegotiated. 124 124 2014 Transurban Annual Report 27 Related party transactions Transactions with joint ventures The following transactions occurred with joint ventures: Revenue from services Operating electronic tolling system for Westlink M7 Management and business development fees Interest earned Term Loan Notes M5 debt notes Loans to/from joint ventures Receivable from joint venture 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 2014 (continued) 2014 $’000 3,158 36,344 39,502 103,437 2,101 105,538 2014 $’000 - 831,646 55,100 886,746 31,220 27,098 58,318 2013 $’000 4,674 39,828 44,502 97,386 843 98,229 2013 $’000 5,787 782,667 48,979 831,646 8,725 22,495 31,220 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. 125 125 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 27 Related party transactions (continued) 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. 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. 28 Subsidiaries (a) Investments in subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following material subsidiaries in accordance with the accounting policy described in note 1(b): Name of entity Country of incorporation Class of shares Equity holding 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 USA USA 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 2014 % 100 100 100 100 100 100 100 100 100 100 100 100 75.1 75.1 100 100 100 100 100 100 100 67.5 67.5 100 100 94 77.5 75 75 75 2013 % 100 100 100 100 100 100 100 100 100 100 100 100 75.1 75.1 100 100 100 100 - - - - - 100 - 67.5 67.5 75 75 75 CityLink Trust CityLink Melbourne Ltd Transurban Infrastructure Management Ltd Transurban Ltd Transurban Finance Trust Transurban Finance Company Pty Ltd Roam Tolling Pty Ltd The Hills Motorway Ltd Hills Motorway Trust Transurban International Holdings Ltd Sydney Roads Ltd Sydney Roads Trust Airport Motorway Trust Airport Motorway Ltd Statewide Roads Ltd Tollaust Pty Ltd LCT-MRE Pty Ltd LCT-MRE Trust Transurban CCT Pty Ltd Transurban CCT Trust TransLink Operations Pty Ltd Sun Group Holdings 1 Pty Ltd Sun Group Invest Trust Transurban (USA) Operations Inc. Transurban Express Lanes LLC Capital Beltway Express LLC * 95 Express Lanes LLC * Transurban DRIVe Holdings LLC * Transurban DRIVe USA LLC * DRIVe USA Investment LLC * * These entities were equity accounted for in prior financial years 126 126 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 29 Non-controlling interests Set out below is summarised financial information for each subsidiary that has non-controlling interests that are material to the Group. The amounts disclosed for each subsidiary are before inter-company eliminations. Airport Motorway Group 24.9% Transurban DRIVe 25% Capital Beltway Express LLC 6% 1 95 Express Lanes Sun Group 3 22.5% 2 37.5% 30 June 2014 $M 30 June 2013 $M 10 2,664 (186) (1,949) 539 23 2,255 (166) (1,525) 587 30 June 2014 $M 15 83 (58) (8) 32 (135) (146) (8) 30 June 2013 $M – – – – – – 30 June 2014 $M 57 1,289 (11) (878) 457 (27) 30 June 2013 $M – – – – – – 30 June 2014 $M 61 689 (44) (388) 318 (72) 30 June 2013 $M 30 June 2014 $M 30 June 2013 $M – – – – – – 21 – – – 21 (8) – – – – – – Summarised balance sheet Current assets Non-current assets Current liabilities Non-current liabilities Net assets Carrying amount of NCI Airport Motorway Group 24.9% Transurban DRIVe 25% Capital Beltway Express LLC 6% 1 95 Express Lanes Sun Group 3 22.5% 2 37.5% Summarised statement of comprehensive income Revenue Expenses Profit for the year Other comprehensive income Total comprehensive income (Profit) loss allocated to NCI OCI allocated to NCI 30 June 2014 $M 108 (105) 3 (8) (5) (1) 2 30 June 2013 $M 30 June 2014 $M 30 June 2013 $M 30 June 2014 $M 30 June 2013 $M 30 June 2014 $M 30 June 2013 $M 30 June 2014 $M 30 June 2013 $M 101 (89) 12 (16) – (104) (104) – (4) (104) (3) 4 26 – – – – – – – – 4 (84) (80) – (80) 5 – – – – – – – – – – – – – – – – – – – – – – – (20) (20) – (20) 8 – – – – – – – – 127 127 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 29 Non-controlling interests (continued) Airport Motorway Group 24.9% Transurban DRIVe 25% Capital Beltway Express LLC 6% 1 95 Express Lanes Sun Group 3 22.5% 2 37.5% Summarised cash flows Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities Net increases in cash and cash equivalents 30 June 2014 30 June 2013 30 June 2014 30 June 2013 30 June 2014 30 June 2013 30 June 2014 30 June 2013 30 June 2014 $M $M $M $M 33 – 35 – (34) (40) (1) (5) $M (4) – (6) (10) $M $M $M – – – – – (34) 32 (2) – – – – $M (20) 40 – 20 1 – – 1 – – – – 30 June 2013 $M – – – – * Carrying amount of non-controlling interests and (profit) loss allocated to non-controlling interests also includes $8 million relating to the CCT Group as described in note 3. 1 Non-controlling interest of 6 per cent is derived as Transurban has a direct interest of 76 per cent and indirect interest of 18 per cent through DRIVe, thus giving the Group effective interest of 94 per cent. 2 Non-controlling interest of 22.5 per cent is derived through Transurban’s direct interest of 10 per cent and indirect interest of 67.5 per cent through DRIVe, thus giving the Group effective interest of 77.5 per cent. 3 Sun Group refers to the group of holding companies set up for the purpose of investing in Queensland Motorways. 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 Net assets Shareholders' equity Contributed equity Reserves Retained earnings Profit (loss) for the year Total comprehensive income (loss) 128 128 2014 $M 1,352 4,743 6,095 100 4,699 4,799 1,296 2013 $M 994 2,381 3,375 183 2,307 2,490 885 (3,747) (2,654) 1,208 1 87 1,296 (85) (85) 640 2 243 885 307 307 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 30 Parent entity financial information (continued) Guarantees entered into by the parent entity 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, Statewide Roads Limited and M5 Holdings Pty Limited as described in note 31. Contingent liabilities of the parent entity For details of contingent liabilities of the parent entity, refer to note 24. 31 Deed of cross guarantee Transurban Holdings Limited, Transurban Limited, Tollaust Pty Limited, Roam Tolling Pty Limited, Sydney Roads Limited, Sydney Roads Management Limited, Statewide Roads 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 2014 and 30 June 2013 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 Summary of movements in consolidated retained earnings Accumulated losses at the beginning of the financial year Profit (loss) for the year Dividends provided for or paid Adjustment for opening retained earnings of entities that joined the 'closed group' Retained earnings at the end of the financial year 129 2014 $M 208 (136) (22) (131) (82) 34 (48) (48) – (48) (478) (48) (74) – (600) 2013 $M 173 (115) (23) (132) (97) 41 (56) (56) – (56) (320) (56) (103) 1 (478) 129 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 31 Deed of cross guarantee (continued) Consolidated balance sheet Set out below is a consolidated balance sheet as at 30 June 2014 and 30 June 2013 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 Other reserves Retained earnings Total equity 2014 $M 2,347 867 3,214 1,709 215 557 2,481 5,695 3,191 35 3,226 1,814 39 7 1,860 5,086 609 1,208 1 (600) 609 2013 $M 55 586 641 1,560 168 565 2,293 2,934 1,339 65 1,404 1,320 36 10 1,366 2,770 164 641 1 (478) 164 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. 32 Events occurring after the reporting period The financial close on the acquisition of Queensland Motorways was completed on 2 July 2014. On this date the Group raised $2,900 million in non-recourse debt to fund the acquisition, of which $2,500 million was drawn on that date. The financial effects of this transaction have not been brought to account at 30 June 2014. The operating results and assets and liabilities of Queensland Motorways will be consolidated from 2 July 2014. Refer to note 3. 130 130 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 33 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 (profits) losses of equity accounted investments Change in operating assets and liabilities: (Increase) decrease in debtors Increase (decrease) in concession and promissory note liability Increase in capitalised held-to-maturity investment interest Increase (decrease) in operating creditors and accruals Increase (decrease) in other operating provisions Increase (decrease) in provision for income taxes payable Movement in deferred taxes Increase (decrease) in maintenance provision Net cash inflow (outflow) from operating activities 34 Earnings per stapled security Basic earnings per security Earnings per security attributable to the ordinary equity holders of the stapled group Diluted earnings per security Earnings per security attributable to the ordinary equity holders of the stapled group 131 2014 $M 252 330 7 10 (115) 6 (2) (55) 14 (1) 8 34 33 521 2014 Cents 18.3 18.3 2014 Cents 18.3 18.3 2013 $M 175 312 7 8 10 (10) 7 (49) (9) 5 (9) (62) 26 411 2013 Cents 11.7 11.7 2013 Cents 11.7 11.7 131 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 34 Earnings per stapled security (continued) Reconciliation of earnings used in calculating earnings per security Basic and diluted earnings per security Profit from continuing operations Profit from discontinued operation (Profit) loss attributable to non-controlling interests Profit attributable to ordinary equity holders of the stapled group used in calculating earnings per security 2014 $M 236 8 38 282 2013 $M 175 – (3) 172 Profit from discontinued operation Profit from discontinued operation is fully attributable to non-controlling interests as it was related to the CCT Group entities that were considered to be held-for-sale. Refer to note 3 for further details. Weighted average number of securities used as denominator 2014 Number 2013 Number Weighted average number of securities used as the denominator in calculating basic and diluted earnings per security 1,539,476,092 1,470,495,508 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. 132 132 2014 Transurban Annual Report 35 Net tangible asset backing Net tangible asset backing per stapled security* Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 2014 $ 3.00 2013 $ 2.10 * 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. 36 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) (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 generate appropriate returns relative to the market. Grant date Vesting / Expiry date Fair value at grant date Balance at start of the year Granted during the year Vested during the year Forfeited during the year Balance at end of the year TSR EBITDA FCF Number Number Number Number Number 2014 1 Nov 2010 1 Nov 2013 23 Dec 2010 1 Nov 2013 26 Sep 2011 30 Jun 2014 11 Nov 2011 30 Jun 2014 15 Aug 2012 30 Jun 2015* 19 Oct 2012 30 Jun 2015* 14 Aug 2013 30 Jun 2016* 30 Jun 2016* 1 Nov 2013 $3.23 $3.33 $3.37 $3.27 $2.72 $2.95 $3.24 $3.13 $4.62 $4.97 N/A N/A N/A N/A N/A N/A N/A N/A $4.63 $4.81 $4.99 $5.43 $6.07 $6.21 Total x 922,476 684,683 420,872 715,024 480,102 448,400 – – – – – – – – 728,380 382,292 (789,978) (592,320) (267,256) (511,886) – – – – (132,498) (92,363) (153,616) (203,138) (113,537) – – – – – – – 366,565 448,400 728,380 382,292 3,671,557 1,110,672 (2,161,440) (695,152) 1,925,637 * vesting / expiry date refers to the ending date of the performance period. Actual vesting / expiry date is determined within 30 days of the release of Transurban Group's financial results for that performance period. 133 133 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 36 Share-based payments (continued) Performance Awards Plan (continued) Grant date Vesting / Expiry date Fair value at grant date Balance at start of the year Granted during the year Vested during the year Forfeited during the year Balance at end of the year TSR EBITDA FCF Number Number Number Number Number 2013 11 Dec 2009 11 Dec 2012 1 Nov 2010 1 Nov 2013 23 Dec 2010 1 Nov 2013 26 Sep 2011 30 Jun 2014 11 Nov 2011 30 Jun 2014 15 Aug 2012 30 Jun 2015* 30 Jun 2015* 19 Oct 2012 Total $3.33 $3.23 $3.33 $3.37 $3.27 $2.72 $2.95 $4.97 $4.62 $4.97 N/A N/A N/A N/A N/A N/A N/A $4.63 $4.81 $4.99 $5.43 1,625,994 1,201,077 684,683 661,932 715,024 – – – (1,624,766) – – – – – – – – – 747,201 – 448,400 (1,228) (278,601) – (241,060) – (267,099) – – 922,476 684,683 420,872 715,024 480,102 448,400 4,888,710 1,195,601 (1,624,766) (787,988) 3,671,557 * vesting / expiry date refers to the ending date of the performance period. Actual vesting / expiry date is determined within 30 days of the release of Transurban Group's financial results for that performance period. 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 Flow component of the Performance Awards has only a non-market based vesting condition which is not considered in the valuation. The valuation of these awards takes into account the security price at grant date, and the expected dividend yield which represents the dividends over the life of the Awards that the rights holder does not receive. A discounted cash flow model is used to perform this valuation. The Group is currently transitioning to a face value approach (discounted for distributions) for the FCF component. The transition is over 3 years and all things being equal there will be a decrease in the number of awards recipients receive until the new methodology is achieved. This transition will be completed for grants made during FY2016. Performance Awards Plan - CEO Sign On Award Plan Scott Charlton received a one-off grant of equity as a sign-on award in recognition of the incentives forfeited with his former employer by joining Transurban. The awards were awarded at no cost to Scott and will vest, subject to his continued employment with Transurban as described in his employment contract, in three equal tranches on the first, second and third anniversaries of his employment date. Upon vesting, the awards will automatically exercise and settle in securities. No dividends or distributions on securities are payable prior to vesting. Vesting / Expiry date Fair value at grant date Balance at start of the year Granted during the year Vested during the year Forfeited during the year Balance at end of the year Number Number Number Number Number 16 Jul 2013 16 Jul 2014 16 Jul 2015 $5.71 $5.71 $5.71 78,752 78,752 78,752 236,256 – – – – (78,752) – – (78,752) – – – – – 78,752 78,752 157,504 134 Grant date 2014 14 Sep 2012 14 Sep 2012 14 Sep 2012 Total 134 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 36 Share-based payments (continued) Performance Awards Plan - CEO Sign On Award Plan (continued) Grant date 2013 14 Sep 2012 14 Sep 2012 14 Sep 2012 Total Vesting / Expiry date Fair value at grant date Balance at start of the year Granted during the year Vested during the year Forfeited during the year Balance at end of the year Number Number Number Number Number 16 Jul 2013 16 Jul 2014 16 Jul 2015 $5.71 $5.71 $5.71 – – – – 78,752 78,752 78,752 236,256 – – – – – – – – 78,752 78,752 78,752 236,256 Short Term Deferred Incentive Plan For the 2014 financial year, the CEO and other Senior Executives had a target STI opportunity of 30 per cent of their total remuneration package. Mandatory STI deferral of 50 per cent of the overall STI award now applies for all grants to the CEO and other Senior Executives. STI payouts can vary between zero (if targets are not met) and 150 per cent (for exceptional outperformance). The deferral period is two years. For Australian Senior Executives, deferral is into securities. Due to legal restrictions on the issue of securities to USA residents, the USA resident Senior Executives receive deferred cash awards. STI deferral grants are made in the form of awards. Each award is an entitlement to receive a fully paid security, or an equivalent cash payment, on terms and conditions determined by the Board. This 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). Grant date 2014 15 Aug 2012 15 Aug 2013 Total Grant date 2013 15 Aug 2012 Total Vesting / Expiry date Fair value at grant date Balance at start of the year Granted during the year Vested during the year Forfeited during the year Balance at end of the year Number Number Number Number Number 1 Jul 2014 1 Jul 2015 $5.68 $6.81 642,388 – – 443,736 642,388 443,736 – – – (79,668) – 562,720 443,736 (79,668) 1,006,456 Vesting / Expiry date Fair value at grant date Balance at start of the year Granted during the year Vested during the year Forfeited during the year Balance at end of the year Number Number Number Number Number 1 Jul 2014 $5.68 – – 642,388 642,388 – – – – 642,388 642,388 The fair value at grant dates in both the deferred STI plan and the CEO sign-on awards plan have been determined in accordance with AASB 2 by using a volume weighted average price (VWAP) over a specified period of time. 135 135 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 36 Share-based payments (continued) 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 were eligible to participate in the Investment Tax Exempt Plan and the Investment Tax Deferred Plan for the year ended 30 June 2014. Under the plans, Transurban provides participants with a matching component toward the acquisition of the Stapled Securities. For the period 1 July 2013 to 30 June 2014, the cost of company matches was $139,918 (2013: $132,162) for the Investment Tax Exempt Plan and $314,667 (2013: $450,374) 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 2014, each participant was allocated 100 stapled securities at a value of $6.94 per security. Stapled securities provided under the Plan were acquired on the open market. Eligible US based participants received an equivalent cash award. Shares purchased on market under the plan and provided to participating employees 2014 Number 2013 Number 50,800 45,900 Expenses arising from share-based payments Total expenses arising from share-based payment transactions recognised during the period as part of employee benefit expense was $6.6 million (2013: $6.6 million). 37 Key management personnel compensation Directors The following persons were Directors of THL, TIML and TIL during the financial year and up until the date of this report: Chief Executive Officer and Executive Director Scott Charlton Non-executive Directors Lindsay Maxsted (Chairman) Neil Chatfield Robert Edgar Samantha Mostyn Christine O'Reilly Rodney Slater Ian Smith 136 136 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 37 Key management personnel compensation (continued) 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: J Aument W Ballantine A Head S Hogg S Johnson M Kulper T Steinhilber L Tobin V Vassallo Group General Manager, North America Group General Manager, Strategy (appointed Group General Manager, Queensland, from 4 June 2014) Group General Manager, New South Wales Chief Financial Officer (departed 14 July 2014) Group General Manager, Human Resources President, Transurban North America (departed 3 September 2013) Group General Manager, Project Delivery and Operational Excellence (until 14 July 2014) Group General Manager, Technology Group General Manager, Victoria Key management personnel compensation The remuneration amounts below represent the entire amounts paid by the Transurban Group. Short-term employee benefits Post-employment benefits Long-term benefits Share-based payments Deferred STIs Termination benefits 2014 $ 11,056,992 257,966 73,043 3,645,461 1,620,545 333,356 2013 $ 10,755,270 232,743 25,335 9,208,279 1,128,897 – 16,987,363 21,350,524 Detailed remuneration disclosures are made in the remuneration report in the Directors' report. 137 137 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 38 Non-cash investing and financing activities Distributions satisfied by the issue of stapled securities under the distribution reinvestment plan 2014 $M 65 65 2013 $M 35 35 39 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 increase the depreciation charge where useful lives are less than previously estimated lives, or will write off or write down 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. As disclosed in note 15, 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. The Group does not consider that there have been any indicators of impairment in relation to any of its cash generating units during the year. 138 138 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 39 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 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 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. Assessment of control The Group considered that, up to 4 June 2014, it jointly controlled (and therefore equity accounted) Transurban DRIVe Holdings LLC (“DRIVe”) even though it owned 75 per cent of the equity, as at least 80 per cent of the membership interests were required to pass key decisions relating to operating and financing of the entity. As disclosed in Note 3, as of 4 June 2014, following the acquisition of Capital Beltway (and its subsequent recapitalisation), as well as the purchase of Fluor’s 10 per cent equity interest in both Capital Beltway and 95 Express Lanes, the Group re-assessed its control over DRIVe. Due to the operations of the Capital Beltway and the 95 Express Lanes (which DRIVe already had a direct ownership interest in) being closely linked, it was determined that the acquisition of Capital Beltway, along with the purchase of Fluor’s 10 per cent interest in both Capital Beltway and the 95 Express Lanes, gave the Group control over DRIVe and the 95 Express Lanes. The Group considers that control was gained over the Cross City Tunnel holding and operating entities (“CCT Group”) as of 30 December 2013, following the acquisition of the group’s debt from Royal Bank of Scotland, even though the Group’s equity ownership was nil. The CCT Group was therefore consolidated as of 30 December 2013. The subsequent acquisition of the concession asset by the Group (from the CCT Group) on 26 June 2014 had no impact on the assessment of control. See note 3 for further details. 139 139 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 40 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: USD$M 30 June 2014 CAD$M EUR$M USD$M 30 June 2013 CAD$M EUR$M Cash and cash equivalents Net investment in foreign operation Borrowings Cross-currency interest rate swaps Trade creditors Net exposure 145 872 (1,421) 629 – 225 – – (250) 250 – – – – (500) 500 – – 4 474 (1,361) 933 (4) 46 – – (250) 250 – – – – – – – – Exposure to other foreign exchange movements is not material. 140 140 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 40 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 $10,329,000 lower (2013: $24,000 lower) or $12,783,000 higher (2013: $30,000 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 $17,209,000 lower (2013: $28,683,000 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 $22,160,000 higher (2013: $38,898,000 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 2014, 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 (2013: 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 $2,232,000 lower (2013: $2,824,000 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 $3,023,000 higher (2013: $3,972,000 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. Based on the financial instruments held at 30 June 2014, had the Australian dollar strengthened/weakened by 5 cents against the Euro 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 Euro denominated financial instruments as detailed in the above table. Had the Australian dollar strengthened by 5 cents against the Euro with all other variables held constant, the Group's equity would have been $15,436,000 lower. Had the Australian dollar weakened by 5 cents against the Euro with all other variables held constant, the Group's equity would have been $19,526,000 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. 141 141 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 40 Financial risk management (continued) Market risk (continued) Cash flow interest rate risk The Group’s main exposure to interest rate risk arises from cash and cash equivalents, 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 2014, 86 per cent (2013: 87 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: Cash and cash equivalents Floating rate borrowings Interest rate swaps (notional principal amount) Weighted average interest rate % 2.4% 3.4% 2.5% Net exposure to cash flow interest rate risk An analysis by maturities is provided in Liquidity risk below. 2014 2013 Weighted average interest rate % 3.6% 3.9% 2.9% Balance $M (2,879) 3,257 (2,808) (2,430) Balance $M (259) 3,072 (2,686) 127 Sensitivity At 30 June 2014, 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 $24,296,000 higher/lower (2013: $1,270,000 lower/higher). Profit is more sensitive to movements in interest rates in 2014 than 2013, due mainly to an increase in cash holding, as a result of the acquisition of Queensland Motorways which completed on 2 July 2014. 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 11 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. 142 142 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 40 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 2014 $M – 421 421 2013 $M 16 202 218 The Group also has a letter of credit facility and a general credit facility in place with undrawn capacity of $8.7 million at 30 June 2014 (refer to note 17). 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. Contractual maturities of financial liabilities At 30 June 2014 Non-derivatives Non-interest bearing Variable rate Fixed rate Total non- derivatives 1 year or less $M Over 1 to 2 years $M Over 2 to 3 years $M Over 3 to 4 years $M Over 4 to 5 years $M Over 5 years $M Total contractual cash flows $M Carrying amount (assets)/ liabilities $M 497 723 225 1,445 – 521 422 943 – 1,310 204 1,514 – 447 234 681 – 232 601 405 488 5,339 902 3,721 7,025 554 3,257 3,541 833 6,232 11,648 7,352 143 143 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 40 Financial risk management (continued) Liquidity risk (continued) Contractual maturities of financial liabilities At 30 June 2014 Derivatives Net settled (interest rate swaps) Net settled (cross- currency interest rate swaps/fx forwards) Total derivatives At 30 June 2013 Non-derivatives Non-interest bearing Variable rate Fixed rate Total non- derivatives Derivatives 1 year or less $M Over 1 to 2 years $M Over 2 to 3 years $M Over 3 to 4 years $M Over 4 to 5 years $M Over 5 years $M Total contractual cash flows $M Carrying amount (assets)/ liabilities $M 86 65 55 141 48 113 41 52 93 24 11 32 259 227 48 72 38 49 (26) 6 215 474 190 417 1 year or less $M Over 1 to 2 years $M Over 2 to 3 years $M Over 3 to 4 years $M Over 4 to 5 years $M Over 5 years $M Total contractual cash flows $M Carrying amount (assets)/ liabilities $M 322 304 358 984 – 1,168 225 – 653 414 1,393 1,067 – 537 199 736 – 445 226 390 303 1,287 712 3,410 2,709 380 3,072 1,866 671 1,980 6,831 5,318 Net settled (interest rate swaps) Net settled (cross- currency interest rate swaps/fx forwards) Total derivatives 97 72 7 104 30 102 41 27 68 22 11 8 251 228 32 54 24 35 15 23 135 386 126 354 144 144 2014 Transurban Annual Report Transurban Holdings Limited Notes to the consolidated financial statements 30 June 2014 (continued) 40 Financial risk management (continued) 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 these financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes. 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 2014 and 30 June 2013: 30 June 2014 Assets Derivatives used for hedging Total assets Liabilities Derivatives used for hedging Total liabilities 30 June 2013 Assets Derivatives used for hedging Total assets Liabilities Derivatives used for hedging Total liabilities Level 1 $M Level 2 $M Level 3 $M – – – – 16 16 433 433 – – – – Level 1 $M Level 2 $M Level 3 $M – – – – 11 11 365 365 – – – – Total $M 16 16 433 433 Total $M 11 11 365 365 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. 145 145 2014 Transurban Annual Report In the Directors' opinion: Transurban Holdings Limited Directors' declaration 30 June 2014 (a) (b) (c) the financial statements and notes set out on pages 56 to 145 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 2014 and of its performance for the year ended on that date, and (ii) there are reasonable grounds to believe that the Company 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 31 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 31. 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 5 August 2014 146 146 2014 Transurban Annual Report 147 2014 Transurban Annual Report23 to 52 148 2014 Transurban Annual ReportTransurban Holding Trust and Controlled Entities ARSN 098 807 419 Annual report for the year ended 30 June 2014 149 2014 Transurban Annual ReportTransurban Holding Trust ARSN 098 807 419 Annual report - 30 June 2014 Directors' report Auditor's Independence Declaration Financial statements Directors' declaration Independent auditor's report to the members Page 151 164 165 248 249 150 2014 Transurban Annual Report Transurban Holding Trust Directors' report 30 June 2014 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 2014. The Trust forms part of the triple staple that is Transurban ("the Transurban Group"). 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 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 Christine O'Reilly Rodney Slater Ian Smith Executive Director Scott Charlton Result The consolidated net profit for the Group was $352 million (2013: $393 million). The profit attributable to ordinary equity holders of Transurban Holding Trust was $345 million (2013: $378 million). Principal activities The principal activities of the Group during the financial year were the leasing of assets and the provision of funding to the Transurban Group. 151 151 2014 Transurban Annual Report Distributions - Transurban Holdings Trust Distributions paid to members during the financial year were as follows: Final distribution for 2014 financial year payable and recognised as a liability: 17.0 cents (2013: 12.0 cents) per fully paid Stapled Security payable 14 August 2014: Final unfranked distribution payable and recognised as a liability: 14.5 cents (2013: 12.0 cents) per fully paid Stapled Security payable 14 August 2014 Fully franked final distribution based on tax paid at 30%: 2.5 cents (2013: nil) per fully paid Stapled Security Distributions paid during the year Final distribution for 2013 financial year of 12.0 cents (2012: 11.5 cents) per fully paid Stapled Security paid 14 August 2013 Interim distribution for 2014 financial year of 13.5 cents (2013: 12.0 cents) per fully paid Stapled Security paid 14 February 2014 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 2014 and 30 June 2013 Paid in cash Satisfied by issue of stapled securities (a) Transurban Holding Trust Directors' report 30 June 2014 (continued) 2014 $M 2013 $M 275 47 322 178 201 379 327 52 379 178 - 178 168 176 344 317 27 344 (a) The value of stapled securities represents the total value of securities issued; however, this value is apportioned between Transurban Holdings Limited ($7.7 million), Transurban Holding Trust ($43.3 million), and Transurban International Limited ($1.0 million). Operating and Financial Review - Year ended 30 June 2014 As a member of the Transurban Group triple staple, the Group operates under a business framework (incorporating strategy and value drivers) consistent with the wider Transurban Group. Business review Business Framework and Strategy At the heart of our business strategy is our desire to be a ‘partner of choice’ for our government clients and an organisation that meets the needs of our customers. To do that, we have to provide and be part of effective transportation solutions to support the growth and well-being of our cities. At Transurban we do this through the effective management of our existing road networks, through our active involvement in the transport policy debate, and by applying our unique skills to the infrastructure challenges in our markets. 152 152 2014 Transurban Annual Report Operating and Financial Review - Year ended 30 June 2014 (continued) In delivering on this objective our business has fostered core capabilities in the following areas: Transurban Holding Trust Directors' report 30 June 2014 (continued)  Network planning and forecasting  Operations and customer management  Project development and delivery  Application of technology, and  Community engagement. Transurban's target markets are the eastern seaboard of Australia and Virginia in the USA, part of the Washington, DC metro area. Value drivers The investment proposition for high quality toll road assets is access to long dated, predictable, growing cash flows generated over the life of the concessions through effective management and development of the road corridors these concessions govern. The organic growth in the business, which is derived from traffic growth and inflation linked toll escalation across the portfolio of assets, is supported by effective maintenance of operations and customers. It is further enhanced by the effective application of technology in key areas including traffic management and tolling. In addition, value can be unlocked through the development of the portfolio through a range of activities including asset enhancements such as Sydney’s Hills M2 Upgrade and M5 West Widening, and new projects negotiated with governments such as the NorthConnex project in Sydney and the upgrade to the western section of CityLink in Melbourne. Financial performance Performance indicators Underlying proportional EBITDA (earnings before interest, tax, depreciation and amortisation) is the primary measure the Transurban Board uses to assess the operating performance of Transurban, with an aim to focus on operating results and associated cash generation. It reflects the contribution from individual assets to Transurban’s operating performance and permits a meaningful assessment of the underlying performance of Transurban’s assets. To arrive at the proportional result, non-controlling interests in Transurban’s controlled roads are removed and Transurban’s interests in non-controlled assets are included, in proportion to Transurban’s ownership. Year ended 30 June 2014 Highlights Transurban Holding Trust’s net profit for the year ended 30 June 2014 was $352 million, a 10.4 per cent decrease on the prior year. 153 153 2014 Transurban Annual Report Transurban Holding Trust Directors' report 30 June 2014 (continued) Operating and Financial Review - Year ended 30 June 2014 (continued) The Group generates revenue from two primary sources: rental income and construction revenue. Rental income is generated from property held by the Group and leased to entities within the wider Transurban Group. In the current year this increased 2.6 per cent to $272 million. Construction revenue is recognised during the construction phase of an intangible asset. In the year ended 30 June 2014 $55 million was generated through the M2 Upgrade project. This construction revenue is offset by construction costs. Total EBITDA versus the prior corresponding period was the same at $286 million. Financial position Transurban Group has a market capitalisation of around $14.5 billion. At 30 June 2014 1,896 million stapled securities were on issue. During the year, Transurban issued 405 million stapled securities as part of the capital raising to fund the acquisition of Queensland Motorways. The Group represents one component of the Transurban triple staple and has total assets of $13,941 million, a 25 per cent increase on the prior year. This increase was driven by the Transurban Group’s equity entitlement offer and share placement undertaken in May 2014 to fund the acquisition of Queensland Motorways (discussed below). The concession assets held by THT are primarily long-life intangible assets, representing the provision by the Victorian and New South Wales State Governments of the right to toll customers for the use of the assets. The duration of the asset concessions range from 30 years to 50 years and for accounting purposes the carrying values are amortised on a straight line basis over the duration of the concession. Details of the Group’s borrowings are discussed in Financing Activities below. Operations and performance of Transurban’s portfolio of assets – Year ended 30 June 2014 The operations and performance of the assets held within the Group is dependent on the operating activities of the Transurban Group as a whole. The tolling of the assets is conducted within a separate section of the triple staple and provides the revenue to fund the lease payments to the Group, and thereby recover the carrying value of the assets. Transurban considers that to understand the performance and operations of the Group, reference must be made to the wider Transurban Group and in particular the Australian based assets. The performance of those assets is discussed below. CityLink (Melbourne) CityLink had continued traffic growth on all parts of the Asset. Toll revenue increased by 7.9 per cent, driven by a 1.6 per cent increase in traffic and a 4.7 per cent increase in toll prices. Western Link performed particularly well, seeing growth of 2.1 per cent, however both sections of the Asset were mildly affected by the re-sheeting of the Domain and Burnley tunnels in late December and early January, which required the closure of those tunnels during works. Changes to the operational structure of the call centre, and a shift to electronic channels for communications led to a reduction in tolling expenses and direct employee costs. 154 154 2014 Transurban Annual Report Transurban Holding Trust Directors' report 30 June 2014 (continued) Operating and Financial Review - Year ended 30 June 2014 (continued) Total CityLink costs have increased by $4 million to $105 million. CityLink’s EBITDA margin continued to improve from 89.0 per cent to 90.3 per cent. Hills M2 (Sydney) The M2 Upgrade project was completed in August 2013 and resulted in a significant uplift in traffic year-on-year. The completion of the M2 Upgrade saw the majority of the Hills M2 return to normal lane configurations and operational status which contributed to overall traffic growth across the Hills M2. In addition to the M2 Upgrade, works were commenced on the maintenance of the Vimiera Road Embankment and construction of the Lane Cove Road eastbound on-ramp. Year on year traffic growth on the Hills M2 was 13.8 per cent, which included traffic growth following completion of the M2 Upgrade project. This traffic increase, in addition to the toll price increase of 19.3 per cent effected on completion of the upgrade on the asset, resulted in a toll revenue increase of $50 million. Costs on the Hills M2 increased in comparison to the previous year, however the asset’s EBITDA margin increased to 84.1 per cent. Lane Cove Tunnel / MRE (Sydney) Lane Cove Tunnel has observed strong traffic growth during the financial year as the constraints from the ongoing upgrade works on the connecting Hills M2 Motorway dissipated following completion of the M2 Upgrade Project. Traffic growth for the tunnel was 9.6 per cent compared to the prior corresponding period, and 6.6 per cent on the Military Road e-Ramps, resulting in a $7 million increase in toll revenue in 2014. Tollaust Pty Limited (a Group company) continued to provide Operations and Maintenance services to Lane Cove Tunnel, and since April 2014 has taken on the role of Operator, using in-house resources. The EBITDA margin on Lane Cove Tunnel increased from 60.0 per cent to 73.0 per cent. Cross City Tunnel (Sydney) On 30 December 2013 Transurban acquired the senior debt exposure of the Cross City Tunnel Group which was in receivership. As a result of the debt acquisition Transurban was deemed to have gained control of the Cross City Tunnel Group and its controlled entities. The acquisition reached financial close on 26 June 2014, when Transurban purchased the Cross City Tunnel concession asset from the receivers and managers. Transurban acquired this concession for $475 million plus stamp duty and transaction costs totalling $27 million. As at the end of the financial year work was well advanced on the integration of this asset into the broader Transurban portfolio. M1 Eastern Distributor (Sydney) The Eastern Distributor commenced three major capital works projects in 2014, which has resulted in elevated levels of maintenance capital expenditure on the asset: 1) New Roadside Tolling Equipment was installed during 2014 and user acceptance testing of this equipment commenced; 2) Resurfacing of the motorway, which was commenced as a part of a two year program of resurfacing works; and 3) Upgrade of the Operations Management and Control System (“OMCS”). The OMCS upgrade is scheduled for completion in 2016. On 4 November 2013, the Eastern Distributor moved to quarterly integer tolling increases (previously 50 cent increments). This has contributed to an increase in toll revenue of $5 million. 155 155 2014 Transurban Annual Report Transurban Holding Trust Directors' report 30 June 2014 (continued) Operating and Financial Review - Year ended 30 June 2014 (continued) Westlink M7 (Sydney) The performance of Westlink M7, particularly the northern section, has improved in 2014 due to the completion of the M2 Upgrade, with an increase in traffic of 8.1 per cent and an increase in revenue of $21 million to $231 million. The M7’s EBITDA margin increased from 81.0 per cent to 83.6 per cent. Free cash and cash flows from operations Free cash is calculated as: Cash flow from operations of 100% owned assets and operating companies (CityLink, Hills M2, Lane Cove Tunnel / MRE, Cross City Tunnel, Statewide Roads, Roam Tolling, Tollaust and Transurban corporate); Excluding Payments for Maintenance of Intangible Assets (concession assets); Excluding Interest received from Term Loan Notes (Westlink M7 & M5 South West Motorway Investment returns captured as interest payments); Plus distributions received from non-100% owned assets (M5 South West Motorway, M1 Eastern Distributor) Plus Term Loan Note repayments from Westlink M7 and M5 South West Motorway (as 50% equity accounted investments) Less Provision for Maintenance of Intangible Assets and payments for e-TAGs. Free cash for the year ended 30 June 2014 was $572 million. Free cash per security was 33.9 cents. The calculation of free cash can be found at note 22 to the statutory accounts. Free cash per security was impacted in the year by the issue of new securities to fund the acquisition of Queensland Motorways. All securities issued are entitled to the full final distribution and this dilutes the free cash. The distribution of 35 cent per security is 96.9 per cent cash covered for the year. Business development activities Acquisition of Queensland Motorways In April 2014, a Transurban-led consortium (62.5% Transurban, 25% AustralianSuper and 12.5% Tawreed, a wholly-owned subsidiary of the Abu Dhabi Investment Authority) reached agreement to acquire Queensland Motorways for $6,673 million, plus stamp duty and transaction costs totalling $447 million. Transurban will operate the network on behalf of the owners. Financial close was achieved on 2 July 2014. Acquisition of Cross City Tunnel The process to acquire Cross City Tunnel began when Transurban acquired the secured senior debt of the Cross City Tunnel Group from Royal Bank of Scotland in December 2013. Cross City Tunnel was in receivership at the time, with receivers and managers appointed to conduct a sale process. The debt acquisition gave Transurban the right to remove and appoint the receivers and managers and therefore significant rights over the relevant activities of the Cross City Tunnel entities. In May 2014, Transurban entered into an agreement with members of the Cross City Tunnel Group (subject to deeds of company arrangement) (CCT Vendors), acting by their Receivers and Managers, to acquire CCT for approximately $475 million plus stamp duty and transaction costs. Financial close was achieved on 26 June 2014. 156 156 2014 Transurban Annual Report Transurban Holding Trust Directors' report 30 June 2014 (continued) Operating and Financial Review - Year ended 30 June 2014 (continued) NorthConnex Having reached agreement with the New South Wales Government in May 2013 to work together to procure the design and construction price, in March 2014 Transurban announced the preferred contractor for the NorthConnex project. This project has now moved into the planning approval stage with the public display of the Environmental Impact Assessment. If approved, it is expected that work on NorthConnex would begin in 2015 with the project open for use in 2019. CityLink – Tullamarine Widening In April 2014, Transurban announced an in-principle agreement with the Victorian Government under the Government’s Unsolicited Proposals framework for a major co-ordinated upgrade to the western section of CityLink, the Bolte Bridge-West Gate Freeway interchange and the Tullamarine Freeway (“CityLink – Tulla Widening”). The project is subject to the State and Transurban reaching final agreement on terms (including scope) and documentation (expected by late 2014). Financing activities As discussed above, Transurban Holding Trust provides funding to certain assets within the Transurban Group. The following financing activities were undertaken in the year ended 30 June 2014: December 2013 Financed tranche A of Airport Motorway’s bank debt with $300 million domestic MTNs. June 2014 Raised A$277 million non-recourse debt on Cross City Tunnel. On 2 July 2014, the Group raised $2,900 million in non-recourse debt to fund the acquisition of Queensland Motorways, of which $2,500 million was drawn on that date. Debt maturity profiles The following chart shows the Group’s current external debt maturity profile related to assets through which the Trust provide funding to the wider Transurban Group. The charts show the debt in the financial year it matures and the full value of the debt facilities has been shown as this is the value of debt for refinancing purposes. 600 500 400 300 n o i l l i m $ A 200 400 340 100 0 260 277 225 300 D ec-14 Jun-15 D ec-15 Jun-16 D ec-16 Jun-17 D ec-17 Jun-18 D ec-18 Jun-19 D ec-19 Jun-20 D ec-20 Jun-21 D ec-21 Hills M2 Lane Cove Tunnel Cross City Tunnel M1 157 157 2014 Transurban Annual Report Transurban Holding Trust Directors' report 30 June 2014 (continued) Operating and Financial Review - Year ended 30 June 2014 (continued) Financial risk management Transurban Group’s and the Trust’s exposure to financial risk management and its policies for managing that risk can be found in the Financial Risk Management notes of the attached accounts – Note 38. That note discusses Transurban’s hedging policies, credit risk, interest rate risk and liquidity and funding policies. Corporate activities Equity entitlement offer and share placement In May 2014, Transurban completed a fully underwritten accelerated renounceable entitlement offer. The Institutional Entitlement Offer raised gross proceeds of approximately $1.8 billion and resulted in the issue of approximately 264 million new Transurban stapled securities. Entitlements not taken up by eligible institutional security holders and entitlements of ineligible institutional security holders were sold and cleared in the institutional shortfall book build at $7.00 per security, a $0.25 per security premium over the offer price of $6.75 and a 2.4 per cent discount to the theoretical ex-rights price as of 23 April 2014 of $7.17 per security. The Retail Entitlement Offer raised gross proceeds of approximately $557 million from the issue of approximately 83 million new securities at an issue price of $6.75 per security. Approximately 28.6 million of these new securities were sold in the bookbuild at a price of $7.21 per security, a $0.46 per security premium over the issue price of $6.75, a $0.21 per security premium over the institutional bookbuild price of $7.00, and a $0.10 per security discount to the last traded price of $7.31 per security. A further $400 million was raised from placement of 58 million securities at a price of $6.95 per security to AustralianSuper and Tawreed. Changes in Executive Management On 4 June 2014, Transurban appointed Wes Ballantine, Group General Manager, Strategy, to the role of Group General Manager, Queensland On 14 July 2014, Samantha Hogg, Chief Financial Officer, left Transurban. Until a permanent replacement is appointed, Leigh Petschel, currently General Manager, Finance, will serve as Acting Chief Financial Officer. Tim Steinhilber, Group General Manager, Project Delivery and Operational Excellence, transferred back to the USA in July 2014 and will support the delivery of the I95 project that is scheduled for completion at the end of 2014. Tony Adams, previously Vice President, Infrastructure, Major Projects, and based in the USA, will transfer to Australia as he assumed the role of Group General Manager, Project Delivery and Operational Excellence in July 2014. People Transurban’s People Strategy focuses on the four areas of Leadership, Capability, Performance, and Wellbeing. These areas are underpinned by the Group values, as well as safety, diversity and sustainability. Leadership Transurban conducts a bi-annual talent review with the Executive team. This review helps identify high potential individuals who may have the ability to move into a Senior Leadership or Executive role, or those who may be able to move laterally outside of their area of technical expertise. It also identifies successors for the Executive team and other future leaders. Development activities for this group are monitored throughout the year. 158 158 2014 Transurban Annual Report Transurban Holding Trust Directors' report 30 June 2014 (continued) Operating and Financial Review - Year ended 30 June 2014 (continued) Senior Leaders participated in a three day offsite in February 2014. The key theme of the program was driving for high performance and it is intended that this will become an annual event for the leadership group. There has been a focus on building greater leadership capability through the middle management group during the reporting period. Activities to support this include the implementation of a Group Coaching program; cascading of activities from the Senior Leadership Program and the continuation of the Coaching and Mentoring program for female managers. Capability A framework identifying both behavioural and technical capabilities has been developed and is being used to assist in identifying key talent for future roles and determining potential gaps. This assists in developing strategies to build future capability. A technical career pathway program has also been developed. One area of continued focus is the Traffic Forecasting Group which is deemed fundamental to the ongoing success of the Group. Steps to enhance capability in this area have progressed. Performance Changes were made to the Short Term Incentive program aimed at enhancing this through increased performance differentiation, the introduction of formal performance comparisons against peers, and strengthening the link between individual and Group performance. A review of the Group’s Benefits program was also undertaken, benchmarking current programs against market practice. Wellbeing A new Wellbeing framework has been developed, identifying the key areas of health; work; financial; values and staying connected. A suite of initiatives to support the framework are being introduced across Transurban. An employee volunteer program has been launched which includes the introduction of volunteer leave for all employees. Office moves in Melbourne and Sydney occurred with a focus on increasing collaboration and ensuring a healthier workspace. Activity based working was also introduced as part of this, which enables greater flexibility for employees in the way in which they work. It has been twelve months since the launch of the refreshed Vision and Values. A Group wide Values Health Check was rolled out to see how and where teams are using the values and to ensure that behaviours continue to be aligned. This provided positive feedback as did the Employee pulse survey that was conducted in May 2014. Sustainability Transurban is committed to taking a sustainable approach to its operations, projects and business practices to create the best outcomes for its government clients, communities and customers. Transurban’s Sustainability Strategy highlights three key focus areas: be good neighbours, use less, and think long term. By adopting and working to these principles, Transurban reinforces its ‘licence to operate’ and strengthens its ability to deliver efficient and integrated transport networks that support productivity and the wellbeing of its communities. During the period, Transurban put into action the Sustainability Strategy. Some important highlights include developing a community investment strategy which saw the launch of the first corporate grants program, embedding sustainability requirements in the NorthConnex tender process and committing to reduce operational energy consumption by 10 per cent by 2023. Transurban provides regular progress reports to the Board on the focus areas. The annual Sustainability Report summarises the year’s activities, while also outlining commitments for the coming years. The 2014 Sustainability Report will be published in October. 159 159 2014 Transurban Annual Report Transurban Holding Trust Directors' report 30 June 2014 (continued) Operating and Financial Review - Year ended 30 June 2014 (continued) Business risks and opportunities The following are key opportunities that may impact Transurban’s financial and operating result in future periods:  Negotiation of new business opportunities to develop projects and enhance the motorway networks in Transurban’s target markets  Higher traffic volumes across Transurban’s assets resulting in stronger cashflows across the Group  Integration of technology and systems across Transurban assets, including tolling systems, to leverage economies of scale available from Transurban’s network footprint.  Policy change in approach to network pricing to drive efficiencies and improvements in capacity utilisation on Transurban’s assets  Development of connecting infrastructure to drive improved traffic volumes on Transurban’s assets; and  Realisation of benefits associated with financing arrangements and financial transactions, including sourcing new financing, the refinancing of existing indebtedness and credit exposures on transactions with financial counterparties. The following are key risks that may impact Transurban’s financial and operating result in future periods:  Reduced traffic volumes or an inability to grow traffic volumes  The loss of a toll road concession for non-performance or default under a concession agreement, financing arrangement or as a result of government action  Existence and development of, or changes to, competing roads, feeder roads and other means of transport  A failure of key operating systems, including tolling systems, which impacts the ability to collect revenue  Changes in law or regulation, including the imposition of new or increased taxes or other governmental charges or levies  Adverse tax developments, including as a result of legislative change or interpretation, and changes to accounting standards  Dependency on the services of key contractors and counterparties for development and construction activities and for the provision of tolling, customer services, operations and maintenance services, road management and control systems  Exposure to risks associated with financing arrangements and financial transactions, including sourcing new financing, the refinancing of existing indebtedness and credit exposures on transactions with financial counterparties  Risks of accidents, incidents and other events relating to the assets and insurance policies not providing adequate protection against those risks  Potential for involvement in legal, regulatory and other proceedings and disputes arising from business and operations; and  Reliance on dividends, interest on and repayments of shareholder loans from joint ventures and subsidiaries for funding. 160 160 2014 Transurban Annual Report Transurban Holding Trust Directors' report 30 June 2014 (continued) Operating and Financial Review - Year ended 30 June 2014 (continued) Risk Management Managing risk is an essential part of our business. Key risks are regularly reviewed by the Board, the Audit and Risk Committee and our Executive Committee. Transurban has a business-wide risk framework to help create a consistent and rigorous approach to identifying, analysing and evaluating risks. This framework has various policies, standards and guidelines attached to it, including the Risk Management Policy which can be found in the Corporate Governance section of our website (www.transurban.com). The framework is overseen by the Audit and Risk Committee and is actively managed by the Executive Committee. It is consistent with AS/NZ31000:2009 and is subject to regular review by internal audit. Our Audit and Risk Committee Charter is also available in the Corporate Governance section of our website. Significant changes in the entity’s state of affairs Other than those matters already discussed in the operating and financial review, no other significant changes have occurred in Transurban’s state of affairs in the year ended 30 June 2014. Matters subsequent to the end of the financial year On 2 July 2014, the Group announced that the consortium comprising Transurban (62.5%), AustralianSuper (25%) and Tawreed Investments Limited (a wholly-owned subsidiary of the Abu Dhabi Investment Authority) (12.5%) had reached financial close on the acquisition of Queensland Motorways for $6,673 million, plus stamp duty and transaction costs of $447 million. As at the date of this report the Directors are not aware of any other circumstances that have arisen since 30 June 2014 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, that have not otherwise been disclosed in the financial report. Likely developments in future financial years and the expected results of operations Other than matters already discussed above, any other potential 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. 161 161 2014 Transurban Annual Report Transurban Holding Trust Directors' report 30 June 2014 (continued) 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. The 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 27. 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 2014 Number $M 2013 Number $M 1,482 414 1,896 2014 $M 1,458 24 1,482 2013 $M 13,941 11,155 The value of the Group's assets is derived using the basis of accounting set out in Note 1 to the financial statements. Current Directors' interests Non-Executive Directors Lindsay Maxsted Neil Chatfield Robert Edgar Samantha Mostyn Christine O'Reilly Rodney Slater Ian Smith . Executive Director Scott Charlton Number of stapled securities 66,559 50,424 30,324 17,256 13,972 - 92,742 213,374 162 162 2014 Transurban Annual Report Transurban Holding Trust Directors' report 30 June 2014 (continued) 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 164. 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 million 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 5 August 2014 163 163 2014 Transurban Annual Report 164 2014 Transurban Annual ReportTransurban Holding Trust ARSN 098 807 419 Annual report - 30 June 2014 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 166 167 168 169 170 171 248 249 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: Level 23 727 Collins Street Docklands VIC 3008 The financial report was authorised for issue by the Directors on 5 August 2014. The Directors have the power to amend and reissue the financial report. 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 165 165 2014 Transurban Annual Report Revenue Other income space Administration costs Promissory notes Construction costs Transurban Holding Trust Consolidated income statement For the year ended 30 June 2014 Notes 4 5 2014 $M 327 28 (12) (2) (55) (69) 2013 $M 477 26 (4) (2) (211) (217) Profit before depreciation and amortisation, net finance costs, equity accounted investments and income taxes 286 286 Depreciation and amortisation expense space Finance income Finance costs Net finance income Share of net profits of equity accounted investments Profit before income tax Income tax expense Profit for the year Profit is attributable to: Unit holders of Transurban Holding Trust Non-controlling interests 6 7 12 8 (123) 573 (381) 192 - 355 (3) 352 345 7 352 (109) 551 (332) 219 - 396 (3) 393 378 15 393 Cents Cents Earnings per unit for profit attributable to the ordinary unit holders: Basic earnings per unit Diluted earnings per unit 33 33 22.4 22.4 25.7 25.7 The above consolidated income statement should be read in conjunction with the accompanying notes. 166 166 2014 Transurban Annual Report Transurban Holding Trust Consolidated statement of comprehensive income For the year ended 30 June 2014 2014 $M 352 19 19 2013 $M 393 22 22 Profit for the year Other comprehensive income Items that may be reclassified to profit or loss Changes in the fair value of cash flow hedges, net of tax Blank Other comprehensive income for the year, net of tax Total comprehensive income for the year 371 415 Total comprehensive income for the year is attributable to: Unit holders of Transurban Holding Trust Non-controlling interest 362 9 371 398 17 415 The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. 167 167 2014 Transurban Annual Report ASSETS Current assets Cash and cash equivalents Trade and other receivables Total current assets Non-current assets Receivables Term loan notes 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 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 Transurban Holding Trust Consolidated balance sheet As at 30 June 2014 2014 $M 75 2,421 2,496 6,912 887 5 3,641 11,445 13,941 172 751 4 - 361 46 1,334 5,013 41 25 5,079 6,413 7,528 2013 $M 29 371 400 6,592 832 4 3,327 10,755 11,155 234 438 7 1 211 27 918 4,615 57 23 4,695 5,613 5,542 9,472 (35) (1,958) 49 7,528 7,336 (52) (1,780) 38 5,542 Notes 9 10 11 13 15 16 17 18 14 19 20 18 14 20 21 22 22 29 The above consolidated balance sheet should be read in conjunction with the accompanying notes. 168 168 2014 Transurban Annual Report Transurban Holding Trust Consolidated statement of changes in equity For the year ended 30 June 2014 Attributable to unit holders of Transurban Holding Trust Notes Issued units $M Reserves $M Accumulated losses $M Non- controlling interests $M Total unit holders' funds $M Balance at 1 July 2012 Comprehensive income Profit for the year Other comprehensive income Total comprehensive income Transactions with owners in their capacity as owners: Distribution reinvestment plan Changes in value of share-based payment reserve Distributions provided for or paid Distributions paid to non-controlling interests Placement to Uni Super Deferred short term incentives issued 21 22 22 Balance at 30 June 2013 Balance at 1 July 2013 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 payment reserve Distributions provided for or paid Equity contributions Distributions paid to non-controlling interests Deferred short term incentives issued 21 21 22 22 7,241 (70) (1,805) - - - 24 1 - - 68 2 95 7,336 7,336 - - - 2,092 42 1 - - - 1 2,136 - 20 20 - (2) - - - - (2) (52) (52) - 17 17 - - - - - - - - 378 - 378 - - (353) - - - (353) (1,780) (1,780) 345 - 345 - - - (523) - - - (523) 36 15 2 17 - - - (15) - - (15) 38 38 7 2 9 - - - (14) 16 - - 2 5,402 393 22 415 24 (1) (353) (15) 68 2 (275) 5,542 5,542 352 19 371 2,092 42 1 (537) 16 - 1 1,615 Balance at 30 June 2014 9,472 (35) (1,958) 49 7,528 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 169 169 2014 Transurban Annual Report 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 (outflow) 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 borrowings 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 Payments for establishing borrowing facilities Proceeds from non-controlling interests Net cash inflow from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at end of the year Transurban Holding Trust Consolidated statement of cash flows For the year ended 30 June 2014 Notes 32 23 9 2014 $M 240 (21) 121 (341) (4) (5) (441) (441) 582 (295) (354) 907 (327) (9) (28) 16 492 46 29 75 2013 $M 296 (28) 131 (314) (5) 80 (211) (211) 399 (312) (472) 868 (317) (10) - - 156 25 4 29 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. 170 170 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 Contents of the notes to the consolidated financial statements Summary of significant accounting policies 1 Trust formation and termination 2 Segment information 3 Revenue 4 Other income 5 Expenses 6 Net finance income 7 Income tax expense 8 9 Current assets - Cash and cash equivalents 10 Current assets - Trade and other receivables 11 Non-current assets - Receivables 12 Equity accounted investments 13 Non-current assets - Term loan notes 14 Derivative financial instruments 15 Deferred tax assets and liabilities 16 Non-current assets - Intangible assets 17 Current liabilities - Trade and other payables 18 Borrowings 19 Current liabilities - Provisions 20 Other liabilities 21 Issued units 22 Reserves and accumulated losses 23 Distributions 24 Remuneration of auditors 25 Intra-group guarantees 26 Commitments 27 Related party transactions 28 Subsidiaries 29 Non-controlling interests 30 Parent entity financial information 31 Events occurring after balance sheet date 32 Reconciliation of profit after income tax to net cash inflow from operating activities 33 Non-cash investing and financing activities 34 Earnings per unit 35 Share-based payments 36 Critical accounting estimates and judgements 37 Key management personnel disclosures 38 Financial risk management Page 172 183 183 183 184 184 184 185 185 186 186 187 189 189 190 191 193 193 195 196 196 198 200 200 200 201 201 203 204 205 205 206 206 206 207 211 212 243 171 171 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (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 assets exceed its current liabilities by $1,162 million as at 30 June 2014. As at 30 June 2014, the Transurban Group comprises Transurban Holdings Limited, Transurban Holding Trust and Transurban International Limited, traded and quoted on the Australian Stock Exchange as one triple stapled security. 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. 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, as at 30 June 2014 the Transurban Group has available a total of $493.4 million of unused working capital facilities with a number of financial institutions. 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. New and amended standards adopted by the Group The Group has amended some of its accounting policies as the result of new or revised accounting standards which became effective for the annual reporting period commencing on 1 July 2013. The affected policies and standards are: (i) AASB 2012-2 Amendments to Australian Accounting Standards - Disclosures - Offsetting Financial Assets and Financial Liabilities. AASB 2012-2 resulted in amendments being made to AASB 7 Financial Instruments - Disclosure, requiring additional disclosures when entities offset financial assets and liabilities within their financial statements. As a result of this amendment to AASB 7 the Group has expanded its disclosures about the offsetting of financial assets and liabilities (see Note 14). 172 172 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) 1 Summary of significant accounting policies (continued) (a) Basis of preparation (continued) New and amended standards adopted by the Group (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, AASB 128 Investments in Associates and Joint Ventures, AASB 2011-7 Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements Standards and AASB 2012-10 Amendments to Australian Accounting Standards - Transition Guidance and Other Amendments. 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. In accordance with the transitional provisions of AASB 10, the Group reassessed the control conclusions for its investments at 1 July 2013. Based on this reassessment no changes have been made regarding the Group’s assessment of control over any entities where the Group has an equity interest. 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. The Group has re-evaluated its involvement in its joint arrangements at 1 July 2013 and has re-classified its investments from jointly controlled entities to joint ventures. Notwithstanding the reclassification, these investments continue to be accounted for using the equity method and accordingly there has been no impact on the recognised assets, liabilities and comprehensive income of the Group. 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. As a result of IFRS 12, the Group has expanded its disclosures about its interests in subsidiaries (see Note 28) and equity accounted investees (see Note 12). Amendments to AASB 128 provide clarification that an entity continues to apply the equity method and does not re-measure 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 has determined that these amendments have no impact on the financial statements of the Group. 173 173 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) 1 Summary of significant accounting policies (continued) (a) Basis of preparation (continued) New and amended standards adopted by the Group (continued) (iii) AASB 13 Fair Value Measurement and AASB 2011-8 Amendments to Australian Accounting Standards arising from AASB 13 AASB 13 establishes a single framework for measuring fair value and making disclosures about fair value measurements, when such measurements are required or permitted by other AASBs. In particular, it unifies the definition of fair value as the price at which an orderly transaction to sell an asset or to transfer a liability would take place between market participants at the measurement date. It also replaces and expands the disclosure requirements about fair value measurements in other AASBs, including AASB 7 Financial Instruments: Disclosures. In accordance with the transitional provisions of AASB 13, the Group has applied the new fair value measurement guidance prospectively, and has not provided any comparative information for new disclosures. Notwithstanding the above, the change has not had a material impact on the measurement of the Group’s assets and liabilities. (iv) AASB 2011-4 Amendments to Australian Accounting Standards to Remove Individual Key Management Personnel Disclosure Requirements The AASB has 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. This amendment has reduced the disclosures required in the notes to the financial statements however it has not affected any of the amounts recognised in the financial statements. Early adoption of standards The Group has elected to early adopt AASB 2013-3 Amendments to AASB 136 - Recoverable Amount Disclosures for Non-Financial Assets, which amends the disclosure requirements in AASB 136 Impairment of Assets. The amendments include the requirement to disclose additional information about the fair value measurement when the recoverable amount of impaired assets is based on fair value less costs of disposal, and may result in additional disclosures if the group recognises an impairment loss or the reversal of an impairment loss during the year. The application date for the Group would have been 1 July 2014, but the Group has early adopted as of 1 July 2013. The adoption of this new standard has not had a significant impact on the disclosure within the financial statements. 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 million dollars, or in certain cases, to the nearest dollar. 174 174 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) 1 Summary of significant accounting policies (continued) (b) Principles of consolidation Subsidiaries Subsidiaries are all those entities which the Group controls. The Group controls an entity when the group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to govern the financial and operating policies of the 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. Associates and joint arrangements Associates are all entities over which the Group has significant influence but not control. Interests in joint arrangements are where the Group jointly controls an entity with another party (refer to note 12). Under AASB 11 Joint Arrangements investments in joint arrangements are classified as either joint operations or joint ventures. The classification depends on the contractual rights and obligations of each investor, rather than the legal structure of the joint arrangement. The Group has joint ventures and does not have any joint operations. 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. 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 Financial results of the operating segment 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). This includes a proportional income statement per operating segment and consolidated financial statements for the Group. (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: 175 175 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) 1 Summary of significant accounting policies (continued) (d) Revenue recognition (continued)  Rental revenue is recognised as earned in accordance with the lease contract.  Interest income is recognised using the effective interest rate method.  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.  Distribution revenue is recognised when the Trust’s right to receive payment is established (e) Income tax Pursuant to the provisions of the Income Tax Legislation, Trusts are not liable to income tax provided that their 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 Trust 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 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. (f) Leases Leases in which a significant portion of the risks 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. 176 176 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) 1 Summary of significant accounting policies (continued) (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. 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 the income statement. (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 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 purpose 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 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 on the balance sheet. 177 177 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) 1 Summary of significant accounting policies (continued) (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. 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 (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. 178 178 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) 1 Summary of significant accounting policies (continued) (j) Investments and other financial assets (continued) 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. (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. 179 179 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) 1 Summary of significant accounting policies (continued) (k) Derivatives and hedging activities (continued) Cash flow hedge (continued) 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 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 16. Where work is in progress, it is classified as assets under construction. (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 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. 180 180 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) 1 Summary of significant accounting policies (continued) (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 measured 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 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. 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. (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 and associates 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. 181 181 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) 1 Summary of significant accounting policies (continued) (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 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 2014 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 2017) AASB 9 Financial Instruments addresses the classification, measurement and derecognition of financial assets and financial liabilities. The standard is not applicable until 1 January 2017 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. (ii) IFRS 15 Revenue from Contracts with Customers (effective 1 January 2017) IFRS 15 establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. IFRS 15 supersedes: (a) IAS 11 Construction Contracts (b) IAS 18 Revenue (c) IFRIC 13 Customer Loyalty Programmes (d) IFRIC 15 Agreements for the Construction of Real Estate (e) IFRIC 18 Transfers of Assets from Customers (f) SIC-31 Revenue-Barter Transactions Involving Advertising Services The core principle of IFRS 15 is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity recognises revenue in accordance with that core principle by applying the following steps: 182 182 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) 1 Summary of significant accounting policies (continued) (t) New accounting standards and interpretations (continued) (ii) IFRS 15 Revenue from Contracts with Customers (effective 1 January 2017) (continued) Step 1: Identify the contract(s) with a customer Step 2: Identify the performance obligations in the contract Step 3: Determine the transaction price Step 4: Allocate the transaction price to the performance obligations in the contract Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation Although a formal assessment has not been completed, the impact of the application of the new standard is not expected to be material. 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. 4 Revenue Rental income Construction revenue Other revenue Total revenue (a) Rental income Notes 4(a) 4(b) 2014 $M 272 55 - 327 2013 $M 265 211 1 477 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 Construction revenue is recognised during the construction phase of an intangible asset. 183 183 2014 Transurban Annual Report 5 Other income Concession fees (a) Concession fees Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) Notes 5(a) 2014 $M 28 28 2013 $M 26 26 Income from concession fees relates to the CityLink concession notes. Pursuant to the Agreement for the Melbourne CityLink Concession Deed (the Concession Deed), CityLink Melbourne Limited (CityLink) (a member of the Transurban Group), is required to pay annual concession fees for the duration of CityLink's concession period. Until a certain threshold rate of return on the project is achieved, the payment of concession fees due under the Concession Deed can be satisfied by means of non-interest bearing concession notes. Following agreements reached with the State of Victoria (the State), the Group paid a total of $765 million to the State to assign all current concession notes issued to the State to Transurban Holding Trust and the State directed CityLink to pay future concession notes to Transurban Holding Trust. Accordingly, CityLink continues to issue notes semi-annually to Transurban Holding Trust, and the Group recognises concession note income from the issue of these notes, at the present value of expected future repayments. 6 Expenses Profit before income tax includes the following specific expenses: Depreciation and amortisation expense 7 Net finance income Finance income Interest income from related parties Other interest income Net foreign exchange gains 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 Notes 7(a) 2014 $M 2013 $M 123 109 2014 $M 523 1 - 49 573 (379) (1) (1) (381) 192 2013 $M 487 1 4 59 551 (331) - (1) (332) 219 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. 184 184 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) 8 Income tax expense Income tax expense Current tax Deferred tax Deferred income tax (revenue) included in income tax expense comprises: (Increase) in deferred tax assets (note 15) 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% (2013 - 30%) Tax effect of amounts which are not deductible (taxable) in calculating taxable income: Trust income not subject to tax Income tax expense 9 Current assets - Cash and cash equivalents Cash at bank and in hand All cash balances are interest bearing. 2014 $M 4 (1) 3 (2) 1 (1) 2014 $M 355 107 (104) 3 2013 $M 4 (1) 3 (1) - (1) 2013 $M 396 119 (116) 3 (359) (399) 2014 $M 75 75 2013 $M 29 29 185 185 2014 Transurban Annual Report 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 2014 (continued) Notes 10(a) 10(b) 2014 $M 2,418 2 1 2,421 2013 $M 369 2 - 371 No class within trade and other receivables contains 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 Pty Limited, 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 2014. 11 Non-current assets - Receivables Concession notes Loans to related parties Notes 11(a) 11(b) 2014 $M 795 6,117 6,912 2013 $M 718 5,874 6,592 None of the non-current receivables are impaired or past due but not impaired. (a) Concession notes Following agreements reached with the State of Victoria (the State), the Group paid a total of $765 million for the State to assign all current concession notes issued to the State to Transurban Holding Trust and the State directed CityLink to pay future concession notes to Transurban Holding Trust. (b) Loans to related parties Loans to related parties represent amounts advanced to other members of the Transurban Group. There is no allowance for doubtful debts as the counterparties are related parties. 186 186 2014 Transurban Annual Report 12 Equity accounted investments Westlink M7: Westlink Motorway Limited WSO Finance Pty Limited Westlink Motorway Partnership Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) 2014 % 50 50 50 2013 % 50 50 50 150 150 2014 $M 2013 $M - - - - - - - - The amounts recognised in the income statement are as follows: Joint operation As at 30 June Total 2014 $M - - 2013 $M - - Summarised financial information of equity accounted investments Set out below is the summarised financial information for the Group’s investments accounted for using the equity method. Summarised Balance Sheet Cash and cash equivalents Other current assets Non-current assets Current financial liabilities Other current liabilities Non-current financial liabilities Other non-current liabilities Net assets (100%) Trust's share of net assets Losses not recognised Carrying amount of joint venture at June 30 Summarised Income Statement Revenue Depreciation and amortisation Other expenses Interest expense Profit / (loss) Other comprehensive income Total profit and total comprehensive income Proportional profit and total comprehensive income Trust's share of profit and total comprehensive income 187 Westlink M7 2014 $M 46 - 2,508 - (42) (3,139) - (627) (314) 314 - 125 (54) - (159) (88) 10 (78) (39) (39) 2013 $M 47 - 2,485 - (25) (3,056) - (549) (275) 275 - 122 (52) 143 (287) (74) 15 (59) (30) (30) 187 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) 12 Equity accounted investments (continued) Reconciliation of summarised financial information Reconciliation of the summarized financial information presented to the carrying amount of the Group’s interest in associates Westlink M7 Summarised financial information Opening net assets on 1 July Investments in subsidiary Profit / (loss) for the period Other comprehensive income Foreign exchange differences Dividends paid Closing net assets Interest in associates (%) Interest in joint ventures Goodwill Uplift on acquisition Losses not recognised Elimination of unrealized profit on intragroup transfer Transfer of reserves to the income statement on gain of control Cessation of equity accounting on gain of control Carrying value Share of expenditure commitments Capital commitments Operating commitments Contingent liabilities Share of contingent liabilities incurred jointly with other investors Associates and joint arrangements Joint operation 2014 $M (549) - (78) - - - (627) (314) - - 314 - - - - - 182 182 - - 50% 2013 $M (490) - (59) - - - (549) (275) - - 275 - - - - - 186 186 - - Westlink M7 Each of the above is a member of the Westlink 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. 188 188 2014 Transurban Annual Report 13 Non-current assets - Term loan notes Term loan notes Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) 2014 $M 887 887 2013 $M 832 832 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 2014 the Group capitalised interest of $55.0 million (2013: $49.0 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. 14 Derivative financial instruments 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 2014 $M 2013 $M 4 4 41 41 45 7 7 57 57 64 189 189 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) 14 Derivative financial instruments (continued) 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's financial risk management policies (refer to note 38). The instruments used by the Group are as follows: 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 4.4 per cent (2013: 4.5 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 93 per cent (2013: 93 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 6.3 per cent (2013: 6.9 per cent). Offsetting financial assets and financial liabilities The Group has not settled any financial assets or financial liabilities on a net basis during the financial year. Currently there is no right or basis to present any financial assets or financial liabilities on a net basis, and as such no financial assets or financial liabilities have been presented on a net basis in the Group’s balance sheet at the end of the financial year. 15 Deferred tax assets and liabilities The balance comprises temporary difference attributable 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 Closing balance 30 June Deferred tax assets/(liabilities) to be recovered after more than 12 months Assets Liabilities Net 2014 $M 2013 $M 2014 $M 2013 $M 2014 $M 2013 $M 7 - 7 (2) 5 5 2 7 7 7 5 - 5 (1) 4 4 1 5 5 5 - (2) (2) 2 - (1) (1) (2) (2) (2) - (1) (1) 1 - (1) - (1) (1) (1) 7 (2) 5 - 5 4 1 5 5 5 5 (1) 4 - 4 3 1 4 4 4 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. 190 190 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) 16 Non-current assets - Intangible assets CityLink $M Hills M2 Motorway $M Lane Cove Tunnel $M Cross City Tunnel $M Assets under construction $M At 1 July 2012 Cost Accumulation amortisation Net book amount Year ended 30 June 2013 Opening net book amount Additions Amortisation charge Closing net book amount At 30 June 2013 Cost Accumulation amortisation Net book amount Year ended 30 June 2014 Opening net book amount Additions Transfers Amortisation charge Closing net book amount At 30 June 2014 Cost Accumulation amortisation Net book amount Concession assets 1,208 (336) 872 872 - (40) 832 1,208 (376) 832 832 - - (38) 794 1,208 (414) 794 2,116 (472) 1,644 1,644 - (55) 1,589 2,116 (527) 1,589 1,589 - 596 (72) 2,113 2,712 (599) 2,113 348 (25) 323 323 - (13) 310 348 (38) 310 310 - - (13) 297 348 (51) 297 - - - - - - - - - - - 382 - - 382 382 - 382 385 - 385 385 211 - 596 596 - 596 596 55 (596) - 55 55 - 55 Total $M 4,057 (833) 3,224 3,224 211 (108) 3,327 4,268 (941) 3,327 3,327 437 - (123) 3,641 4,705 (1,064) 3,641 Service Concession Arrangements have been accounted for in accordance with AASB Interpretation 12 and therefore the concession assets have been classified as Intangible Assets. 191 191 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) 16 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. At the end of the concession period, all concession assets are to be returned to the Victorian State Government. 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. Hills M2 concession asset Transurban has the right to toll the Hills M2 Motorway until May 2046. At the end of the concession period, the concession asset is returned to the New South Wales State Government. The Concession Deed requires Transurban to maintain the Motorway to specified conditions. 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. Lane Cove Tunnel Transurban has the right to toll the Lane Cove Tunnel until January 2037. At the end of the concession period, all concession assets will be returned to the New South Wales State Government. The Concession Deed requires Transurban to maintain the tunnel to specified conditions. Toll increases for the Lane Cove Tunnel are based on the maximum toll increase as defined in the Concession Deed, being a quarterly escalation of CPI. Cross City Tunnel During the year Transurban acquired the right to toll the Cross City Tunnel until December 2035. At the end of the concession period, the concession asset is returned to the New South Wales State Government. The Concession Deed requires Transurban to maintain the tunnel to specified conditions. Toll increases for the Tunnel are based on a maximum toll increase as defined in the Concession Deed, being a quarterly escalation at the greater of quarterly CPI or 0.74 per cent until December 2017, and CPI thereafter. Assets under construction The Group is currently undertaking upgrade works on the Hills M2 Motorway. These will be transferred to the respective intangible assets 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 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. 192 192 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) 2014 $M 14 158 172 2014 $M 400 351 751 1,095 296 3,622 5,013 5,764 2013 $M 25 209 234 2013 $M - 438 438 1,504 - 3,111 4,615 5,053 Notes 18(a) 18(c) 18(a) 18(b) 18(c) 17 Current liabilities - Trade and other payables Trade payables and accruals Related party payables 18 Borrowings Current Term debt Loans from related parties Non-current Term debt Capital Markets debt Loans from related parties Total borrowings (a) Term debt The term debt facilities are comprised of:  $225.0 million facility entered into by AMT Management Limited (as trustee for Airport Motorway Trust). The facility has deferred borrowing costs of $1.8 million.  $740.0 million facility entered into by Hills Motorway Management Limited (as trustee for Hills Motorway Trust) of which $400 million is current at 30 June 2014. The facility has deferred borrowing costs of $1.4 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 $1.1 million.  A $276.5 million facility entered into by Transurban CCT Nominees Pty Limited (as trustee for Transurban CCT Trust). The facility has deferred borrowing costs of $1.9 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 $225.0 million non- recourse syndicated facility with a term of seven years. The current floating interest rate applicable to the facility is 2.7 per cent (2013: 2.8 per cent). The facility is currently fully hedged to an all-in rate after hedging of 7.5 per cent. 193 193 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) 18 Borrowings (continued) 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 construction capex facility of $275.0 million with a term of six years. As at 30 June 2014, the construction capex facility was fully drawn. The current floating interest rate applicable to the total facility is 2.7 per cent (2013: 2.9 per cent). The total facility is currently 86 per cent hedged with an all-in rate after hedging of 7.1 per cent. The Lane Cove Tunnel facility was refinanced in June 2013 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 approximately three years. The current floating rate applicable to the facility is 2.7 per cent (2013: 2.9 per cent). The facility is currently fully hedged to an all-in rate after hedging of 4.2 per cent. The Cross City Tunnel facility was established in June 2014 to partially finance the acquisition of the Cross City Tunnel. The facility is fully secured against the respective rights of Transurban CCT Pty Limited and Transurban CCT 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 2.7 per cent. The facility is currently fully hedged to an all-in rate after hedging of 4.3 per cent. (b) Capital markets debt This facility comprises of the following:  $300.0 million fixed rate bonds raised in November 2013 with a term of seven years. Interest is payable at 5.5 per cent. This facility is fully secured against the respective rights of Airport Motorway Limited and Airport Motorway Trust and their assets. The above facility has deferred borrowing costs of $4.2 million. (c) Loans from related parties The Group receives funding from a related party, Transurban Finance Company Pty Limited, which is used to finance its activities. Borrowing costs are also passed down. Covenants The Group's consolidated external debt has the following Interest Coverage Ratio ("ICR") covenants:  M1 Eastern Distributor - ICR greater than 1.15 times  Hills M2 Motorway - ICR greater than 1.2 times  Lane Cove Tunnel - ICR greater than 1.15 times  Cross City Tunnel - ICR greater than 1.15 times 194 194 2014 Transurban Annual Report 19 Current liabilities - Provisions Distribution to security holders Distribution to non-controlling interests in subsidiaries Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) Notes 19(a) 19(a) 2014 $M 322 39 361 2013 $M 178 33 211 (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: 2014 Carrying amount at 1 July Provision recognised Amounts paid/utilised during the year Carrying amount at 30 June Distribution to non- controlling interests in subsidiaries $M Distribution to security holders $M 178 523 (379) 322 33 15 (9) 39 195 195 2014 Transurban Annual Report 20 Other liabilities Current Unearned income (related parties) Non-current Promissory notes Total other liabilities (a) Unearned income Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) Notes 20(a) 20(b) 2014 $M 2013 $M 46 46 25 25 71 27 27 23 23 50 Unearned income represents amounts received in advance and will be recognised when the income is earned. (b) Promissory Notes The Hills Motorway Trust has entered into leases with Roads and Maritime Services of New South Wales (RMS). Annual lease liabilities under these leases total $7.0 million, indexed annually to consumer price index (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 trustee of the Hills Motorway 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 (2013: 12 per cent) which recognises their subordinated nature. The face value of Promissory Notes on issue at 30 June 2014 is $158.6 million (2013: $147.6 million). The net present value at 30 June 2014 of the redemption payments relating to these Promissory Notes is $24.6 million (2013: $22.9 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 Ordinary units fully paid 2014 Number M 1,896 1,896 2013 Number M 1,482 1,482 2014 $M 9,472 9,472 2013 $M 7,336 7,336 196 196 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) 21 Issued units (continued) Units in trust The number of units on issue is 1,896,384,073 (2013: 1,481,594,818). 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 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. 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 2012 Distribution reinvestment plan Transfer vesting portion of LTI from share-based payment reserve Placement to UniSuper Limited Deferred Short Term Incentives issued Closing balance at 30 June 2013 Opening balance at 1 July 2013 Distribution reinvestment plan Transfer vesting portion of LTI from share-based payment reserve Deferred Short Term Incentives issued Institutional Share offer Share Placement Retail Share offer Closing balance at 30 June 2014 (a) Distribution reinvestment plan Notes 21(a) 21(c) 21(d) 21(a) 21(d) 21(e) 21(e) 21(e) Number of units M 1,458 6 1 16 1 1,482 1,482 10 - - 264 57 83 1,896 $M 7,241 24 1 68 2 7,336 7,336 42 1 1 1,360 310 422 9,472 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. 197 197 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) 21 Issued units (continued) (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 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. (c) Placement to UniSuper Limited On 7 January 2013 Transurban issued 16,260,163 ordinary stapled securities under a placement to UniSuper Limited (as trustee of the superannuation fund known as UniSuper). (d) Deferred Short Term Incentives Mandatory STI deferral of a portion of the overall STI award, as detailed in the Remuneration Report, was introduced for the CEO and other Senior Executives in the year ended 30 June 2012. For Australian Senior Executives deferral is into securities. (e) Institutional and retail offer and placement On 1 May 2014, the Transurban Group successfully completed the fully underwritten institutional component of its accelerated renounceable 10 for 43 pro rata entitlement offer at an offer price of $6.75, raising approximately $1.79 billion. The retail component of the offer was successfully completed on 29 May 2014 and raised gross proceeds of approximately $557 million. As part of the entitlement offer, the Transurban Group also completed a placement of securities to its Queensland Motorways consortium bid partners AustralianSuper and Tawreed, raising gross proceeds of approximately $400 million. The total gross proceeds for the Transurban Group from the entitlement offer and placement were approximately $2.74 billion, and were used to fund the Transurban Group’s equity contribution for the Queensland Motorways acquisition, which completed on 2 July 2014. 22 Reserves and accumulated losses Reserves Cash flow hedges Share-based payments Movements: Cash flow hedges Balance 1 July Revaluation - gross (note 14) Amount attributable to non-controlling interests Balance 30 June 198 198 2014 $M (40) 5 (35) 2014 $M (57) 19 (2) (40) 2013 $M (57) 5 (52) 2013 $M (76) 21 (2) (57) 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) 22 Reserves and accumulated losses (continued) Reserves (continued) Share-based payments Balance 1 July Employee share plan expense Transfer vesting portion of LTI to issued units Deferred Short Term Incentives issued Balance 30 June Nature and purpose of other reserves 2014 $M 5 2 (1) (1) 5 2013 $M 7 4 (4) (2) 5 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. Accumulated losses Movements in accumulated losses were as follows: Balance 1 July Profit for the year attributable to unit holders of Transurban Holding Trust Distributions to unit holders Balance 30 June 2014 $M (1,780) 345 (523) (1,958) 2013 $M (1,804) 378 (354) (1,780) 199 199 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) 23 Distributions Distribution payable Final distribution for 2014 financial year payable and recognised as a liability: 17.0 cents (2013: 12.0 cents) per fully paid Stapled Security payable 14 August 2014 Final unfranked distribution payable and recognised as a liability: 14.5 cents (2013: 12.0 cents) per fully paid Stapled Security payable 14 August 2014 Fully franked final distribution based on tax paid at 30%: 2.5 cents (2013: nil) per fully paid Stapled Security Distributions paid during the year Final distribution for 2013 financial year of 12.0 cents (2012: 11.5 cents) per fully paid Stapled Security paid 14 August 2013 Interim distribution for 2014 financial year of 13.5 cents (2013: 12.0 cents) per fully paid Stapled Security paid 14 February 2014 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 2014 and 30 June 2013 Paid in cash Satisfied by issue of Stapled securities (a) 2014 $M 2013 $M 275 47 322 178 201 379 2014 $M 327 52 379 178 - 178 168 176 344 2013 $M 317 27 344 (a) The value of stapled securities represents the total value of securities issued; however, this value is apportioned between Transurban Holdings Limited ($7.7 million), Transurban Holding Trust ($43.3 million), and Transurban International Limited ($1.0 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 Intra-group guarantees As at 30 June 2014, 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. 200 200 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) 26 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 2014 $M 20 - 20 2013 $M 55 1 56 Hills Motorway Management Limited, as trustee 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 trustee, by means of the issue of non-interest bearing promissory notes to the RMS. For further information refer to note 20. 27 Related party transactions Transactions with 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 Limited 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. 201 201 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) 27 Related party transactions (continued) 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 Other administration costs Aggregate amounts of related party assets at balance date Current receivables Term loan notes (loan to associate) Non-current receivables Concession notes Aggregate amounts of related party liabilities at balance date Current liabilities Non-current liabilities 2014 $M 2013 $M 272 419 103 794 267 3 9 279 2,418 887 6,117 795 10,217 509 3,622 4,131 266 389 97 752 245 3 - 248 369 832 5,874 718 7,793 648 3,110 3,758 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. Loans to associate The “loan to associate” is via Term Loan Notes (“TLN’s”). The TLN’s 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 Wales 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’s 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. 202 202 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) 28 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): Country of incorporation Class of shares Equity holding Name of entity CityLink Trust Transurban Finance Trust Transurban AL Trust Transurban CARS Trust Transurban WSO Trust Hills Motorway Trust T (895) Finance Trust Sydney Roads Trust Airport Motorway Trust LCT-MRE Trust LCT-MRE Holdings Trust Transurban CCT Holdings Trust Transurban CCT 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 Ltd LMI Westlink Partner Holding No.2 Pty Ltd LMI Westlink Partner No.2 Pty Ltd Sun Group Invest Trust 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 2014 % 100 100 100 100 100 100 100 100 75.1 100 100 100 100 100 100 100 100 100 100 100 100 62.5 The proportion of ownership interest is equal to the proportion of voting power held. 203 2013 % 100 100 100 100 100 100 100 100 75.1 100 100 - - 100 100 100 100 100 100 100 100 - 203 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) 29 Non-Controlling interests (a) Non-controlling interests (NCI) Set out below is summarised financial information for each subsidiary that has non-controlling interests that are material to the Group. The amounts disclosed for each subsidiary are before inter-company eliminations. Summarised balance sheet Current assets Non-current assets Current liabilities Non-current liabilities Net assets Carrying amount of NCI Summarised statement of comprehensive income Revenue Profit (loss) for the period Other comprehensive income Total comprehensive income Profit allocated to NCI OCI allocated to NCI Airport Motorway Trust Sun Group Invest Trust* 24.9% 37.5% 30 June 2014 30 June 2013 30 June 2014 30 June 2013 $M 21 837 (158) (537) 163 (41) $M 21 812 (135) (544) 154 (38) $M 21 - - - 21 (8) $M - - - - - - Airport Motorway Trust 24.9% Sun Group Invest Trust* 37.5% 30 June 2014 $M 30 June 2013 $M 30 June 2014 $M 30 June 2013 $M 100 58 - 58 (14) - 97 59 - 59 (15) - - (19) - (19) 7 - - - - - - - Airport Motorway Trust 24.9% Sun Group Invest Trust* 37.5% 30 June 2014 30 June 2013 30 June 2014 30 June 2013 Summarised cash flow Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities Net increases in cash and cash equivalents $M $M - - - - - - - - Distributions paid to NCI (9) (10) *Sun Group Invest Trust is the subsidiary of the Trust for the purpose of investing in Queensland Motorways $M (20) 40 - 20 - $M - - - - - 204 204 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (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 The parent entity has no contingent liabilities. 31 Events occurring after balance sheet date 2014 $M 3,442 9,135 12,577 473 3,776 4,249 2013 $M 1,013 8,181 9,194 323 2,854 3,177 (25,125) (18,051) 9,472 5 (1,149) 8,328 697 697 7,336 4 (1,323) 6,017 445 445 The financial close on the acquisition of Queensland Motorways was completed on 2 July 2014. On this date the Group raised $2,900 million in non-recourse debt to fund the acquisition of which $2,500 million was drawn on that date. The financial effects of this transaction have not been brought to account at 30 June 2014. The operating results and assets and liabilities of Queensland Motorways will be consolidated from 2 July 2014. As at the date of this report the Directors are not aware of any other circumstances that have arisen since 30 June 2014 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, that have not otherwise been disclosed in the financial report. 205 205 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (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: Decrease/(Increase) in receivables and prepayments Decrease in payables (Increase) in operating related party balances Movement in current tax liabilities and deferred taxes Increase in unearned income Increase in promissory note liability Net cash inflow from operating activities 33 Non-cash investing and financing activities Distributions satisfied by the issue of units under the distribution reinvestment plan 34 Earnings per unit Basic earnings per unit Earnings attributable to the ordinary unit holder Total basic earnings per unit attributable to the ordinary equity holders of the Trust Diluted earnings per unit Earnings attributable to the ordinary unit holder Total diluted earnings per unit attributable to the ordinary equity holders of the Trust 2014 $M 352 123 (55) (77) 10 (1) 11 (387) (2) 19 2 (5) 2014 $M 42 2014 Cents 22.4 22.4 2014 Cents 22.4 22.4 2013 $M 393 109 (49) (86) 10 1 - (305) (2) 6 3 80 2013 $M 24 2013 Cents 25.7 25.7 2013 Cents 25.7 25.7 206 206 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (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 2014 $M 352 (7) 345 2013 $M 393 (15) 378 Weighted average number of units used as the denominator in calculating basic and diluted earnings per unit 2014 Number 2013 Number 1,539,476,092 1,470,495,508 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. 207 207 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) 35 Share-based payments (continued) Performance Awards Plan (continued) Grant date Vesting / Expiry date Fair value at grant date ($) Balance at start of the year Granted during the year Vested during the year Forfeited during the year Balance at end of the year TSR EBITDA FCF Number Number Number Number Number 2014 1 Nov 2010 1 Nov 2013 23 Dec 2010 1 Nov 2013 26 Sep 2011 30 Jun 2014 11 Nov 2011 30 Jun 2014 15 Aug 2012 30 Jun 2015* 30 Jun 2015* 19 Oct 2012 14 Aug 2013 30 Jun 2016* 30 Jun 2016* i Nov 2013 3.23 3.33 3.37 3.27 2.72 2.95 3.24 3.13 4.62 4.97 N/A N/A N/A N/A N/A N/A N/A N/A 4.63 4.81 4.99 5.43 6.07 6.21 Total a 922,476 684,683 420,872 715,024 480,102 448,400 - - - - - - - - 728,380 382,292 (789,978) (592,320) (267,256) (511,886) - - - - (132,498) (92,363) (153,616) (203,138) (113,537) - - - - - - - 366,565 448,400 728,380 382,292 3,671,557 1,110,672 (2,161,440) (695,152) 1,925,637 * vesting / expiry date refers to the ending date of the performance period. Actual vesting / expiry date is determined within 30 days of the release of Transurban Group's financial results for that performance period. Grant date Vesting / Expiry date Fair value at grant date ($) Balance at start of the year Granted during the year Vested during the year Forfeited during the year Balance at end of the year TSR EBITDA FCF Number Number Number Number Number 2013 11 Dec 2009 1 Nov 2010 23 Dec 2010 26 Sep 2011 11 Nov 2011 15 Aug 2012 19 Oct 2012 Total a 11 Dec 2012 1 Nov 2013 1 Nov 2013 30 Jun 2014 30 Jun 2014 30 Jun 2015 30 Jun 2015 3.33 3.23 3.33 3.37 3.27 2.72 2.95 4.97 4.62 4.97 N/A N/A N/A N/A N/A N/A N/A 4.63 4.81 4.99 5.43 1,625,994 1,201,077 684,683 661,932 715,024 - - - (1,624,766) - - - - - - - - - 747,201 - 448,400 (1,228) (278,601) - (241,060) - (267,099) - - 922,476 684,683 420,872 715,024 480,102 448,400 4,888,710 1,195,601 (1,624,766) (787,988) 3,671,557 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 Flow component of the Performance Awards has only a non-market based vesting condition which is not considered in the valuation. The valuation of these awards takes into account the security price at grant date, and the expected dividend yield which represents the dividends over the life of the Awards that the rights holder does not receive. A discounted cash flow model is used to perform this valuation. 208 208 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) 35 Share-based payments (continued) Assessed fair value (continued) The Group is currently transitioning to a face value approach (discounted for distributions) for the FCF component. The transition is over 3 years and all things being equal there will be a decrease in the number of awards recipients receive until the new methodology is achieved. This transition will be completed for grants made during FY2016. Performance Awards Plan - CEO Sign On Award Plan Scott Charlton received a one-off grant of equity as a sign-on award in recognition of the incentives forfeited with his former employer by joining Transurban. The awards were awarded at no cost to Scott and will vest, subject to his continued employment with Transurban as described in his employment contract, in three equal tranches on the first, second and third anniversaries of his employment date. Upon vesting, the awards will automatically exercise and settle in securities. No dividends or distributions on securities are payable prior to vesting. Grant date 2014 14 Sep 2012 14 Sep 2012 Total x Grant date 2013 14 Sep 2012 14 Sep 2012 14 Sep 2012 Total Vesting / Expiry date Fair value at grant date Balance at start of the year Granted during the year Vested during the year Forfeited during the year Balance at end of the year Number Number Number Number Number 16 Jul 2014 16 Jul 2015 $5.71 $5.71 78,752 78,752 157,504 - - - (78,752) - (78,752) - - - - 78,752 78,752 Vesting / Expiry date Fair value at grant date Balance at start of the year Granted during the year Vested during the year Forfeited during the year Balance at end of the year Number Number Number Number Number 16 Jul 2013 16 Jul 2014 16 Jul 2015 $5.71 $5.71 $5.71 78,752 78,752 78,752 236,256 - - - - - - - - - - - - 78,752 78,752 78,752 236,256 Short Term Deferred Incentive Plan For the 2014 financial year, the CEO and other Senior Executives had a target STI opportunity of 30 per cent of their total remuneration package. Mandatory STI deferral of 50 per cent of the overall STI award now applies for all grants to the CEO and other Senior Executives. STI payouts can vary between zero (if targets are not met) and 150 per cent (for exceptional outperformance). The deferral period is two years. For Australian Senior Executives, deferral is into securities. Due to legal restrictions on the issue of securities to USA residents, the USA resident Senior Executives receive deferred cash awards. STI deferral grants are made in the form of awards. Each award is an entitlement to receive a fully paid security, or an equivalent cash payment, on terms and conditions determined by the Board. This 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). 209 209 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) 35 Share-based payments (continued) Short Term Deferred Incentive Plan (continued) Vesting / Expiry date Fair value at grant date Balance at start of the year Granted during the year Vested during the year Forfeited during the year Balance at end of the year Number Number Number Number Number 1 Jul 2014 1 Jul 2014 $5.68 $5.68 642,388 - 443,736 642,388 443,736 (79,668) - 562,720 443,736 (79,668) 1,006,456 - - Vesting / Expiry date Fair value at grant date Balance at start of the year Granted during the year Vested during the year Forfeited during the year Balance at end of the year Number Number Number Number Number 1 Jul 2014 $5.68 - - 642,388 642,388 - - - - 642,388 642,388 Grant date 2014 15 Aug 2012 15 Aug 2012 Total Grant date 2013 15 Aug 2012 Total Fair value x x The fair value at grant dates in both the deferred STI plan and the CEO sign-on awards plan have been determined in accordance with AASB 2 by using a volume weighted average price (VWAP) over a specified period of time. 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 were eligible to participate in the Investment Tax Exempt Plan and the Investment Tax Deferred Plan for the year ended 30 June 2014. Under the plans, Transurban provides participants with a matching component toward the acquisition of the stapled securities. For the period 1 July 2013 to 30 June 2014, the cost of company matches was $139,918 (2013: $132,162) for the Investment Tax Exempt Plan and $314,667 (2013: $450,374) 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 2014, each participant was allocated 100 stapled securities at a value of $6.94 per security. Stapled Securities provided under the Plan were acquired on the open market. Eligible US based participants received an equivalent cash award. Shares purchased on the market under the plan and provided to participating employees 2014 Number 50,800 2013 Number 45,900 Expenses arising from share-based payment transactions Total expenses arising from share-based payment transactions recognised for the Transurban Group during the period as part of employee benefit expense was $6.6 million (2013: $6.6 million). 210 210 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) 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 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 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 sheet date. Estimated impairment of intangible assets and cash generating units The Group tests whether intangible assets and cash generating units have suffered any impairment, in accordance with the accounting policy stated in note 1(h). 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. As disclosed in Note 16, 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. The Group does not consider that there have been any indicators of impairment in relation to any of its cash generating units during the year. 211 211 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) 37 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 Director Scott Charlton Non-executive Directors Lindsay Maxsted (Chairman) Neil Chatfield Robert Edgar Samantha Mostyn Christine O'Reilly Rodney Slater Ian Smith 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: J Aument W Ballantine A Head S Hogg L Petschel S Johnson T Steinhilber L Tobin V Vassallo Group General Manager, North America Group General Manager, Strategy Group General Manager, New South Wales Chief Financial Officer (departed 14 July 2014) Acting Chief Financial Officer (from 14 July 2014) Group General Manager, Human Resources Group General Manager, Project Delivery and Operational Excellence (until 14 July 2014) Group General Manager, Technology Group General Manager, Victoria 212 212 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) 2014 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 were the 'key management personnel' (KMP) of the Transurban Group (Group) during the year ended 30 June 2014 (FY2014). The KMP disclosed in this report are listed in the table below: Current Non-executive Directors Lindsay Maxsted, Chair Neil Chatfield Robert Edgar Samantha Mostyn Christine O'Reilly Rodney Slater Ian Smith Current Senior Executives Scott Charlton, Executive Director and Chief Executive Officer (CEO) Jennifer Aument, Group General Manager, North America Wesley Ballantine, Group General Manager, Queensland (from 4 June 2014, formerly Group General Manager, Strategy) Andrew Head, Group General Manager, New South Wales Samantha Hogg, Chief Financial Officer (1) Sue Johnson, Group General Manager, Human Resources Tim Steinhilber, Group General Manager, Delivery and Operational Excellence (1) Lisa Tobin, Group General Manager, Technology Vin Vassallo, Group General Manager, Victoria Former Senior Executives Michael Kulper, President North America (departed 3 September 2013) (1) On 14 July 2014, the Group announced changes to KMP. Samantha Hogg departed the Group and Tim Steinhilber has transferred back to the USA. Refer to section 1B for further details. Contents 1 Remuneration snapshot 2 Remuneration governance 3 Remuneration in context 4 CEO / Senior Executive remuneration for FY2014 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. 213 214 216 217 218 238 240 213 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) 1 Remuneration snapshot The Transurban Board is committed to an executive remuneration framework that is focused on driving a performance culture and linking pay to the achievement of the Group’s strategy and business objectives and, ultimately, generating security holder value. Transurban’s remuneration framework is reviewed annually taking into consideration security holder and other stakeholder feedback, market expectations and regulatory developments. At the 2013 Annual General Meeting (AGM), the framework received strong support from security holders, with a 98.8% vote in favour of the resolution to adopt the 2013 Remuneration Report. There were no substantive changes to the framework in FY2014, but some refinements were made to further align remuneration with the creation of sustainable security holder value, business outcomes, and the Group’s organisational values: integrity, collaboration, accountability, ingenuity and respect. In particular, changes were made to the Short Term Incentive (STI) program for all eligible employees, which were aimed at enhancing this variable pay element through increased performance differentiation, the introduction of formal performance comparisons against peers, and strengthening the link between individual and Group performance. A TRANSURBAN’S REMUNERATION FRAMEWORK The key elements of the remuneration framework for the CEO and other Senior Executives for FY2014 were as follows: Remuneration mix The remuneration of the CEO and other Senior Executives was structured as a mix of fixed remuneration and variable ('at risk') remuneration through short term and long term incentive components. The relative weightings of the three components were as follows: Total remuneration % (annualised at target) Fixed TEC Variable (performance based) CEO Senior Executives 40 45 STI 30 (50% deferred) 30 (50% deferred) LTI 30 25 * All Senior Executives moved to 50% STI deferral effective 1 July 2013. Fixed total employment cost (TEC) Fixed TEC was set with reference to the market median, using the ASX 20-50 as the primary reference, with consideration also given to the ASX 100. Remuneration packages (including TEC levels) are reviewed annually by the Remuneration and Human Resources Committee with reference to an individual's role, experience and performance, as well as relevant comparative market data provided by an independent remuneration consultant. TEC levels are also reviewed on a change in role. 214 214 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) Short term incentive (STI) During FY2014, changes were made to the STI program to achieve greater performance differentiation. The link between Group and individual performance was also strengthened by using individual performance as a multiplier when calculating reward for Group performance. Group performance measures under the new STI program were again linked to growth in proportional EBITDA, cost management based on proportional net costs, and safety. See section 5 for further details. Individual performance continues to be measured against key performance indicators (KPIs). Under the new STI program, each individual’s assessment will be used in determining a rating relative to peers. The overall rating will derive an individual’s STI using a payment schedule as determined by the Board designed to encourage high performance. During FY2014, the proportion of the STI award subject to mandatory deferral was aligned for the CEO and all Senior Executives, so that all members of KMP now have 50 per cent of their STI award deferred for two years. Increasing the level of STI deferral (from 30% when it was first introduced in FY2012) strengthens the link between KMP performance and security holder value and provides a greater retention element. For Australian Senior Executives, STI deferral is into securities. Due to legal restrictions on the issue of securities to USA residents, the USA resident Senior Executives receive deferred cash awards. The deferred component of remuneration may, at the discretion of the Board, be subject to forfeiture or clawback (eg. in the event of misconduct or material misstatement of financial results). Long term incentive (LTI) For FY2014, LTI performance measures 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, telecommunications and construction Global Industry Classification Standards (GICS) sectors of the ASX 150; and  50 per cent Free Cash Flow (FCF) per security, reflecting the Group's focus on the maximising free cash flow to drive security holder return. The definition of FCF per security is set out on page 227 of the audited financial statements. The FCF calculation is included in note 22 of the Transurban Holdings Limited audited financial statements. B OTHER EVENTS / ACTIONS IMPACTING REMUNERATION IN FY2014 USA restructure As previously disclosed, the Group’s New York office was closed in FY2014. As a consequence, it was determined that the position of President, North America was no longer required. As no suitable positions were available for Michael Kulper (the incumbent), his employment with the Group ceased on 3 September 2013. On ceasing employment as President, North America, Michael Kulper received a sum equivalent to 3 months TEC as a payment in lieu of notice (USD 247,450), and he was paid (USD 304,554) (equivalent to 16 weeks TEC) severance payment. The following arrangements also applied to Michael Kulper:  he retained the deferred securities granted to him under the FY2012 and FY2013 STI plans in accordance with their original terms; and  he retained a pro-rated proportion of his LTI awards granted to him under the FY2011 (161,103 Performance Awards), FY2012 (111,721 Performance Awards) and FY2013 (65,293 Performance Awards) LTI plans 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. Michael Kulper was not eligible to participate in the FY2014 LTI plan. 215 215 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) Queensland Motorways In April 2014, a Transurban-led consortium was announced as the successful bidder for Queensland Motorways, which operates a network of toll roads in and around Brisbane. Financial close was achieved on 2 July 2014. Wesley Ballantine, Group General Manager, Strategy, was appointed to the position of Group General Manager, Queensland on 4 June 2014. Wesley Ballantine has been employed by the Group since 2006. Wesley Ballantine’s remuneration was reviewed on this change in role, taking into account benchmark data and internal relativities. Refer to section 4. Changes to KMP On 14 July 2014, Transurban announced changes to its Executive Committee. Samantha Hogg, Chief Financial Officer, left the Group on 14 July 2014 after six years with the business. Tim Steinhilber, Group General Manager, Project Delivery and Operational Excellence, transferred back to the USA to support the delivery of the I95 project that is scheduled for completion at the end of 2014. The remuneration arrangements applying to Samantha Hogg on her departure, will be disclosed in the 2015 report. Anthony Adams, currently Vice President, Infrastructure, Major Projects, and based in the USA, will transfer back to Australia to assume the role of Group General Manager, Project Delivery and Operational Excellence. Anthony joined Transurban in June 2003. Leigh Petschel, currently General Manager, Finance, is Acting Chief Financial Officer. Leigh joined Transurban in October 2013. 2 Remuneration governance A BOARD AND REMUNERATION AND HUMAN RESOURCES COMMITTEE RESPONSIBILITY The Remuneration and Human Resources 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. It is critical that the Remuneration and Human Resources 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, the CEO and the Group General Manager, Human Resources attend Committee meetings, however they do not participate in formal decision making. The membership of the Remuneration and Human Resources Committee was unchanged in FY2014. The members of the Committee continue to be Robert Edgar (Chair), Samantha Mostyn and Neil Chatfield. Further details regarding the Committee are set out in the Directors’ report. The Remuneration and Human Resources Committee reviews gender pay equity annually. The Group has focused on achieving pay equity at all work levels in the organisation and the FY2014 outcomes indicate that this objective has substantially been achieved. 216 216 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) B ENGAGEMENT OF REMUNERATION CONSULTANTS To ensure that the Remuneration and Human Resources Committee has all relevant information at its disposal when making remuneration decisions, it 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 by Directors. Those consultants who provided the Remuneration and Human Resources Committee with a remuneration recommendation relating to KMP during FY2014, and who have been deemed by the Group to be ‘remuneration consultants’, are listed below: Consultant Fees for remuneration recommendations Ernst & Young $10,000 Fees for other advice provided to the Group during FY20141 $768,079 1 Fees for other advice includes the review of USA tax returns, expatriate taxation requirements, audit of various undertakings and general consulting Ernst & Young was selected by the Remuneration and Human Resources 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 their recommendations, both a declaration of independence from the KMP to whom their recommendations related, and also confirmation of 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. that Ernst & Young provide, with terms also required 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. 3 Remuneration in context Transurban is a top 20 Australian Securities Exchange listed business and is the largest transport infrastructure entity in Australia, and one of the largest toll road entities in the world. Transurban is focused on providing effective and innovative urban transport solutions in road infrastructure, through the management and development of urban networks of toll road concessions. The effective management of toll road concessions involves leveraging a network footprint in our markets, taking a leading role in shaping policy, and utilising our core capabilities in the following areas:  Network planning and forecasting;  Operations and customer management;  Project development and delivery;  Application of technology; and  Community engagement. 217 217 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) The investment proposition for high quality toll road assets lies in providing investors with access to long dated, predictable, growing cash flows generated over the life of the concessions through effective management and development of the road corridors they govern. The Board and management are focused on ensuring security holder value is enhanced through the strong performance of the Group’s asset portfolio. Development activities also provide opportunities to further expand the portfolio and unlock further value in the concessions. 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 the Hills M2, Lane Cove Tunnel and Cross City 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) and, from 2 July 2014, Queensland Motorways in Brisbane (62.5 per cent). In North America, the Group currently has interests in two assets, the 495 Express Lanes (94.0 per cent), and the 95 Express Lanes project (77.5 per cent), which is currently under construction and remains on schedule for completion in late 2014. 4 CEO / Senior Executive remuneration for FY2014 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. 218 218 2014 Transurban Annual Report The Group's remuneration strategy and policy as set by the Board is summarised below: Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) Creating Security Holder Value  Remuneration Strategy Attract, retain, motivate and reward executives 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  Remuneration Structure Fixed remuneration Total Employment Cost (TEC):  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 ('at risk') remuneration Short term incentive (STI):  Annual rewards tied to pre-determined individual and Group performance measures, and includes a deferred element (into securities)   Individual performance against targets and comparable performance against peers are used to determine an outcome Individual targets reflect individual specific accountabilities and key drivers for growth and success  Group performance targets linked to earnings, cost management and safety  Individual performance outcome provides a multiplier for the Group performance element (linking the two elements)  Maximum potential STI is capped at 150 per cent Long term incentive (LTI):  Equity rewards to align executive and security holder interests (using indeterminate rights)  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  Maximum LTI opportunity is capped at 100% 219 219 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) B REMUNERATION MIX For FY2014, 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 components were determined by the Board (on the recommendation of the Remuneration and Human Resources Committee) and are set out in the table below: Total remuneration % (annualised at target)* Fixed TEC Variable (performance based) CEO Senior Executives 40 45 STI** 30 (50% deferred) 30 (50% deferred) LTI 30 25 * These figures may not necessarily reflect the relative value derived from each of the components, which depends on actual performance against targets for the variable components. The STI percentages are based on achieving the relevant performance targets. The 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. **All Senior Executives moved to 50% STI deferral for grants made in FY2014. C FIXED REMUNERATION - TOTAL EMPLOYMENT COST (TEC) What is TEC? Fixed remuneration is represented by total employment cost comprising base salary and superannuation contributions (or pension plans in the case of USA based employees). 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 TEC increases in the service agreement of the CEO or any Senior Executive. How is TEC determined? Remuneration packages (including TEC levels) are reviewed annually by the Remuneration and Human Resources 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 levels are also reviewed on a change in role. Any changes to TEC levels recommended by the Committee must be approved by the Board. The CEO's and other Senior Executives' TEC is determined with reference to the market median. The primary reference for determining the market median is the ASX 20-50, with consideration also given to the ASX 100. Consideration is given to sizing factors including market capitalisation and revenue. A range around the median provides flexibility to recognise individual experience and capabilities. D SHORT TERM INCENTIVE (STI) How does the STI plan operate? Eligible 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 corporate objectives. This aligns employee interests with the Group's financial performance, as well as the Group’s organisational values. 220 220 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) For FY2014, the CEO and other Senior Executives had a target STI opportunity of 30 per cent of their total remuneration package. Mandatory STI deferral of 50 per cent of the overall STI award now applies for all grants to the CEO and other Senior Executives. STI payouts can vary between zero (if targets are not met) and 150% (for exceptional outperformance). The deferral period is two years. For Australian Senior Executives, deferral is into securities. Due to legal restrictions on the issue of securities to USA residents, the USA resident Senior Executives receive deferred cash awards. STI deferral grants are made in the form of awards. Each award is an entitlement to receive a fully paid security, or an equivalent cash payment, on terms and conditions determined by the Board. This 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). What were the STI performance measures for FY2014? The STI performance measures for the CEO and other Senior Executives for the year ended 30 June 2014 were chosen to provide a balance between corporate, individual, operational, strategic, financial and non-financial aspects of performance and are described below: Measure Group performance target (1) Growth in proportional EBITDA (20% weighting) The proportional EBITDA targets were set against the previous year's results and the Group's FY2014 budget. The EBITDA target excluded the 495 Express Lanes. Proportional EBITDA result % STI that vests^ Less than 10% above underlying result for FY2013 10% above underlying result for FY2013 Budget EBITDA for FY2014 ($926 million) 16% above underlying result for FY2013 zero 50 100 150 ^ Straight line vesting applies between 50-100% and 100-150%. (2) Cost management based on proportional net costs (20% weighting) The proportional net costs targets were set against the previous year’s results and the Group’s FY2014 budget. The proportional net costs target included the 495 Express Lanes. Proportional net costs result Over FY2014 budget FY2014 budget ($201 million) FY2014 budget less $5 million FY2014 budget less $15 million % STI that vests^ zero 50 100 150 ^ Straight line vesting applies between 50-100% and 100-150%. (3) Safety targets (10% weighting) The safety target was a lead indicator that required the completion of safety development action plans. The target is split with equal weighting between employee/contractor (5%) and customer (5%) safety targets. Safety target result % STI that vests^ Less than 60% safety action plan items implemented 60% safety action plan items implemented 75% safety action plan items implemented 90% safety action plan items implemented ^ Straight line vesting applies between 50-100% and 100-150%. zero 50 100 150 221 221 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) Individual key performance indicators (KPIs) Individual KPIs (50% weighting), were unique to the individual's area of accountability, and in FY2014 related to critical business sustainability measures, including: operational excellence, strategy, people and leadership, operational performance, cost reduction, customer satisfaction, project outcomes, succession planning, risk management, growth and business plan implementation. Individuals have a clear line of sight to KPIs and are able to directly affect outcomes through their own actions. 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 is it used as an STI performance measure? EBITDA (earnings before interest, taxes, depreciation and amortisation) 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. The Board believes 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 for FY2014 does not include the EBITDA contribution for those assets which are equity accounted (M5 and M7). DRIVe’s EBITDA is also excluded from the statutory results for the period that it was equity accounted (1 July 2013 to 4 June 2014). 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 from proportional EBITDA to provide an underlying result when determining performance incentives. For FY2014, the Board resolved to exclude the 495 Express Lanes from the proportional EBITDA measure as this is a period of ramp-up for this asset. The 495 Express Lanes opened to traffic in November 2012 giving the Group limited toll revenue historical data when setting targets for FY2014. Proportional EBITDA has been used by the Group as an STI performance measure since 2009. What are proportional net costs and why is this used as a performance measure? Proportional net costs are calculated as fee and other revenue less total costs of the Group. Costs after fee and other revenues encourage and allows management to incur additional costs where these are justified by increased revenue results. The use of a cost related STI performance measure reflects management’s 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 have been used by the Group as an STI performance measure since 2010. The proportional net costs measure for FY2014 includes costs associated with 495 Express Lanes, as there is a known cost base to work from and drive efficiencies. 222 222 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) What were the changes to the STI program introduced in FY2014? The STI program was reviewed in FY2014 and changes implemented to achieve a program that provides greater performance differentiation between participants. The link between Group and individual performance has been strengthened by using individual performance as a multiplier when calculating reward for Group performance. In FY2014, Group performance measures under the new STI program were again linked to growth in proportional EBITDA, cost management based on proportional net costs, and safety. Individual performance continues to be measured against KPIs, with an overall outcome reached for each participant against target. Under the new program, this information is used to assist with providing a rating which will consider performance comparative both to peers and against the Group’s values. The overall rating will derive a STI using a payment schedule as determined by the Board designed to encourage and reward high performance. 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 and Human Resources 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 considers the appropriate rating for each Senior Executive, taking into account their comparable performance and behaviours against the Group’s values. The Board then approves STI awards. STI cash awards for FY2014 will be paid in August 2014. The STI deferred component for FY2014 will be awarded in August 2014 and will vest, subject to continuity of employment (unless otherwise determined by the Board) and clawback provisions, on 1 July 2016. The Board believes the method of assessment is rigorous and provides a balanced evaluation of the performance of the CEO and each other Senior Executive. What if a Senior Executive ceases employment before the STI targets are assessed? Under the service agreements for the CEO and other Senior Executives, if the CEO or other Senior Executive ceases employment with the Group before performance against STI targets is assessed, they would generally not be entitled to receive any STI award, unless otherwise determined by the Board. How is the annual STI pool determined? The Board approves a pool to be distributed for the annual STI program (cash and deferred securities/cash). The pool is the sum of all eligible employee’s possible STI outcomes at 100 per cent target (TEC multiplied by their STI opportunity). This value is divided by two and each half is treated as follows: one half represents the individual component of the STI and is capped at 100 per cent, the second half is multiplied by the Group’s performance outcome to represent the Group’s performance component and is capped at 150 per cent. The overall pool is capped at 125 per cent. The Board has discretion as to the proportion of the pool that will be distributed in any given year. What is the maximum and minimum payment an individual can receive under the STI plan? The minimum payment an individual can receive is 0% and the maximum is 150% of their STI opportunity. What were the changes to the STI deferral? During FY2014, those Senior Executives who had been on the old arrangement of 30 per cent deferral (S Hogg and A Head) were moved to 50 per cent deferral. This applies for grants made from 1 July 2013 onwards. 223 223 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) What were the Group STI performance outcomes for FY2014? Group performance in respect of the proportional EBITDA, proportional net costs and safety STI performance measures for FY2014 was assessed by the Board as 125.5% of the possible STI opportunity. It should be noted that the transaction costs associated with the acquisition of Queensland Motorways ($5.9 million) and Cross City Tunnel ($3.1 million) were included in both the proportional EBITDA and proportional net cost outcomes. Measure Proportional EBITDA Proportional net costs Safety action plan items implemented Overall Group Performance Performance $931.2 million1 $182.6 million 76% - 1 For FY2014 the 495 Express Lanes are excluded from the Proportional EBITDA measure. Outcome 113.7% 150.0% 100.0% 125.5% What were the individual STI performance outcomes and awards for the CEO and Senior Executives for FY2014? 1 O n - t a r g e t Current Senior Executives S Charlton J Aument W Ballantine A Head S Hogg S Johnson 1 T Steinhilber O n 1 1 L Tobin V Vassallo STI outcome (%) Actual STI awarded1 ($) Individual KPIs 131.0 Group performance2 164.4 90.0 131.0 125.0 50.0 88.0 75.0 88.0 115.0 113.0 164.4 156.9 62.8 110.4 94.1 110.4 144.3 Total 147.7 101.5 147.7 140.9 56.4 99.2 84.6 99.2 Cash3 1,039,250 162,394 207,225 294,000 131,100 136,800 145,700 174,675 129.7 228,275 Deferred into securities 1,039,250 162,394 207,225 294,000 131,100 136,800 145,700 174,675 228,275 STI forfeited (%) - - - - 43.6 0.8 15.4 0.8 - 1 On-target performance must be achieved before any STI is awarded. Therefore, the minimum potential value of the STI in respect of FY2014 was nil. 2 The Group performance outcome is determined by multiplying the individual percentage outcome by the Group’s percentage outcome of 125.5%. 3 The cash STI payments will be paid in August 2014. The STI deferred component (50 per cent of the STI awarded) will vest, subject to continuity of employment (unless otherwise determined by the Board) and clawback provisions, on 1 July 2016. 224 224 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) What was the grant and movement in the number of STI deferred awards? Mandatory STI deferral was introduced in FY2012, with the first grant of awards made in August 2012. Grants were also made in August 2013 as detailed below: Balance at start of year Granted during year as remuneration Matured and paid during year Forfeited during the year Balance at the end of year Current Senior Executives* S Charlton2 J Aument W Ballantine A Head S Hogg S Johnson - 14,789 15,212 22,449 18,973 16,540 108,486 14,282 17,328 15,202 17,944 21,288 - - - - - - - - - - - - 108,486 29,071 32,540 37,651 36,917 37,828 - - 6,612 21,192 19,356 T Steinhilber L Tobin2 V Vassallo2 Former Senior Executives M Kulper1 1 M Kulper was employed for the full FY2013 performance year, and received 22,813 awards in respect of that period. He has retained his deferred cash awards in the STI plans in accordance with their original terms. 2 Scott Charlton, Lisa Tobin and Vin Vassallo had a zero opening balance at the beginning of FY2014, as they joined the Group after the FY2012 STI performance period and therefore were not entitled to receive an STI deferred award in respect of that period. They all received a grant during FY2014, in respect of the FY2013 performance period. 22,813 59,277 40,548 36,464 6,612 6,612 6,612 - - - - - - - - E 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 offered to the CEO and other Senior Executives, and certain other employees nominated by the CEO and approved by the Board. For FY2014, the CEO was offered an LTI grant equivalent to 30 per cent of his total remuneration package. Other eligible Senior Executives were offered grants equivalent to 25 per cent of their total remuneration package. LTI grants are made in the form of performance awards under the Group’s Performance Awards Plan (PAP) at no cost to the recipient. Each performance award is an entitlement to receive a fully paid security, or an equivalent cash payment, on terms and conditions determined by the Board, subject to the achievement of certain vesting conditions linked to performance over a three year period. LTI grants are generally made twice per annum – once following the annual performance review (August) for Senior Executives excluding the CEO, and at a later date in November for the CEO. This is to allow the CEO’s grant of performance awards to be put to security holder vote at the AGM. Two performance measures are used to determine the number of performance awards that will vest at the end of the performance period. Total Shareholder Return (TSR) provides a comparison for Transurban’s performance against those companies with which the Group competes for capital. Additionally, growth in Free Cash Flow (FCF) helps to retain a focus on maximisation of free cash. The maximum opportunity following these tests is capped at 100%. The performance awards will, subject to achievement of the two performance measures against the vesting schedules, vest and be automatically exercised at the vesting date with no exercise price payable by the recipient. The Board will determine in its absolute discretion whether the performance awards will be settled in securities or a cash payment of equivalent value. Due to legal restrictions on the issue of securities to USA residents, the USA Senior Executive receives a cash payment upon vesting. 225 225 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) 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. What is the Group’s LTI allocation valuation methodology? A fair value approach is applied for the TSR allocation. The Group is currently transitioning to a face value approach (discounted for distributions) for the FCF component. The transition is over 3 years and all things being equal there will be a decrease in the number of awards recipients receive until the new methodology is achieved. This transition will be completed for grants made during FY2016. What were the LTI performance measures for FY2014? Performance awards granted during the FY2014 are subject to a three year performance period and the following dual performance measures over that period: Measure Description of measure Relative TSR (50% weighting) Relative TSR is measured against a bespoke comparator group comprising companies in the transport, utilities, real estate, telecommunications and construction Global Industry Classification Standards (GICS) sectors of the ASX 150. The 42 companies in this group are: Abacus Property Group, AGL Energy Limited, Auckland International Airport Limited, Asciano Limited, Australand Property Group, APA Group, Aurizon Holdings Limited, BWP Trust, CFS Retail Property Trust Group, Charter Hall Group, Commonwealth Property Office Fund, Charter Hall Retail REIT, DUET Group, Dexus Property Group, Envestra Limited, Federation Centres Limited, Goodman Group, GPT Group, iiNet Limited, Investa Office Fund, Leighton Holdings Limited, Lend Lease Group, Mirvac Group, Monadelphous Group Limited, Macquarie Atlas Roads Limited, M2 Telecommunications Group Limited, Qantas Airways Limited, Qube Logistics Holdings Limited, Shopping Centres Australasia Property Group, Stockland, Spark Infrastructure Group, SP AusNet, Sydney Airport, Transurban Group, Telecom Corporation of New Zealand Limited, Telstra Corporation Limited, Toll Holdings Limited, TPG Telecom Limited, UGL Limited, Virgin Australia Holdings Limited, Westfield Group, Westfield Retail Trust. 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 2014, 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 the performance period, in accordance with the following table: TSR vesting schedule: The Group’s relative TSR ranking in the comparator group % of performance awards that vest At or below the 50% percentile Nil Above the 50th percentile but below the 75th percentile Straight line vesting between 50 and 100 At or above the 75th percentile 100 226 226 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) Measure Description of measure Growth in FCF per security (50% weighting) Within Transurban, Free Cash Flow (FCF) per security is defined as:  The Group’s cash flow from operating activities;  less: cash flows from operating activities of non 100% owned 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 22 of the Transurban Holdings Limited audited financial statements. For performance awards granted during the year ended 30 June 2014, the FCF per security component will vest based on the Group's compound annual growth targets translated into annual FCF per security over the three year performance period, as set out below: Growth in FCF per security vesting schedule: % annual growth in FCF per security % of performance awards that vest Less than 12% Nil Between 12% and 15% Straight line vesting between 50 and 100 15% or more 100 For performance awards granted during FY2015, the performance target range for growth in FCF per security is between 10.0 per cent and 13.0 per cent per annum. This is calculated from a base of 35.0 cents per security for FY2014, which is aligned to the FY2014 distributions paid. The Board has determined to use this base due to significant shifts in equity issued by the Group during the period, in particular 404.5 million securities issued in May 2014 associated with the Queensland Motorways acquisition. The 35.0 cent per security base is considered the best point of alignment with security holders’ expectation for growth in free cash. 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. The vesting schedule applied is in line with market practice, with straight line vesting between 50% and 100% for performance above the 50th percentile up to the 75th percentile for performance against the comparator group. Growth in FCF per security reflects the Group’s continuing focus on the maximisation of free cash, and has been used as an LTI performance measure since FY2013. Why has the FCF target for FY2014 of 12-15% increased from 6-9% in FY2013? Transurban regularly updates its corporate model to reflect the latest assumptions regarding traffic, operating costs, maintenance costs, discount rates, etc. The Transurban Board considers the Group’s potential performance over any given three year period and relates remuneration incentives to these expectations. Most importantly, it is the Board’s role to assess the realistic nature of cash flow expectations and set challenging but realistic targets. One target may be appropriate one year, but not so another year. The completion of construction for the M2 was a contributing factor for the change in the FCF target from FY2013 to FY2014. 227 227 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) Why is a three year performance period used for LTIs? The three year performance period for LTI has been set in line with market practice. The Board continues to monitor market practice in this regard. 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 20 trading days up to and including the testing date is used in the calculation of TSR. 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 will be calculated based on the FCF per security 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 the CEO and other Senior Executives, if the CEO or other Senior Executive ceases employment with the Group before the performance measures are tested, their unvested performance awards would generally lapse, unless otherwise determined by the Board. 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 FY2014 will be subject to the incumbent Board's discretion. 228 228 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) What was the grant, and movement in the number and value, of performance awards during FY2014? Eligible Senior Executives (excluding the CEO) received performance awards with a grant date of 15 August 2013. Following the receipt of security holder approval at the 2013 AGM, the CEO received performance awards with a grant date of 1 November 2013. All performance awards granted in FY2014 vest subject to a performance period from 1 July 2013 through to 30 June 2016. The relevant values of the grants are as follows: Recipient Grant date Fair value of awards at grant date1($) Closing security price at grant date Eligible Senior Executives 15 August 2013 Relative TSR $3.24 FCF per security $6.07 CEO 1 November 2013 $3.13 $6.21 $6.89 $6.97 1 An explanation of the pricing model used to calculate these values is set out in note 36 to the audited Transurban Holdings Limited financial statements. Performance awards granted in FY2014 Name Current Senior Executives S Charlton1 J Aument W Ballantine A Head S Hogg S Johnson T Steinhilber L Tobin V Vassallo Number of performance awards granted2 Value at grant date ($) Maximum total value of grant yet to vest3($) 382,292 74,494 62,630 94,767 105,633 62,630 78,267 79,980 79,980 1,713,466 1,713,466 334,159 280,940 425,098 473,841 280,941 351,084 358,768 358,768 334,159 280,940 425,098 473,841 280,941 351,084 358,768 358,768 1 The grant made to the CEO constituted his LTI entitlement for FY2014 and was made following security holder approval at the 2013 AGM on the terms summarised above. Performance awards vest subject to performance over the period from 1 July 2013 through to 30 June 2016. 2 The grants made to Senior Executives assume full vesting of their full LTI entitlement for FY2014 and were made on the terms summarised above. Performance awards vest subject to performance testing over the period from 1 July 2013 through to 30 June 2016. 3 The maximum value of the grant has been estimated based on the fair value per award at date of grant. The minimum total value of the grant, if the applicable performance measures are not met, is nil. 229 229 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) F LEGACY LTI PLANS The Group has a number of LTI plans that were offered in previous years, as detailed below: Plan Grant date FY2013 PAP 15 Aug 2012 FY2012 PAP 26 Sep 2011 FY2011 PAP 1 Nov 2010 19 Oct 2012 (CEO only) 11 Nov 2011 (CEO only) Performance period External performance measure (50% of grant) 1 Jul 2012 – 30 Jun 2015 1 Jul 2011 - 30 Jun 2014 TSR : 1 Nov 2010 - 1 Nov 2013 EBITDA : 1 Jul 2010 - 30 Jun 2013 Relative TSR Relative TSR Relative TSR Comparator group 37 companies within a bespoke comparator group within the ASX150 Relative TSR 33 companies within a bespoke comparator group within the ASX150 The S&P/ASX 100 Vesting schedule Above 50th percentile to 75th percentile At or above the 75th percentile % of performance awards that vest Straight line vesting between 50%- 100% 100% vests Internal performance measure (50% of grant) Growth in free cash flow (FCF) per security Growth in free cash flow (FCF) per security Group's annual growth in proportional EBITDA From 6% - 9% From 7% - 10% From 7% - 11% Compound Growth % of performance awards that vest Vesting schedule At target From target % to stretch % 50% vests Straight line vesting between 50% - 100% At or above stretch % 100% vests Current status To be tested after 30 Jun 2015 TESTED 71.59% vested on 30 Jun 2014 TESTED 86.51% vested on 1 Nov 2013 Awards on issue 814,965 – – Value of performance awards vested and lapsed in FY2014 The FY2011 PAP vested on 1 November 2013. The outcome of the performance tests were as follows: Test type TSR Result of test Transurban ranked 33 out of 93 companies (65.21%) Proportional EBITDA 85% of the target EBITDA range was achieved Overall vesting % units vest 80.42% 92.60% 86.51% 230 230 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) FY2011 PAP - Lapsed FY2011 PAP - Vested Number Value ($)1 Number Value ($)1 2,913 3,297 12,211 8,881 3,996 3,879 10,535 11,922 44,156 32,113 14,451 14,026 18,684 21,144 78,312 56,954 25,630 24,876 74,331 84,119 311,555 226,585 101,964 98,967 Current Senior Executives J Aument2 W Ballantine2 A Head S Hogg S Johnson2 T Steinhilber2 Former Senior Executives M Kulper 21,732 78,583 139,371 554,471 1 Based on the fair value at date of grant. 2 Awards granted prior to the Senior Executive becoming a member of KMP. Awards vested while the Senior Executive was a member of KMP. The FY2012 PAP vested on 30 June 2014. The outcome of the performance tests were as follows: Test type TSR Free Cash Flow Overall vesting Result of test Transurban ranked 14 out of 31 companies (56.66%) % units vest 63.32% 93.8 cents adjusted to 97.9 cents 79.86% 71.59% Current Senior Executives A Head S Hogg Former Senior Executives FY2012 PAP - Lapsed FY2012 PAP – Vested Number Value ($)1 Number Value ($)1 30,616 28,785 116,784 109,799 77,150 72,535 314,102 295,314 M Kulper 31,739 121,070 79,982 325,629 1 Based on the fair value at date of grant. The Board exercised its discretion to ensure that participants in the FY2012 PAP were neither advantaged nor disadvantaged as a result of the Queensland Motorways (QM) acquisition and associated capital raising. The issuance of 404.5 million new securities in May 2014 associated with the funding of the QM acquisition occurred in FY2014, while financial close of the QM acquisition occurred in FY2015. The Board exercised its discretion to, in effect, exclude the new securities issued to fund the QM acquisition from the number of securities used to calculate the FY2014 Free Cash Flow (FCF) per security for the purposes of calculating the FCF outcome for the FY2012 PAP. Interest income on the equity raised prior to year end was similarly excluded from the calculation. The targets set at the beginning of the performance period (1 July 2011) were not adjusted. 231 231 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) Number of performance awards on issue as at 30 June 2014 The number of performance awards held by members of KMP as at 30 June 2014 is provided below. Comparative data is shown for those Senior Executives who were members of KMP during both FY2014 and FY2013. Balance at start of year Granted during year as remuneration Matured and paid during year Lapsed or forfeited during year Balance at the end of year Current Senior Executives* S Charlton 2014 2013 J Aument 2014 2013 W Ballantine 2014 2013 A Head 2014 2013 S Hogg 2014 2013 S Johnson 2014 2013 T Steinhilber 2014 2013 L Tobin 2014 2013 V Vassallo 2014 2013 Former Senior Executives M Kulper 2014 2013 684,6561 – 382,292 684,6561 (78,752) – – – 988,196 684,6561 21,597 39,3652 24,441 44,4712 311,043 257,636 292,851 214,633 29,626 52,7712 28,755 53,7712 – – – – 508,549 491,675 74,494 – 62,630 – (18,684) (17,768)3 (21,144) (20,030)3 (2,913) – (3,297) – 74,494 21,597 62,630 24,441 94,767 (155,462) (42,827) 112,754 (59,347) – 207,521 311,043 105,633 125,754 (129,489) (37,666) (47,478) – 231,329 292,851 62,630 – 78,267 – 79,980 – 79,980 – – 178,830 (25,630) (23,145)3 (24,876) (25,022)3 – – – – (3,996) – (3,879) – – – – – 62,630 29,626 78,267 28,755 79,980 – 79,980 – (219,353) (161,956) (223,903)4 – 65,293 508,549 All Performance Awards granted or matured in FY14 (where applicable) in the table above were issued by Transurban and resulted or will result in one ordinary Transurban stapled security (or cash equivalent, as determined by the Board) per Performance Award granted or matured. * Lisa Tobin and Vin Vassallo joined the Group in February 2013 and did not receive a pro rata LTI grant in respect of FY2013. 1 Scott Charlton’s number of performance awards granted during FY2013 includes 236,256 performance awards granted in September 2012 as a sign-on award, to vest, subject to his continued employment, in three equal tranches on the first, second and third anniversaries of his commencement with the Group. The first tranche (78,752) awards vested on 16 July 2013, and a second tranche (78,752) awards vested on 16 July 2014. Therefore as at the date of this report, Scott Charlton has 909,444 performance awards yet to vest of which 78,752 awards relate to his sign-on award. 2 Opening balance held prior to the Senior Executive becoming a member of KMP. 3 Awards matured and paid during the year occurred prior to the Senior Executive becoming a member of KMP. 4 Awards lapsed/forfeited includes pro rata forfeiture of grants made in FY2011, FY2012 and FY2013 in line with good leaver treatment. 232 232 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) G REMUNERATION PAID TO THE CEO AND OTHER SENIOR EXECUTIVES Short-term employee benefits Cash salary and fees Cash STI2 Non- monetary benefits3 Deferred STI4 Post- employment benefits Termination benefits Super- annuation Shared based benefits5 Total Long- term benefits Long service leave Current CEO S Charlton 2014 2013 1,858,493 1,039,250 7,042 492,200 17,774 1,789,850 738,300 22,379 246,100 15,098 Current Other Senior Executives J Aument1 2014 516,456 244,487 1,250 126,054 11,274 2013 W Ballantine1 2014 2013 A Head 2014 2013 S Hogg 2014 2013 S Johnson1 2014 2013 T Steinhilber1 2014 2013 L Tobin1 2014 2013 V Vassallo1 2014 2013 27,260 10,775 - 5,204 916 393,737 207,225 1,462 107,433 230,757 81,150 3,398 44,498 604,875 294,000 2,418 111,497 589,279 241,395 2,366 77,012 676,275 131,100 2,018 117,353 656,561 284,935 2,030 76,648 423,737 136,800 1,496 127,917 280,971 112,325 3,823 60,277 572,856 309,886 30,165 177,462 269,441 259,550 52,658 53,001 507,741 174,675 1,753 30,000 185,869 - 710 15,000 507,741 228,275 1,753 30,000 176,134 - 710 15,000 17,774 9,836 17,774 16,470 17,774 16,470 17,774 12,043 17,774 6,388 17,774 6,863 17,774 6,863 - - - - - - - - - - - - - - - - - - - - - - 1,484,748 4,899,507 1,302,848 4,114,575 192,748 1,092,269 3,534 47,689 21,430 15,368 96,404 26,851 845,465 411,858 13,053 12,696 474,344 1,517,961 441,434 1,380,652 21,368 13,674 485,938 1,451,826 407,426 1,457,744 8,661 23,829 98,710 38,665 815,095 531,933 8,531 208,931 1,325,605 - - - - - 58,491 699,529 109,235 841,178 - 208,442 109,235 894,778 - 198,707 233 233 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) Short-term employee benefits Cash salary and fees Cash STI2 Non- monetary benefits3 Deferred STI4 Post- employment benefits Termination benefits Super- annuation Shared based benefits5 Total Long- term benefits Long service leave Former CEO C Lynch 2014 2013 - - - - - 144,951 178,652 555 504,275 5,490 Former Other Senior Executives - - - - - - (62,121) 6,103,665(6) - 6,875,467 - - - 8,346 (341,435) 499,569 K Daley 2014 2013 M Kulper 2014 2013 E Mildwater 2014 2013 - 816,330 583,403 - - - - - - 53,262 (50,659) 13,725 2,912 300,6297 2,791 333,356 - 385,1687 1,608,259 1,067,296 362,264 15,482 120,168 10,997 - 485,161 - - - - - 1,525 (37,627) 13,725 - - - 28,977 1,441,431 3,046,615 - - - (15,434) (274,631) 172,719 1 The dates on which the Senior Executives who were promoted or appointed during FY2013 are the dates that those Senior Executives commenced being a KMP. Their remuneration for the period during which they were members of KMP is disclosed in the table only. 2 The amount represents the cash STI payment to the Senior Executive for FY2014, which will be paid in August 2014. Jennifer Aument and Tim Steinhilber also received a second and final payment in relation to the successful delivery of the 495 Express Lanes of $82,093 and $164,186 respectively (paid in August 2013). 3 Non-monetary benefits include Group insurance and expatriate allowances (where relevant). 4 A component of STI award is deferred into securities. In accordance with Accounting Standards, the deferred component will be recognised over the three year service period. The amount recognised in this table is the FY2014 accounting charge for unvested grants. 5 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 36 to the Transurban Holdings Limited audited financial statements. 6 The value for share based benefits for C Lynch includes all unvested LTI awards. In accordance with Accounting Standard AASB 2, these have been accounted as an acceleration of vesting. The amount that would have been recognised for services received from Chris Lynch as CEO of the Group over the remainder of the vesting period has been included in the table above. These awards will continue on foot in accordance with the original terms, with the applicable measures for each grant to be tested at the end of the applicable original performance period. These LTI awards may or may not vest. Also included is a cash payment of $1,060,000 which was made to Chris Lynch in lieu of an LTI earned but not received for a six month period during his tenure in line with his contractual entitlement to receive an LTI award for every day employed by the Group. This payment was made in cash in August 2012. 7The value for Deferred STI and share based benefits for M Kulper includes all unvested awards. In accordance with Accounting Standard AASB 2, these have been accounted as an acceleration of vesting. The amount that would have been recognised for services received from M Kulper as President, North America of the Group over the remainder of the vesting period has been included in the table above. These awards will continue on foot in accordance with the original terms. The LTI awards may or may not vest. 234 234 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) H 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. Under these agreements, the CEO and other Senior Executives are eligible to participate in STI and LTI plans. Some other key aspects of the agreements in place for FY2014 are outlined below: CEO Other Senior Executives Period of notice to terminate (Executive) 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. I ADDITIONAL REMUNERATION INFORMATION Employee Security Plans The Group operated the following broad employee based security plans in FY2014. ShareLink Incentive Plan Under the ShareLink Incentive Plan, subject to Board approval, an allocation of Transurban securities 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 21 February 2014. Due to legal restrictions on the issue of securities to USA residents, eligible employees in the USA 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. Securities granted under the plan carry a three year holding lock from the grant date and can only be traded once the holding lock expires or when employment with the Group ceases, whichever is earlier. 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 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. 235 235 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) Dealing 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. Securities held by Senior Executives as at 30 June 2014 The number of securities held by members of KMP as at 30 June 2014 is provided below. Comparative data is shown for those Senior Executives who were members of KMP during both FY2014 and FY2013. Current Senior Executives Balance at start of year Changes during year Balance at end of year S Charlton 2014 2013 J Aument 2014 2013 W Ballantine 2014 2013 A Head 2014 2013 S Hogg 2014 2013 S Johnson 2014 2013 T Steinhilber 2014 2013 L Tobin 2014 2013 V Vassallo 2014 2013 10,000 – – – 3,988 2,8891 3,041 3,041 11,553 1,553 29,596 19,1291 – – – – 10,538 10,0181 Former Senior Executives M Kulper 2014 2013 1 Opening balance held prior to the Senior Executive becoming a member of KMP. 2 Balance removed on departure from the Group during FY2014. 3 Includes the FY2012 PAP awards which vested 30 June 2014. Refer section 4F. 80,000 80,000 236 236 124,622 10,000 – – 697 1,099 84,7193 – 129,4893 10,000 14,167 10,467 – – – – 510 520 (80,000)2 – 134,622 10,000 – – 4,685 3,988 87,760 3,041 141,042 11,553 43,763 29,596 – – – – 11,048 10,538 – 80,000 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) Securities held by Non-executive Directors as at 30 June 2014 Current Non-executive Directors Balance at start of year Changes during year Balance at end of year L Maxsted 2014 2013 N Chatfield 2014 2013 R Edgar 2014 2013 S Mostyn 2014 2013 C O'Reilly 2014 2013 R Slater 2014 2013 I Smith 2014 2013 Former Non-executive Directors R Officer 2014 2013 30,000 30,000 30,910 20,910 24,590 23,733 14,000 10,300 4,363 – – – 71,772 70,000 – 20,115 36,559 – 19,514 10,000 5,734 857 3,256 3,700 9,609 4,363 – – 20,970 1,772 – (20,115)1 1 Balance removed on resignation as a Director during the relevant year. 237 66,559 30,000 50,424 30,910 30,324 24,590 17,256 14,000 13,972 4,363 – – 92,742 71,772 – – 237 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (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 2014, 20 per cent of the STI award was 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 221. STI is an ‘at risk’ component of remuneration – payments are determined based on the following three measures, and could result in zero payout if targets are not met. The maximum payment available to any Senior Executive is 150% of target. Proportional EBITDA The proportional EBITDA result for FY2014 was $934.1 million. Excluding the effect of 495 Express Lanes, this resulted in the payment of 113.7 per cent of STIs attributable to proportional EBITDA. The growth in EBITDA was driven by the completion of the Hills M2 Upgrade in August 2013 and continued cost and revenue recovery initiatives across all assets in the portfolio. Proportional net costs The proportional net costs result for the year ended 30 June 2014 was $182.6 million, an 11.8 per cent increase from the prior year result. This resulted in the payment of 150% of STIs attributable to proportional net costs. On an underlying basis, shown in the table below, net costs increased 7.5% from the prior year result. The increase includes the impact of project development and acquisitions work in the current financial year. Net costs as reported Prior year one-off items TTMS impact – both periods Safety % increase 11.8% FY14 182.6 - 4.2 FY13 163.4 1.0 9.4 186.9 173.8 7.5% For the year ended 30 June 2014, the safety performance measure resulted in a 100 per cent STI outcome. The target was a lead indicator that required the completion of safety development action plans. The target was split with equal weighting between employee/contractor (5 per cent) and customer (5 per cent) safety targets. The Group achieved the completion of 76 per cent of the defined safety development action plans. 238 238 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) B GROUP PERFORMANCE AND LTI For the year ended 30 June 2014, LTIs were linked to relative TSR and FCF per security. Relative TSR Relative TSR for the year ended 30 June 2014 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. FCF per security The performance target for performance awards granted during the year ended 30 June 2014 was a range for compound growth in FCF per security of between 12 per cent and 15 per cent per annum over three years. It was 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 2015, the performance target range for compound growth in FCF per security per annum is between 10.0 per cent and 13.0 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 2010, Transurban’s distribution policy has been to align distributions with 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. Group Performance Measure Security price at year end Distribution paid per security Underlying proportional EBITDA - $m1 TSR performance2 TSR rank position3 2014 $7.39 35.0c 934.1 17% 2013 $6.76 31.0c 828.0 25% 33 / 934 14 / 315 12 / 896 2011 $5.23 27.0c 718.7 32% 2010 $4.24 24.0c 635.4 10% n/a n/a 2012 $5.69 29.5c 784.0 15% 35 / 86 6 / 86 19 / 867 29.8c 33.9 FCF per security performance - weighted average 1 In the current and prior year, LTIs were linked to relative TSR and FCF per security. In earlier years, LTIs were linked to relative TSR and proportional EBITDA. 2 The TSR performance is the total security holder return for that financial year 3 This is the TSR ranking position for the LTI that vests during the financial year 4 FY2011 PAP that vested 1 November 2013 5 FY2012 PAP that vested 30 June 2014 6 FY2010 PAP that vested November 2012 (testing as at 30 June 2012) 7 FY2009 PAP tested in three tranches 27.5c 30.1c 27.4c 239 239 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) 6 Non-executive director remuneration A REMUNERATION POLICY The diagram below sets out the key objectives of the Group’s Non-executive Director remuneration policy and how they are achieved 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 and workload expected, the Director’s experience and expertise, and market benchmark data provided by remuneration consultants Director remuneration consists of base (Director) fees and Committee fees. No element of Director remuneration is 'at risk' (i.e. 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 Annual General Meeting. No change to this amount is proposed for FY2015. The aggregate fee pool and the manner in which it is apportioned amongst Non-executive Directors are reviewed annually. The Remuneration and Human Resources Committee undertakes this review and makes recommendations to the Board. In conducting the review, the Committee considers market benchmark data from independent remuneration consultants. Non-executive Director fees for FY2014 Non-executive Director (base) fees have not increased since 2010. Current base fees and Committee fees per year are set out below: Board Audit and Risk Committee Nomination Committee Remuneration and Human Resources Committee Chair fee $ 455,000 40,000 10,000 30,000 Member fee $ 170,000 20,000 10,000 20,000 The Chair of the Board does not receive any additional fees for Committee responsibilities. The Chair of each Committee only receives the Chair fee (and not a member fee). Non-executive Directors are permitted to be paid additional fees for special duties or exertions. No such fees were paid during FY2014. 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. 240 240 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) Retirement benefits Non-executive Directors are not entitled to any retirement benefits. 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 each year. No securities were issued to Non-executive Directors under the plan during FY2014. C REMUNERATION PAID TO NON-EXECUTIVE DIRECTORS Non-executive Director remuneration for FY2014 and FY2013 is set out below: Short-term benefits Fees Post-employment benefits Superannuation1 Current Non-executive Directors L Maxsted 2014 2013 N Chatfield 2014 2013 R Edgar 2014 2013 S Mostyn 2014 2013 C O'Reilly 2014 2013 R Slater 2014 2013 I Smith 2014 2013 Former Non-executive Directors R Officer (resigned 7 August 2012) 2014 2013 Total 2014 2013 437,925 438,716 222,825 223,625 212,825 211,119 183,570 183,608 183,570 181,229 197,023 194,070 155,973 155,967 - 18,832 1,593,711 1,607,166 17,774 16,470 17,774 16,470 17,774 16,470 16,980 16,470 16,980 16,247 - - 14,427 14,037 - 1,695 101,709 97,859 Total 455,699 455,186 240,599 240,095 230,599 227,589 200,550 200,078 200,550 197,476 197,023 194,070 170,400 170,004 - 20,527 1,695,420 1,705,025 1 Superannuation contributions made on behalf of Non-executive Directors to satisfy the Group’s obligations under applicable superannuation guarantee legislation. 241 241 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) D NON-EXECUTIVE DIRECTOR RELATED PARTY INFORMATION Rodney Slater is a partner in the public policy practice group of Squire Patton Boggs (US) LLP. Transurban used Squire Patton Boggs (US) LLP during the year ended 30 June 2014 for various lobbying activities in the USA. This relationship is based on normal commercial terms. US$180,144 was paid to Squire Patton Boggs (US) LLP during FY2014. Lindsay Maxsted is Chairman and 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. Neil Chatfield is Chairman and a Non-executive Director of Seek Limited. Seek provides employment advisory services to Transurban. This relationship is based on normal commercial terms. Neil Chatfield is also Chairman of, and Samantha 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. Christine O’Reilly is a Non-executive Director of Energy Australia. Energy Australia is one of Transurban’s electricity providers in NSW and Queensland. This relationship is based on normal commercial terms. 242 242 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) 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. 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 2014 30 June 2013 USD$M USD$M 946 (909) 37 584 (547) 37 the financial Sensitivity Based on 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 $3.8m lower (2013: $3.9m lower) or $4.7m higher (2013: $4.8m higher), as a result of foreign exchange gains/losses on translation of US dollar denominated financial instruments as detailed in the above table. instruments held at the period, had the end of 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. 243 243 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (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 cash and 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 2014, 93 per cent (2013: 93 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: Cash and cash equivalents Floating rate borrowings Interest rate swaps (notional principal amount) Net exposure to cash flow interest rate risk 2014 2013 Weighted average interest rate % 2.2% 4.4% 2.7% Weighted average interest rate % 3.6% 4.5% 2.9% Balance $M (75) 1,502 (1,398) 29 Balance $M (29) 1,513 (1,413) 71 An analysis by maturities is provided in liquidity risk below. Sensitivity At 30 June 2014, 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 $0.3m lower/higher (2013: $0.7m 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. 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. 244 244 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (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 (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 forecasted 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 Transurban 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 2014 $M - 421 421 2013 $M 16 202 218 The Transurban Group also has a letter of credit facility and a general credit facility in place with undrawn capacity at 30 June 2014 of $8.7 million. 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. 245 245 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) 38 Financial risk management (continued) Liquidity risk (continued) 1 year or less $M Over 1 to 2 years $M Over 2 to 3 years $M Over 3 to 4 years $M Over 4 to 5 years $M Over 5 years $M Total contractual cash flows $M Carrying amount (assets)/ liabilities $M 526 469 581 - 193 831 1,576 1,024 - 1,125 437 1,562 22 22 16 16 7 7 - 11 728 739 3 3 - 225 528 148 - 1,868 674 2,023 4,973 551 1,836 3,927 753 2,016 7,670 6,314 - - - - 48 48 45 45 Contractual maturities of financial liabilities At 30 June 2014 Non-derivatives Non-interest bearing Variable rate Fixed rate Total non- derivatives Derivatives Net settled (interest rate swaps) Total derivatives 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 At 30 June 2013 $M $M $M $M $M $M Total contractual cash flows $M Carrying amount (assets)/ liabilities $M Non-derivatives Non-interest bearing Variable rate Fixed rate Total non- derivatives Derivatives Net settled (interest rate swaps) Total derivatives 437 261 464 - 813 634 - 323 780 1,162 1,447 1,103 - 351 386 737 - 12 677 147 225 1,235 584 1,985 4,176 461 1,791 3,262 689 1,607 6,745 5,514 83 83 19 19 10 10 5 5 1 1 - - 118 118 64 64 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 these 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: 246 246 2014 Transurban Annual Report Transurban Holding Trust Notes to the consolidated financial statements 30 June 2014 (continued) 38 Financial risk management (continued) Fair value measurements (continued) (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 (c) inputs for the asset or liability that are not based on observable market data (unobservable inputs) (level 3). The following table presents the Group's assets and liabilities measured and recognised at fair value at 30 June 2014 and 30 June 2013: As at 30 June 2014 Assets Total assets Liabilities Derivatives used for hedging Total liabilities As at 30 June 2013 Assets Total assets Liabilities Derivatives used for hedging Total liabilities Level 1 $M Level 2 $M Level 3 $M - - - - 45 45 - - - Level 1 $M Level 2 $M Level 3 $M - - - - 64 64 - - - Total $M - 45 45 Total $M - 64 64 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. 247 247 2014 Transurban Annual Report Transurban Holding Trust Directors' declaration 30 June 2014 In the Directors' opinion: (a) the financial statements and notes set out on pages 165 to 247 are in accordance with the Corporations Act 2001, including: (i) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements, and (ii) giving a true and fair view of the Group's financial position as at 30 June 2014 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 5 August 2014 248 248 2014 Transurban Annual Report 249 2014 Transurban Annual Report250 2014 Transurban Annual ReportTransurban International Limited and Controlled Entities ABN 90 121 746 825 Annual report for the year ended 30 June 2014 251 2014 Transurban Annual ReportTransurban International Limited ABN 90 121 746 825 Annual report - 30 June 2014 Contents Directors' report Auditor's Independence Declaration Financial statements Directors' declaration Independent auditor's report to the members Page 253 299 300 356 357 252 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 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 2014. TIL forms part of the triple staple that is Transurban ("the Transurban Group"). 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 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 Christine O'Reilly Rodney Slater Ian Smith Executive Director Scott Charlton Result The consolidated net loss for the year ended 30 June 2014 for the Group was $11.0 million (2013: $47.2 million). The profit attributable to ordinary equity holders of the Group was $19.5 million (2013: $47.2 million loss). Principal activities The principal activities of the Group during the financial year were the development and operation of toll roads. Dividends No dividends were declared or paid during the financial year. Operating and Financial Review – Year ended 30 June 2014 As a member of the Transurban Group triple staple, the Group operates under a business framework (incorporating strategy and value drivers) consistent with the wider Transurban Group. Business Framework and Strategy At the heart of our business strategy is our desire to be a ‘partner of choice’ for our government clients and an organisation that meets the needs of our customers. To do that, we have to provide and be part of effective transportation solutions to support the growth and well-being of our cities. At Transurban we do this through the effective management of our existing road networks, through our active involvement in the transport policy debate, and by applying our unique skills to the infrastructure challenges in our markets. In delivering on this objective our business has fostered core capabilities in the following areas:  Network planning and forecasting  Operations and customer management  Project development and delivery  Application of technology, and  Community engagement. The Group’s target market is Virginia in the USA, part of the Washington, DC metro area. 253 253 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) Operating and Financial Review – Year ended 30 June 2014 (continued) Value drivers The investment proposition for high quality toll road assets is access to long dated, predictable, growing cash flows generated over the life of the concessions through effective management and development of the road corridors these concessions govern. Financial performance Performance indicators Underlying proportional EBITDA (earnings before interest, tax, depreciation and amortisation) is the primary measure the Transurban Board uses to assess the operating performance of Transurban, with an aim to focus on operating results and associated cash generation. It reflects the contribution from individual assets to Transurban’s operating performance and permits a meaningful assessment of the underlying performance of Transurban’s assets. To arrive at the proportional result, non-controlling interests in Transurban’s controlled roads are removed and Transurban’s interests in non-controlled assets are included, in proportion to Transurban’s ownership. Free cash is the primary measure used to assess Transurban’s cash generation. Free cash represents the cash available for distribution to security holders. Structure of the Group and relationship to the financial performance During the year ended 30 June 2014 the structure of investments within Transurban International Limited changed. The Group holds Transurban’s 75.0 per cent investment in Transurban DRIVe Holdings LLC (DRIVe). For the full year ended 30 June 2013 and for the current year to 11 April 2014, DRIVe in turn owned 100.0 per cent of Pocahontas 895 and 90.0 per cent of each of 495 Express Lanes and 95 Express Lanes (currently under construction) On 11 April 2014 Transurban Group acquired Fluor Enterprises Inc.’s 10.0 per cent ownership in each of 495 Express Lanes and 95 Express Lanes. These were acquired outside of the DRIVe Group, instead representing direct investments for Transurban. After these acquisitions, Transurban’s proportional ownership in each asset was 77.5 per cent. Also during the year ended 30 June 2014, a review of 495 Express Lanes was completed which resulted in downward adjustments to traffic and revenue projections, including the ramp-up profile of the project. As a result, Transurban and Capital Beltway Express LLC worked with key stakeholders, including lenders, to implement changes to the capital structure to ensure it could be supported by the emerging revenue profile. On 5 June 2014, Capital Beltway Express LLC repaid $432.8 million of debt and associated swap termination costs through $281.4 million of additional equity investment from Transurban and the release of $151.4 million of existing finance reserves. After this recapitalisation, also conducted directly by Transurban rather than within the DRIVe Group, Transurban’s proportional ownership in Capital Beltway Express LLC increased to 94.0 per cent. The increase in ownership to 94.0 per cent led the Transurban Group to assess control of assets and operating entities within Transurban International Limited. Capital Beltway Express LLC is now controlled by Transurban effective 4 June 2014 and is reflected in the consolidated results of the Group from that time. By extension, Transurban’s control over Capital Beltway Express LLC has led to the Group assessing that Transurban DRIVe Holdings LLC is also controlled, including 95 Express Lanes LLC. 254 254 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) Operating and Financial Review – Year ended 30 June 2014 (continued) On 14 May 2014, DRIVe also successfully transferred Pocahontas 895 back to lenders. It no longer forms part of the Transurban International Limited Group. The results of Transurban International Limited for the year ended 30 June 2014 therefore reflect a combination of equity accounted results of DRIVe to 4 June 2014, consolidated results from 4 June to 30 June 2014 and the results of the activities of the Group in providing management services to DRIVe. Year ended 30 June 2014 Highlights The Group’s loss for the year ended 30 June 2014 was $11.0 million, compared to $47.2 million in the prior year. The Group has toll revenue of $3.8 million, derived from 495 Express Lanes LLC from 4 June 2014, when it was consolidated into the Group. Management and Business Development revenue decreased to $37.9 million. Construction revenue and costs in the current year reflects the Group’s development of the Tolling and Traffic Management System (TTMS) for 95 Express Lanes. In the prior period this included development work on the TTMS for 495 Express Lanes also. EBITDA on a statutory basis decreased to $2.9 million. The Group’s share of net profit of equity accounted investments was $93.8 million. In the prior period this was a loss of $28.2 million. The change is due to the prior year impairment of the carrying value of Pocahontas, offset in the current year by the gain recognised on the hand back of Pocahontas to lenders. Financial position Transurban Group has a market capitalisation of approximately $14.5 billion and at 30 June 2014, 1,896 million stapled securities were on issue. During the year, Transurban issued 405 million stapled securities as part of the capital raising to fund the acquisition of Queensland Motorways. Transurban International Limited (TIL) represents one component of the Transurban triple staple and has total assets of $2,133.6 million. In the prior year total assets were $263.9 million. The increase represents the recognition of Transurban DRIVe Holdings, and 495 Express Lanes, as consolidated assets at 30 June 2014. The operating assets contained within the Group are primarily long-life intangible assets, representing the provision by the Virginian Department of Transportation of the right to toll customers for the use of the assets. 495 Express Lanes has a concession life of 80 years and 95 Express Lanes has a concession life of 75 years. For accounting purposes the carrying values are amortised on a straight line basis over the duration of the concession. Details of borrowings applicable to the Group and DRIVe are discussed in Financing Activities. Operations and performance of Transurban’s portfolio of assets – Year ended 30 June 2014 Transurban considers the primary measure of operating performance to be its underlying proportional EBITDA. To determine the proportional EBITDA, non-controlling interests are removed from the statutory result and Transurban’s interests in non-controlled assets are included in proportion to our ownership. Note 2 to the statutory accounts (Segment Information) presents the proportional result for the Group, including reconciliations to the statutory result. While management considers proportional EBITDA to be the best indicator of asset performance, interest expense and revenue, depreciation and income tax are also included in the Segment Information disclosure. Pocahontas 895 (Virginia USA) Transurban transferred ownership of Pocahontas 895 to lenders on 14 May 2014 and now has no financial or operational interests in the asset. 255 255 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) Operating and Financial Review – Year ended 30 June 2014 (continued) 495 Express Lanes (Virginia USA) The 495 Express Lanes traffic performance and share of corridor volume continued to increase over the year. Average workday revenue for the month of June 2014 increased 98.8 per cent over the month of June 2013. The average daily toll revenue for the year grew 105.4 per cent from the prior year. Average daily trips increased 32.0 per cent for the same period. The average dynamic toll charged increased by 56.3 per cent from US$1.51 in 2013 to US$2.36 for 2014. The maximum dynamic toll charged during the year was US$11.85 to travel the full length of the Express Lanes. On 29 May 2014, the 495 Express Lanes achieved record daily toll revenue. Free cash and cash flows from operations Free cash of the Transurban Group is calculated as: Cash flow from operations of 100% owned assets and operating companies (CityLink, Hills M2, Lane Cove Tunnel / MRE, Cross City Tunnel, Statewide Roads, Roam Tolling, Tollaust and Transurban corporate); Excluding Payments for Maintenance of Intangible Assets (concession assets); Excluding Interest received from Term Loan Notes (Westlink M7 & M5 South West Motorway Investment returns captured as interest payments); Plus distributions received from non-100% owned assets (M5 South West Motorway, M1 Eastern Distributor) Plus Term Loan Note repayments from Westlink M7 and M5 South West Motorway (as 50% equity accounted investments) Less Provision for Maintenance of Intangible Assets and payments for e-TAGs. Free cash of the Transurban Group for the year ended 30 June 2014 was $572 million. Free cash per security was 33.9 cents. The calculation of free cash can be found at note 22 to the Transurban Holdings Limited statutory accounts. Free cash per security was impacted in the year by the issue of new securities to fund the acquisition of Queensland Motorways. All securities issued are entitled to the full final distribution and this dilutes the free cash. The distribution of 35 cent per security is 96.9 per cent cash covered for the year. For the year ended 30 June 2014, the Group’s cash flow from operations was an outflow of $5.5 million. Business development activities 95 Express Lanes (Virginia USA) Construction on the project, which connects to the 495 Express Lanes, is now 85.0 per cent complete (US$594 million costs incurred to date), with the 95 Express Lanes due to open at the end of calendar year 2014. The 95 Express Lanes have a 75 year operating concession and the project represents a 29-mile extension to the 495 Express Lanes. Once complete the 95 and 495 Express Lanes network will include more than 40 miles of Express Lanes. On 11 April 2014, Transurban acquired Fluor Enterprises Inc.’s 10% interest in 95 Express Lanes LLC. After this acquisition, Transurban owns 77.5% of 95 Express Lanes LLC. 256 256 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) Operating and Financial Review – Year ended 30 June 2014 (continued) 495 Express Lanes (Virginia USA) A review of the project was completed during the year, which resulted in downward adjustments to traffic and revenue projections. As a result, Transurban and Capital Beltway Express LLC worked with key stakeholders, including lenders, to implement changes to the capital structure to ensure it could be supported by the emerging revenue profile. On 11 April 2014, during the process to change the capital structure, Transurban acquired Fluor Enterprises Inc.’s 10 per cent interest in Capital Beltway LLC. On 4 June 2014, Capital Beltway Express LLC repaid US$433 million of debt and associated swap termination costs through US$281 million of additional equity investment from Transurban and the release of US$151 million of existing finance reserves. After this acquisition and the capital injection, Transurban owns 94 per cent of Capital Beltway Express LLC. Financing activities The Group’s financing is through the loans from related parties (specifically the wider Transurban Group) and asset level debt related to the individual road projects. Related party loans increased by $367.8 million during the year due to the re-capitalisation of Capital Beltway, the purchase of Fluor’s 10 per cent interest in Capital Beltway and I95 and DRIVe capital calls (relating to the construction of the I95). Asset level debt increased due to the Group consolidating DRIVe and Capital Beltway during the year. Debt maturity profiles The following chart shows the Group’s current debt maturity profile. The chart shows the debt in the financial year it matures and in the case of the asset level debt, the full value of the debt facilities has been shown as this is the value of debt for refinancing purposes. The debt values are shown at 30 June 2014 and US dollar debt has been converted at the hedged rate where cross currency swaps are in place. Unhedged US dollar debt has been converted to Australian dollars at spot exchange rate ($0.942 at 30 June 2014). Asset level debt maturity profile 1,200 1,000 ) t n e l a v i u q e ( n o i l l i m $ A 800 600 400 200 0 1 4 2 7 7 3 8 1 2 2 3 2 3 6 1 4 2 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 95 Express Lanes TIFIA funding 95 Express Lanes private activity bonds 495 Express Lanes TIFIA funding 495 Express Lanes private activity bonds 495 Express Lanes letter of credit 257 257 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) Operating and Financial Review – Year ended 30 June 2014 (continued) Financial risk management Transurban Group’s exposure to financial risk management and its policies for managing that risk can be found in the Financial Risk Management note of the attached accounts – Note 35. This section discusses Transurban’s hedging policies, credit risk, interest rate risk and liquidity and funding policies. Corporate activities Equity entitlement offer and share placement In May 2014, Transurban completed a fully underwritten accelerated renounceable entitlement offer. The Institutional Entitlement Offer raised gross proceeds of approximately $1.8 billion and resulted in the issue of approximately 264 million new Transurban stapled securities. Entitlements not taken up by eligible institutional security holders and entitlements of ineligible institutional security holders were sold and cleared in the institutional shortfall book build at $7.00 per security, a $0.25 per security premium over the offer price of $6.75 and a 2.4 per cent discount to the theoretical ex-rights price as of 23 April 2014 of $7.17 per security. The Retail Entitlement Offer raised gross proceeds of approximately $557 million from the issue of approximately 83 million new securities at an issue price of $6.75 per security. Approximately 28.6 million of these new securities were sold in the bookbuild at a price of $7.21 per security, a $0.46 per security premium over the issue price of $6.75, a $0.21 per security premium over the institutional bookbuild price of $7.00, and a $0.10 per security discount to the last traded price of $7.31 per security. A further $400 million was raised from placement of 58 million securities at a price of $6.95 per security to AustralianSuper and Tawreed. Changes in Executive Management On 14 July 2014, Samantha Hogg, Chief Financial Officer, left Transurban. Until a permanent replacement is appointed, Leigh Petschel, currently General Manager, Finance, will serve as Acting Chief Financial Officer. Tim Steinhilber, Group General Manager, Project Delivery and Operational Excellence, transferred back to the USA in July 2014 and will support the delivery of the I95 project that is scheduled for completion at the end of 2014. Tony Adams, previously Vice President, Infrastructure, Major Projects, and based in the USA, will transfer to Australia as he assumed the role of Group General Manager, Project Delivery and Operational Excellence in July 2014. People Transurban’s People Strategy focuses on the four areas of Leadership, Capability, Performance, and Wellbeing. These areas are underpinned by the Group values, as well as safety, diversity and sustainability. Leadership Transurban conducts a bi-annual talent review with the Executive team. This review helps identify high potential individuals who may have the ability to move into a Senior Leadership or Executive role, or those who may be able to move laterally outside of their area of technical expertise. It also identifies successors for the Executive team and other future leaders. Development activities for this group are monitored throughout the year. 258 258 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) Operating and Financial Review – Year ended 30 June 2014 (continued) Senior Leaders participated in a three day offsite in February 2014. The key theme of the program was driving for high performance and it is intended that this will become an annual event for the leadership group. There has been a focus on building greater leadership capability through the middle management group during the reporting period. Activities to support this include the implementation of a Group Coaching program; cascading of activities from the Senior Leadership Program and the continuation of the Coaching and Mentoring program for female managers. Capability A framework identifying both behavioural and technical capabilities has been developed and is being used to assist in identifying key talent for future roles and determining potential gaps. This assists in developing strategies to build future capability. A technical career pathway program has also been developed. One area of continued focus is the Traffic Forecasting Group which is deemed fundamental to the ongoing success of the Group. Steps to enhance capability in this area have progressed. Performance Changes were made to the Short Term Incentive program aimed at enhancing this through increased performance differentiation, the introduction of formal performance comparisons against peers, and strengthening the link between individual and Group performance. A review of the Group’s Benefits program was also undertaken, benchmarking current programs against market practice. Wellbeing A new Wellbeing framework has been developed, identifying the key areas of health; work; financial; values and staying connected. A suite of initiatives to support the framework are being introduced across Transurban. An employee volunteer program has been launched which includes the introduction of volunteer leave for all employees. Office moves in Melbourne and Sydney occurred with a focus on increasing collaboration and ensuring a healthier workspace. Activity based working was also introduced as part of this, which enables greater flexibility for employees in the way in which they work. It has been twelve months since the launch of the refreshed Vision and Values. A Group wide Values Health Check was rolled out to see how and where teams are using the values and to ensure that behaviours continue to be aligned. This provided positive feedback as did the Employee pulse survey that was conducted in May 2014. Sustainability Transurban is committed to taking a sustainable approach to its operations, projects and business practices to create the best outcomes for its government clients, communities and customers. Transurban’s Sustainability Strategy highlights three key focus areas: be good neighbours, use less, and think long term. By adopting and working to these principles, Transurban reinforces its ‘licence to operate’ and strengthens its ability to deliver efficient and integrated transport networks that support productivity and the wellbeing of its communities. During the period, Transurban put into action the Sustainability Strategy. Some important highlights include developing a community investment strategy which saw the launch of the first corporate grants program, embedding sustainability requirements in the NorthConnex tender process and committing to reduce operational energy consumption by 10 per cent by 2023. Transurban provides regular progress reports to the Board on the focus areas. The annual Sustainability Report summarises the year’s activities, while also outlining commitments for the coming years. The 2014 Sustainability Report will be published in October. 259 259 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) Operating and Financial Review – Year ended 30 June 2014 (continued) Business risks and opportunities The following are key opportunities that may impact Transurban’s financial and operating result in future periods:  Negotiation of new business opportunities to develop projects and enhance the motorway networks in Transurban’s target markets  Higher traffic volumes across Transurban’s assets resulting in stronger cashflows across the Group  Integration of technology and systems across Transurban assets, including tolling systems, to leverage economies of scale available from Transurban’s network footprint.  Policy change in approach to network pricing to drive efficiencies and improvements in capacity utilisation on Transurban’s assets  Development of connecting infrastructure to drive improved traffic volumes on Transurban’s assets; and  Realisation of benefits associated with financing arrangements and financial transactions, including sourcing new financing, the refinancing of existing indebtedness and credit exposures on transactions with financial counterparties. The following are key risks that may impact Transurban’s financial and operating result in future periods:  Reduced traffic volumes or an inability to grow traffic volumes  The loss of a toll road concession for non-performance or default under a concession agreement, financing arrangement or as a result of government action  Existence and development of, or changes to, competing roads, feeder roads and other means of transport  A failure of key operating systems, including tolling systems, which impacts the ability to collect revenue  Changes in law or regulation, including the imposition of new or increased taxes or other governmental charges or levies  Adverse tax developments, including as a result of legislative change or interpretation, and changes to accounting standards  Dependency on the services of key contractors and counterparties for development and construction activities and for the provision of tolling, customer services, operations and maintenance services, road management and control systems  Exposure to risks associated with financing arrangements and financial transactions, including sourcing new financing, the refinancing of existing indebtedness and credit exposures on transactions with financial counterparties  Risks of accidents, incidents and other events relating to the assets and insurance policies not providing adequate protection against those risks  Potential for involvement in legal, regulatory and other proceedings and disputes arising from business and operations; and  Reliance on dividends, interest on and repayments of shareholder loans from joint ventures and subsidiaries for funding. Risk Management Managing risk is an essential part of our business. Key risks are regularly reviewed by the Board, the Audit and Risk Committee and our Executive Committee. Transurban has a business-wide risk framework to help create a consistent and rigorous approach to identifying, analysing and evaluating risks. This framework has various policies, standards and guidelines attached to it, including the Risk Management Policy which can be found in the Corporate Governance section of our website (www.transurban.com). 260 260 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) Operating and Financial Review – Year ended 30 June 2014 (continued) The framework is overseen by the Audit and Risk Committee and is actively managed by the Executive Committee. It is consistent with AS/NZ31000:2009 and is subject to regular review by internal audit. Our Audit and Risk Committee Charter is also available in the Corporate Governance section of our website. Significant changes in the entity’s state of affairs Other than those matters already discussed in the operating and financial review, no other significant changes have occurred in Transurban’s state of affairs in the year ended 30 June 2014. Matters subsequent to the end of the financial year As at the date of this report the Directors are not aware of any other circumstances that have arisen since 30 June 2014 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, that have not otherwise been disclosed in the financial report. Likely developments in future financial years and the expected results of operations Other than matters already discussed above, any other potential 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. 261 261 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) Information on Directors Lindsay Maxsted Dip Bus, FCA, FAICD Chairman 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 a partner of KPMG and was the CEO of that firm from 2001 to 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. As at the date of this report Lindsay holds interests in 66,559 Stapled Securities. Transurban Board Committee membership Chairman of the Nomination Committee and a member of the Audit and Risk Committee. Scott Charlton BSci, MBA (Texas) Chief Executive Officer and Executive Director Term of office Director since 16 July 2012. CEO since 16 July 2012. Scott joined Transurban from Lend Lease, where he was Group COO (from November 2011) and Group Director of Operations (from March 2010). Prior to this Scott held several senior appointments across a range of infrastructure entities and financial institutions, including as CFO of Leighton Holdings Limited (2007 to 2009) and as Managing Director of Deutsche Bank in Australia and Hong Kong (1995 to 2003). As at the date of this report Scott holds interests in 213,374 Stapled Securities, 909,444 performance awards (unlisted) and 108,486 STI deferred awards (unlisted). Neil Chatfield M.Bus, FCPA, FAICD Independent Non-executive Director Term of office Director since 18 February 2012. Neil is an established Executive and Non-executive Director with extensive experience across all facets of company management, and with specific expertise in financial management, capital markets, mergers and acquisitions, and risk management. Neil is currently the Chairman of Virgin Australia Holdings Limited and of Seek Limited, and a Non-executive Director of Recall Holdings Limited. Neil is also Honorary Chairman of HomeGround Services. He was previously a Non-executive Director of Grange Resources Limited (to April 2014) and of Whitehaven Coal Limited (to May 2012). Neil previously served as Executive Director and the CFO of Toll Holdings Limited (from 1997 to 2008). As at the date of this report Neil holds interests in 50,424 Stapled Securities. 262 262 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) Information on Directors (continued) Transurban Board Committee membership Chairman of the Audit and Risk Committee and a member of the Nomination and Remuneration and Human Resources 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 Federation Centres 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 (to March 2012), AMMB Holdings Berhad, Shanghai Rural Commercial Bank and of the Bank of Tianjin. As at the date of this report Bob holds interests in 30,324 Stapled Securities. Transurban Board Committee membership Chairman of the Remuneration and Human Resources Committee and member of the Audit and Risk and Nomination Committees. Samantha Mostyn BA, LLB Independent Non-executive Director Term of office Director since 8 December 2010. Sam has significant experience in the Australian corporate sector both in Executive and Non-executive capacities, in particular in the areas of human resources, corporate and government affairs, sustainability management, and diversity. Sam is currently a Non-executive Director of Virgin Australia Holdings Limited, Citigroup Pty Ltd, and Cover- More Group Limited. She is President of the Australian Council for International Development. She is also a Director of Australian Volunteers International, Australia Council for the Arts, Carriageworks, St James Ethics Centre Foundation, and the NSW Climate Change Council. Sam is currently Deputy Chair of the Diversity Council Australia, and is a member of the advisory boards of ClimateWorks Australia and the Crawford School of Government and Economics, ANU. She is also a Commissioner of the Australian Football League. Sam has previously held senior executive positions at IAG, Optus and Cable & Wireless Plc. As at the date of this report Sam holds interests in 17,256 Stapled Securities. Transurban Board Committee membership Member of the Remuneration and Human Resources and Nomination Committees. 263 263 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) Information on Directors (continued) Christine O'Reilly BBus Independent Non-executive Director Term of office Director since 12 April 2012 Christine has 30 years’ experience in the finance and infrastructure sectors in various roles including as Co- Head of Unlisted Infrastructure at Colonial First State Global Asset Management and as CEO of the GasNet Australia Group. Christine is currently a Non-executive Director of CSL Limited, Energy Australia, Medibank Private, and Baker IDI, and is the Deputy Chair of CARE Australia. As at the date of this report Christine holds interests in 13,972 Stapled Securities. Transurban Board Committee membership Member of the Audit and Risk and Nomination Committees. 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 Squire Patton Boggs (US) LLP, 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. As at the date of this report Rodney does not hold interests in any Stapled Securities Transurban Board Committee membership Member of the Nomination Committee. 264 264 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) Information on Directors (continued) Ian Smith BE Mining (Hons), BFin Admin, MAICD Independent Non-executive Director Term of office Director since 1 January 2012. Ian is currently the Managing Director and CEO of Orica Limited and serves as President of The Australian Mines and Metals Association. Previously, Ian was the Managing Director and CEO of Newcrest Mining, the Global Head of Operational and Technical Excellence at Rio Tinto, based in London, and Managing Director Comalco Aluminium Smelting within the Rio Tinto Group. Prior to this, Ian held senior operational and project management roles with WMC Resources, Pasminco Limited and CRA Limited. He was previously the Chairman of the Minerals Council of Australia and a Director of the Australian Chamber of Commerce and Industry. Ian is a Fellow of both the Institute of Engineers Australia and the Australasian Institute of Mining and Metallurgy - from which he was awarded its highest honour, the Institute Medal, in June 2012. As at the date of this report Ian holds interests in 92,742 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 14 years of legal, company secretariat and other relevant experience. Prior to her in-house work, Amanda was a solicitor specialising in M&A work with Australian law firm King & Wood Mallesons. Julie Galligan LLB, BA Julie joined Transurban in November 2008 and was appointed as General Counsel in February 2012. Julie has over 14 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. 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 2014, and the numbers of meetings attended by each Director were: Lindsay Maxsted Scott Charlton Neil Chatfield Robert Edgar Samantha Mostyn Christine O'Reilly Rodney Slater Ian Smith Attended 13 13 13 13 13 13 13 12 Held 13 13 13 13 13 13 13 13 265 265 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) Information on Directors (continued) The number of meetings of each Board Committee held during the year ended 30 June 2014, and the number of meetings attended by each Director, are set out in the following table. Audit and Risk Committee(1) Remuneration and Human Resources Committee(2) Nomination Committee(3) Special purpose Sub- committees(4) Attended Held Attended Held Attended Held Attended Held 6 6 6 6 * 6 * 1 6 * 6 6 * 6 * * 5 5 5 5 5 3 * 2 * * 5 5 5 * * * 2 2 2 2 2 2 2 1 2 * 2 2 2 2 2 * 12 12 11 * * 11 * * 12 12 12 * * 11 * * Lindsay Maxsted Scott Charlton Neil Chatfield Robert Edgar Samantha Mostyn Christine O'Reilly Rodney Slater Ian Smith * = Not a member of the relevant Committee (1) Scott Charlton and Ian Smith were not members of the Audit and Risk Committee but attended meetings during the year. (2) Lindsay Maxsted, Scott Charlton, Christine O'Reilly and Ian Smith were not members of the Remuneration and Human Resources Committee but attended meetings during the year. Scott Charlton was excluded from discussions involving his remuneration during meetings which he attended. (3) Ian Smith and Scott Charlton were not members of the Nomination Committee but attended meetings during the year. (4) Special purpose sub-committees were formed during the year to deal with matters relating to the Queensland Motorways bid submission and the due diligence process undertaken in connection with the equity raising for the acquisition of Queensland Motorways. 266 266 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) 2014 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 were the 'key management personnel' (KMP) of the Transurban Group (Group) during the year ended 30 June 2014 (FY2014). The KMP disclosed in this report are listed in the table below: Current Non-executive Directors Lindsay Maxsted, Chair Neil Chatfield Robert Edgar Samantha Mostyn Christine O'Reilly Rodney Slater Ian Smith Current Senior Executives Scott Charlton, Executive Director and Chief Executive Officer (CEO) Jennifer Aument, Group General Manager, North America Wesley Ballantine, Group General Manager, Queensland (from 4 June 2014, formerly Group General Manager, Strategy) Andrew Head, Group General Manager, New South Wales Samantha Hogg, Chief Financial Officer (1) Sue Johnson, Group General Manager, Human Resources Tim Steinhilber, Group General Manager, Delivery and Operational Excellence (1) Lisa Tobin, Group General Manager, Technology Vin Vassallo, Group General Manager, Victoria Former Senior Executives Michael Kulper, President North America (departed 3 September 2013) (1) On 14 July 2014, the Group announced changes to KMP. Samantha Hogg departed the Group and Tim Steinhilber has transferred back to the USA. Refer to section 1B for further details. Contents 1 Remuneration snapshot 2 Remuneration governance 3 Remuneration in context 4 CEO / Senior Executive remuneration for FY2014 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. 268 270 271 272 292 294 267 267 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) 1 Remuneration snapshot The Transurban Board is committed to an executive remuneration framework that is focused on driving a performance culture and linking pay to the achievement of the Group’s strategy and business objectives and, ultimately, generating security holder value. Transurban’s remuneration framework is reviewed annually taking into consideration security holder and other stakeholder feedback, market expectations and regulatory developments. At the 2013 Annual General Meeting (AGM), the framework received strong support from security holders, with a 98.8% vote in favour of the resolution to adopt the 2013 Remuneration Report. There were no substantive changes to the framework in FY2014, but some refinements were made to further align remuneration with the creation of sustainable security holder value, business outcomes, and the Group’s organisational values: integrity, collaboration, accountability, ingenuity and respect. In particular, changes were made to the Short Term Incentive (STI) program for all eligible employees, which were aimed at enhancing this variable pay element through increased performance differentiation, the introduction of formal performance comparisons against peers, and strengthening the link between individual and Group performance. A TRANSURBAN’S REMUNERATION FRAMEWORK The key elements of the remuneration framework for the CEO and other Senior Executives for FY2014 were as follows: Remuneration mix The remuneration of the CEO and other Senior Executives was structured as a mix of fixed remuneration and variable ('at risk') remuneration through short term and long term incentive components. The relative weightings of the three components were as follows: Total remuneration % (annualised at target) Fixed TEC Variable (performance based) CEO Senior Executives 40 45 STI 30 (50% deferred) 30 (50% deferred) LTI 30 25 * All Senior Executives moved to 50% STI deferral effective 1 July 2013. Fixed total employment cost (TEC) Fixed TEC was set with reference to the market median, using the ASX 20-50 as the primary reference, with consideration also given to the ASX 100. Remuneration packages (including TEC levels) are reviewed annually by the Remuneration and Human Resources Committee with reference to an individual's role, experience and performance, as well as relevant comparative market data provided by an independent remuneration consultant. TEC levels are also reviewed on a change in role. 268 268 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) Short term incentive (STI) During FY2014, changes were made to the STI program to achieve greater performance differentiation. The link between Group and individual performance was also strengthened by using individual performance as a multiplier when calculating reward for Group performance. Group performance measures under the new STI program were again linked to growth in proportional EBITDA, cost management based on proportional net costs, and safety. See section D for further details. Individual performance continues to be measured against key performance indicators (KPIs). Under the new STI program, each individual’s assessment will be used in determining a rating relative to peers. The overall rating will derive an individual’s STI using a payment schedule as determined by the Board designed to encourage high performance. During FY2014, the proportion of the STI award subject to mandatory deferral was aligned for the CEO and all Senior Executives, so that all members of KMP now have 50 per cent of their STI award deferred for two years. Increasing the level of STI deferral (from 30% when it was first introduced in FY2012) strengthens the link between KMP performance and security holder value and provides a greater retention element. For Australian Senior Executives, STI deferral is into securities. Due to legal restrictions on the issue of securities to USA residents, the USA resident Senior Executives receive deferred cash awards. The deferred component of remuneration may, at the discretion of the Board, be subject to forfeiture or clawback (eg. in the event of misconduct or material misstatement of financial results). Long term incentive (LTI) For FY2014, LTI performance measures 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, telecommunications and construction Global Industry Classification Standards (GICS) sectors of the ASX 150; and  50 per cent Free Cash Flow (FCF) per security, reflecting the Group's focus on the maximising free cash flow to drive security holder return. The definition of FCF per security is set out on page 281. The FCF calculation is included in note 22 of the audited financial statements of Transurban Holdings Limited. B OTHER EVENTS / ACTIONS IMPACTING REMUNERATION IN FY2014 USA restructure As previously disclosed, the Group’s New York office was closed in FY2014. As a consequence, it was determined that the position of President, North America was no longer required. As no suitable positions were available for Michael Kulper (the incumbent), his employment with the Group ceased on 3 September 2013. On ceasing employment as President, North America, Michael Kulper received a sum equivalent to 3 months TEC as a payment in lieu of notice (USD 247,450), and he was paid (USD 304,554) (equivalent to 16 weeks TEC) severance payment. The following arrangements also applied to Michael Kulper:  he retained the deferred securities granted to him under the FY2012 and FY2013 STI plans in accordance with their original terms; and  he retained a pro-rated proportion of his LTI awards granted to him under the FY2011 (161,103 Performance Awards), FY2012 (111,721 Performance Awards) and FY2013 (65,293 Performance Awards) LTI plans 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. Michael Kulper was not eligible to participate in the FY2014 LTI plan. 269 269 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) Queensland Motorways In April 2014, a Transurban-led consortium was announced as the successful bidder for Queensland Motorways, which operates a network of toll roads in and around Brisbane. Financial close was achieved on 2 July 2014. Wesley Ballantine, Group General Manager, Strategy, was appointed to the position of Group General Manager, Queensland on 4 June 2014. Wesley Ballantine has been employed by the Group since 2006. Wesley Ballantine’s remuneration was reviewed on this change in role, taking into account benchmark data and internal relativities. Refer to section 4. Changes to KMP On 14 July 2014, Transurban announced changes to its Executive Committee. Samantha Hogg, Chief Financial Officer, left the Group on 14 July 2014 after six years with the business. Tim Steinhilber, Group General Manager, Project Delivery and Operational Excellence, transferred back to the USA to support the delivery of the I95 project that is scheduled for completion at the end of 2014. The remuneration arrangements applying to Samantha Hogg on her departure, will be disclosed in the 2015 report. Anthony Adams, currently Vice President, Infrastructure, Major Projects, and based in the USA, will transfer back to Australia to assume the role of Group General Manager, Project Delivery and Operational Excellence. Anthony joined Transurban in June 2003. Leigh Petschel, currently General Manager, Finance, is Acting Chief Financial Officer. Leigh joined Transurban in October 2013. 2 Remuneration governance A BOARD AND REMUNERATION AND HUMAN RESOURCES COMMITTEE RESPONSIBILITY The Remuneration and Human Resources 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. It is critical that the Remuneration and Human Resources 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, the CEO and the Group General Manager, Human Resources attend Committee meetings, however they do not participate in formal decision making. The membership of the Remuneration and Human Resources Committee was unchanged in FY2014. The members of the Committee continue to be Robert Edgar (Chair), Samantha Mostyn and Neil Chatfield. Further details regarding the Committee are set out in the Directors’ report. The Remuneration and Human Resources Committee reviews gender pay equity annually. The Group has focused on achieving pay equity at all work levels in the organisation and the FY2014 outcomes indicate that this objective has substantially been achieved. 270 270 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) B ENGAGEMENT OF REMUNERATION CONSULTANTS To ensure that the Remuneration and Human Resources Committee has all relevant information at its disposal when making remuneration decisions, it 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 by Directors. Those consultants who provided the Remuneration and Human Resources Committee with a remuneration recommendation relating to KMP during FY2014, and who have been deemed by the Group to be ‘remuneration consultants’, are listed below: Consultant Fees for remuneration recommendations Ernst & Young $10,000 Fees for other advice provided to the Group during FY20141 $768,079 1 Fees for other advice includes the review of USA tax returns, expatriate taxation requirements, audit of various undertakings and general consulting Ernst & Young was selected by the Remuneration and Human Resources 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 their recommendations, both a declaration of independence from the KMP to whom their recommendations related, and also confirmation of 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. that Ernst & Young provide, with terms also required 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. 3 Remuneration in context Transurban is a top 20 Australian Securities Exchange listed business and is the largest transport infrastructure entity in Australia, and one of the largest toll road entities in the world. Transurban is focused on providing effective and innovative urban transport solutions in road infrastructure, through the management and development of urban networks of toll road concessions. The effective management of toll road concessions involves leveraging a network footprint in our markets, taking a leading role in shaping policy, and utilising our core capabilities in the following areas:  Network planning and forecasting;  Operations and customer management;  Project development and delivery;  Application of technology; and  Community engagement. 271 271 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) The investment proposition for high quality toll road assets lies in providing investors with access to long dated, predictable, growing cash flows generated over the life of the concessions through effective management and development of the road corridors they govern. The Board and management are focused on ensuring security holder value is enhanced through the strong performance of the Group’s asset portfolio. Development activities also provide opportunities to further expand the portfolio and unlock further value in the concessions. 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 the Hills M2, Lane Cove Tunnel and Cross City 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) and, from 2 July 2014, Queensland Motorways in Brisbane (62.5 per cent). In North America, the Group currently has interests in two assets, the 495 Express Lanes (94.0 per cent), and the 95 Express Lanes project (77.5 per cent), which is currently under construction and remains on schedule for completion in late 2014. 4 CEO / Senior Executive remuneration for FY2014 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. 272 272 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) 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 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  Remuneration Structure Fixed remuneration Total Employment Cost (TEC):  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 ('at risk') remuneration Short term incentive (STI):  Annual rewards tied to pre-determined individual and Group performance measures, and includes a deferred element (into securities)   Individual performance against targets and comparable performance against peers are used to determine an outcome Individual targets reflect individual specific accountabilities and key drivers for growth and success  Group performance targets linked to earnings, cost management and safety  Individual performance outcome provides a multiplier for the Group performance element (linking the two elements)  Maximum potential STI is capped at 150 per cent Long term incentive (LTI):  Equity rewards to align executive and security holder interests (using indeterminate rights)  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  Maximum LTI opportunity is capped at 100% 273 273 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) B REMUNERATION MIX For FY2014, 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 components were determined by the Board (on the recommendation of the Remuneration and Human Resources Committee) and are set out in the table below: Total remuneration % (annualised at target)* Fixed TEC Variable (performance based) CEO Senior Executives 40 45 STI** 30 (50% deferred) 30 (50% deferred) LTI 30 25 * These figures may not necessarily reflect the relative value derived from each of the components, which depends on actual performance against targets for the variable components. The STI percentages are based on achieving the relevant performance targets. The 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. **All Senior Executives moved to 50% STI deferral for grants made in FY2014. C FIXED REMUNERATION - TOTAL EMPLOYMENT COST (TEC) What is TEC? Fixed remuneration is represented by total employment cost comprising base salary and superannuation contributions (or pension plans in the case of USA based employees). 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 TEC increases in the service agreement of the CEO or any Senior Executive. How is TEC determined? Remuneration packages (including TEC levels) are reviewed annually by the Remuneration and Human Resources 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 levels are also reviewed on a change in role. Any changes to TEC levels recommended by the Committee must be approved by the Board. The CEO's and other Senior Executives' TEC is determined with reference to the market median. The primary reference for determining the market median is the ASX 20-50, with consideration also given to the ASX 100. Consideration is given to sizing factors including market capitalisation and revenue. A range around the median provides flexibility to recognise individual experience and capabilities. D SHORT TERM INCENTIVE (STI) How does the STI plan operate? Eligible 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 corporate objectives. This aligns employee interests with the Group's financial performance, as well as the Group’s organisational values. 274 274 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) For FY2014, the CEO and other Senior Executives had a target STI opportunity of 30 per cent of their total remuneration package. Mandatory STI deferral of 50 per cent of the overall STI award now applies for all grants to the CEO and other Senior Executives. STI payouts can vary between zero (if targets are not met) and 150% (for exceptional outperformance). The deferral period is two years. For Australian Senior Executives, deferral is into securities. Due to legal restrictions on the issue of securities to USA residents, the USA resident Senior Executives receive deferred cash awards. STI deferral grants are made in the form of awards. Each award is an entitlement to receive a fully paid security, or an equivalent cash payment, on terms and conditions determined by the Board. This 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). What were the STI performance measures for FY2014? The STI performance measures for the CEO and other Senior Executives for the year ended 30 June 2014 were chosen to provide a balance between corporate, individual, operational, strategic, financial and non-financial aspects of performance and are described below: Measure Group performance target (1) Growth in proportional EBITDA (20% weighting) The proportional EBITDA targets were set against the previous year's results and the Group's FY2014 budget. The EBITDA target excluded the 495 Express Lanes. Proportional EBITDA result % STI that vests^ Less than 10% above underlying result for FY2013 10% above underlying result for FY2013 Budget EBITDA for FY2014 ($926 million) 16% above underlying result for FY2013 ^ Straight line vesting applies between 50-100% and 100-150%. zero 50 100 150 (2) Cost management based on proportional net costs (20% weighting) The proportional net costs targets were set against the previous year’s results and the Group’s FY2014 budget. The proportional net costs target included the 495 Express Lanes. Proportional net costs result Over FY2014 budget FY2014 budget ($201 million) FY2014 budget less $5 million FY2014 budget less $15 million ^ Straight line vesting applies between 50-100% and 100-150%. (3) Safety targets (10% weighting) % STI that vests^ zero 50 100 150 The safety target was a lead indicator that required the completion of safety development action plans. The target is split with equal weighting between employee/contractor (5%) and customer (5%) safety targets. Safety target result % STI that vests^ Less than 60% safety action plan items implemented 60% safety action plan items implemented 75% safety action plan items implemented 90% safety action plan items implemented ^ Straight line vesting applies between 50-100% and 100-150%. zero 50 100 150 275 275 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) Individual key performance indicators (KPIs) Individual KPIs (50% weighting), were unique to the individual's area of accountability, and in FY2014 related to critical business sustainability measures, including: operational excellence, strategy, people and leadership, operational performance, cost reduction, customer satisfaction, project outcomes, succession planning, risk management, growth and business plan implementation. Individuals have a clear line of sight to KPIs and are able to directly affect outcomes through their own actions. 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 is it used as an STI performance measure? EBITDA (earnings before interest, taxes, depreciation and amortisation) 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. The Board believes 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 for FY2014 does not include the EBITDA contribution for those assets which are equity accounted (M5 and M7). DRIVe’s EBITDA is also excluded from the statutory results for the period that it was equity accounted (1 July 2013 to 4 June 2014). 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 from proportional EBITDA to provide an underlying result when determining performance incentives. For FY2014, the Board resolved to exclude the 495 Express Lanes from the proportional EBITDA measure as this is a period of ramp-up for this asset. The 495 Express Lanes opened to traffic in November 2012 giving the Group limited toll revenue historical data when setting targets for FY2014. Proportional EBITDA has been used by the Group as an STI performance measure since 2009. What are proportional net costs and why is this used as a performance measure? Proportional net costs are calculated as fee and other revenue less total costs of the Group. Costs after fee and other revenues encourage and allows management to incur additional costs where these are justified by increased revenue results. The use of a cost related STI performance measure reflects management’s 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 have been used by the Group as an STI performance measure since 2010. The proportional net costs measure for FY2014 includes costs associated with 495 Express Lanes, as there is a known cost base to work from and drive efficiencies. 276 276 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) What were the changes to the STI program introduced in FY2014? The STI program was reviewed in FY2014 and changes implemented to achieve a program that provides greater performance differentiation between participants. The link between Group and individual performance has been strengthened by using individual performance as a multiplier when calculating reward for Group performance. In FY2014, Group performance measures under the new STI program were again linked to growth in proportional EBITDA, cost management based on proportional net costs, and safety. Individual performance continues to be measured against KPIs, with an overall outcome reached for each participant against target. Under the new program, this information is used to assist with providing a rating which will consider performance comparative both to peers and against the Group’s values. The overall rating will derive a STI using a payment schedule as determined by the Board designed to encourage and reward high performance. 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 and Human Resources 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 considers the appropriate rating for each Senior Executive, taking into account their comparable performance and behaviours against the Group’s values. The Board then approves STI awards. STI cash awards for FY2014 will be paid in August 2014. The STI deferred component for FY2014 will be awarded in August 2014 and will vest, subject to continuity of employment (unless otherwise determined by the Board) and clawback provisions, on 1 July 2016. The Board believes the method of assessment is rigorous and provides a balanced evaluation of the performance of the CEO and each other Senior Executive. What if a Senior Executive ceases employment before the STI targets are assessed? Under the service agreements for the CEO and other Senior Executives, if the CEO or other Senior Executive ceases employment with the Group before performance against STI targets is assessed, they would generally not be entitled to receive any STI award, unless otherwise determined by the Board. How is the annual STI pool determined? The Board approves a pool to be distributed for the annual STI program (cash and deferred securities/cash). The pool is the sum of all eligible employees’ possible STI outcomes at 100 per cent target (TEC multiplied by their STI opportunity). This value is divided by two and each half is treated as follows: one half represents the individual component of the STI and is capped at 100 per cent, the second half is multiplied by the Group’s performance outcome to represent the Group’s performance component and is capped at 150 per cent. The overall pool is capped at 125 per cent. The Board has discretion as to the proportion of the pool that will be distributed in any given year. What is the maximum and minimum payment an individual can receive under the STI plan? The minimum payment an individual can receive is 0% and the maximum is 150% of their STI opportunity. What were the changes to the STI deferral? During FY2014, those Senior Executives who had been on the old arrangement of 30 per cent deferral (S Hogg and A Head) were moved to 50 per cent deferral. This applies for grants made from 1 July 2013 onwards. 277 277 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) What were the Group STI performance outcomes for FY2014? Group performance in respect of the proportional EBITDA, proportional net costs and safety STI performance measures for FY2014 was assessed by the Board as 125.5% of the possible STI opportunity. It should be noted that the transaction costs associated with the acquisition of Queensland Motorways ($5.9 million) and Cross City Tunnel ($3.1 million) were included in both the proportional EBITDA and proportional net cost outcomes. Measure Proportional EBITDA Proportional net costs Safety action plan items implemented Overall Group Performance Performance $931.2 million1 $182.6 million 76% - 1 For FY2014 the 495 Express Lanes are excluded from the Proportional EBITDA measure. Outcome 113.7% 150.0% 100.0% 125.5% What were the individual STI performance outcomes and awards for the CEO and Senior Executives for FY2014? 1 O n - t a r g e t 1 O n 1 1 Current Senior Executives S Charlton J Aument W Ballantine A Head S Hogg S Johnson T Steinhilber L Tobin V Vassallo STI outcome (%) Actual STI awarded1 ($) Individual KPIs 131.0 Group performance2 164.4 90.0 131.0 125.0 50.0 88.0 75.0 88.0 115.0 113.0 164.4 156.9 62.8 110.4 94.1 110.4 144.3 Total 147.7 101.5 147.7 140.9 56.4 99.2 84.6 99.2 129.7 Cash3 Deferred into securities 1,039,250 1,039,250 162,394 207,225 294,000 131,100 136,800 145,700 174,675 228,275 162,394 207,225 294,000 131,100 136,800 145,700 174,675 228,275 STI forfeited (%) - - - - 43.6 0.8 15.4 0.8 - 1 On-target performance must be achieved before any STI is awarded. Therefore, the minimum potential value of the STI in respect of FY2014 was nil. 2 The Group performance outcome is determined by multiplying the individual percentage outcome by the Group’s percentage outcome of 125.5%. 3 The cash STI payments will be paid in August 2014. The STI deferred component (50 per cent of the STI awarded) will vest, subject to continuity of employment (unless otherwise determined by the Board) and clawback provisions, on 1 July 2016. 278 278 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) What was the grant and movement in the number of STI deferred awards? Mandatory STI deferral was introduced in FY2012, with the first grant of awards made in August 2012. Grants were also made in August 2013 as detailed below: Balance at start of year Granted during year as remuneration Matured and paid during year Forfeited during the year Balance at the end of year Current Senior Executives* S Charlton2 J Aument W Ballantine A Head S Hogg S Johnson T Steinhilber L Tobin2 V Vassallo2 Former Senior Executives M Kulper1 - 108,486 14,789 15,212 22,449 18,973 16,540 19,356 - - 14,282 17,328 15,202 17,944 21,288 21,192 6,612 6,612 36,464 22,813 - - - - - - - - - - - - - - - - - - - - 108,486 29,071 32,540 37,651 36,917 37,828 40,548 6,612 6,612 59,277 1 M Kulper was employed for the full FY2013 performance year, and received 22,813 awards in respect of that period. He has retained his deferred cash awards in the STI plans in accordance with their original terms. 2 Scott Charlton, Lisa Tobin and Vin Vassallo had a zero opening balance at the beginning of FY2014, as they joined the Group after the FY2012 STI performance period and therefore were not entitled to receive an STI deferred award in respect of that period. They all received a grant during FY2014, in respect of the FY2013 performance period. E 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 offered to the CEO and other Senior Executives, and certain other employees nominated by the CEO and approved by the Board. For FY2014, the CEO was offered an LTI grant equivalent to 30 per cent of his total remuneration package. Other eligible Senior Executives were offered grants equivalent to 25 per cent of their total remuneration package. LTI grants are made in the form of performance awards under the Group’s Performance Awards Plan (PAP) at no cost to the recipient. Each performance award is an entitlement to receive a fully paid security, or an equivalent cash payment, on terms and conditions determined by the Board, subject to the achievement of certain vesting conditions linked to performance over a three year period. LTI grants are generally made twice per annum – once following the annual performance review (August) for Senior Executives excluding the CEO, and at a later date in November for the CEO. This is to allow the CEO’s grant of performance awards to be put to security holder vote at the AGM. Two performance measures are used to determine the number of performance awards that will vest at the end of the performance period. Total Shareholder Return (TSR) provides a comparison for Transurban’s performance against those companies with which the Group competes for capital. Additionally, growth in Free Cash Flow (FCF) helps to retain a focus on maximisation of free cash. The maximum opportunity following these tests is capped at 100%. The performance awards will, subject to achievement of the two performance measures against the vesting schedules, vest and be automatically exercised at the vesting date with no exercise price payable by the recipient. The Board will determine in its absolute discretion whether the performance awards will be settled in securities or a cash payment of equivalent value. Due to legal restrictions on the issue of securities to USA residents, the USA Senior Executive receives a cash payment upon vesting. 279 279 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) 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. What is the Group’s LTI allocation valuation methodology? A fair value approach is applied for the TSR allocation. The Group is currently transitioning to a face value approach (discounted for distributions) for the FCF component. The transition is over 3 years and all things being equal there will be a decrease in the number of awards recipients receive until the new methodology is achieved. This transition will be completed for grants made during FY2016. What were the LTI performance measures for FY2014? Performance awards granted during the FY2014 are subject to a three year performance period and the following dual performance measures over that period: Measure Description of measure Relative TSR (50% weighting) Relative TSR is measured against a bespoke comparator group comprising companies in the transport, utilities, real estate, telecommunications and construction Global Industry Classification Standards (GICS) sectors of the ASX 150. The 42 companies in this group are: Abacus Property Group, AGL Energy Limited, Auckland International Airport Limited, Asciano Limited, Australand Property Group, APA Group, Aurizon Holdings Limited, BWP Trust, CFS Retail Property Trust Group, Charter Hall Group, Commonwealth Property Office Fund, Charter Hall Retail REIT, DUET Group, Dexus Property Group, Envestra Limited, Federation Centres Limited, Goodman Group, GPT Group, iiNet Limited, Investa Office Fund, Leighton Holdings Limited, Lend Lease Group, Mirvac Group, Monadelphous Group Limited, Macquarie Atlas Roads Limited, M2 Telecommunications Group Limited, Qantas Airways Limited, Qube Logistics Holdings Limited, Shopping Centres Australasia Property Group, Stockland, Spark Infrastructure Group, SP AusNet, Sydney Airport, Transurban Group, Telecom Corporation of New Zealand Limited, Telstra Corporation Limited, Toll Holdings Limited, TPG Telecom Limited, UGL Limited, Virgin Australia Holdings Limited, Westfield Group, Westfield Retail Trust. 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 2014, 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 the 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 % of performance awards that vest Nil Straight line vesting between 50 and 100 At or above the 75th percentile 100 280 280 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) Measure Description of measure Growth in FCF per security (50% weighting) Within Transurban, Free Cash Flow (FCF) per security is defined as:  The Group’s cash flow from operating activities;  less: cash flows from operating activities of non 100% owned 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 22 of the audited financial statements of Transurban Holdings Limited. For performance awards granted during the year ended 30 June 2014, the FCF per security component will vest based on the Group's compound annual growth targets translated into annual FCF per security over the three year performance period, as set out below: Growth in FCF per security vesting schedule: % annual growth in FCF per security % of performance awards that vest Less than 12% Nil Between 12% and 15% Straight line vesting between 50 and 100 15% or more 100 For performance awards granted during FY2015, the performance target range for growth in FCF per security is between 10.0 per cent and 13.0 per cent per annum. This is calculated from a base of 35.0 cents per security for FY2014, which is aligned to the FY2014 distributions paid. The Board has determined to use this base due to significant shifts in equity issued by the Group during the period, in particular 404.5 million securities issued in May 2014 associated with the Queensland Motorways acquisition. The 35.0 cent per security base is considered the best point of alignment with security holders’ expectation for growth in free cash. 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. The vesting schedule applied is in line with market practice, with straight line vesting between 50% and 100% for performance above the 50th percentile up to the 75th percentile for performance against the comparator group. Growth in FCF per security reflects the Group’s continuing focus on the maximisation of free cash, and has been used as an LTI performance measure since FY2013. Why has the FCF target for FY2014 of 12-15% increased from 6-9% in FY2013? Transurban regularly updates its corporate model to reflect the latest assumptions regarding traffic, operating costs, maintenance costs, discount rates, etc. The Transurban Board considers the Group’s potential performance over any given three year period and relates remuneration incentives to these expectations. Most importantly, it is the Board’s role to assess the realistic nature of cash flow expectations and set challenging but realistic targets. One target may be appropriate one year, but not so another year. The completion of construction for the M2 was a contributing factor for the change in the FCF target from FY2013 to FY2014. 281 281 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) Why is a three year performance period used for LTIs? The three year performance period for LTI has been set in line with market practice. The Board continues to monitor market practice in this regard. 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 20 trading days up to and including the testing date is used in the calculation of TSR. 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 will be calculated based on the FCF per security 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 the CEO and other Senior Executives, if the CEO or other Senior Executive ceases employment with the Group before the performance measures are tested, their unvested performance awards would generally lapse, unless otherwise determined by the Board. 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 FY2014 will be subject to the incumbent Board's discretion. 282 282 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) What was the grant, and movement in the number and value, of performance awards during FY2014? Eligible Senior Executives (excluding the CEO) received performance awards with a grant date of 15 August 2013. Following the receipt of security holder approval at the 2013 AGM, the CEO received performance awards with a grant date of 1 November 2013. All performance awards granted in FY2014 vest subject to a performance period from 1 July 2013 through to 30 June 2016. The relevant values of the grants are as follows: Recipient Grant date Fair value of awards at grant date1($) Closing security price at grant date Relative TSR FCF per security Eligible Senior Executives 15 August 2013 CEO 1 November 2013 $3.24 $3.13 $6.07 $6.21 $6.89 $6.97 1 An explanation of the pricing model used to calculate these values is set out in note 34 to the audited financial statements. Performance awards granted in FY2014 Name Current Senior Executives S Charlton1 J Aument W Ballantine A Head S Hogg S Johnson T Steinhilber L Tobin V Vassallo Number of performance awards granted2 Value at grant date ($) Maximum total value of grant yet to vest3($) 382,292 74,494 62,630 94,767 105,633 62,630 78,267 79,980 79,980 1,713,466 1,713,466 334,159 280,940 425,098 473,841 280,941 351,084 358,768 358,768 334,159 280,940 425,098 473,841 280,941 351,084 358,768 358,768 1 The grant made to the CEO constituted his LTI entitlement for FY2014 and was made following security holder approval at the 2013 AGM on the terms summarised above. Performance awards vest subject to performance over the period from 1 July 2013 through to 30 June 2016. 2 The grants made to Senior Executives assume full vesting of their full LTI entitlement for FY2014 and were made on the terms summarised above. Performance awards vest subject to performance testing over the period from 1 July 2013 through to 30 June 2016. 3 The maximum value of the grant has been estimated based on the fair value per award at date of grant. The minimum total value of the grant, if the applicable performance measures are not met, is nil. 283 283 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) F LEGACY LTI PLANS The Group has a number of LTI plans that were offered in previous years, as detailed below: Plan Grant date FY2013 PAP 15 Aug 2012 FY2012 PAP 26 Sep 2011 FY2011 PAP 1 Nov 2010 19 Oct 2012 (CEO only) 11 Nov 2011 (CEO only) Performance period External performance measure (50% of grant) Comparator group 1 Jul 2012 – 30 Jun 2015 1 Jul 2011 - 30 Jun 2014 TSR : 1 Nov 2010 - 1 Nov 2013 EBITDA : 1 Jul 2010 - 30 Jun 2013 Relative TSR Relative TSR Relative TSR 37 companies within a bespoke comparator group within the ASX150 33 companies within a bespoke comparator group within the ASX150 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) Growth in free cash flow (FCF) per security Growth in free cash flow (FCF) per security Group's annual growth in proportional EBITDA From 6% - 9% From 7% - 10% From 7% - 11% Compound Growth % of performance awards that vest Vesting schedule At target From target % to stretch % 50% vests Straight line vesting between 50% - 100% At or above stretch % 100% vests Current status To be tested after 30 Jun 2015 TESTED 71.59% vested on 30 Jun 2014 TESTED 86.51% vested on 1 Nov 2013 Awards on issue 814,965 – – Value of performance awards vested and lapsed in FY2014 The FY2011 PAP vested on 1 November 2013. The outcome of the performance tests were as follows: Test type TSR Result of test Transurban ranked 33 out of 93 companies (65.21%) % units vest 80.42% Proportional EBITDA 85% of the target EBITDA range was achieved Overall vesting 92.60% 86.51% 284 284 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) FY2011 PAP - Lapsed FY2011 PAP - Vested Number Value ($)1 Number Value ($)1 2,913 3,297 12,211 8,881 3,996 3,879 10,535 11,922 44,156 32,113 14,451 14,026 18,684 21,144 78,312 56,954 25,630 24,876 74,331 84,119 311,555 226,585 101,964 98,967 Current Senior Executives J Aument2 W Ballantine2 A Head S Hogg S Johnson2 T Steinhilber2 Former Senior Executives M Kulper 21,732 78,583 139,371 554,471 1 Based on the fair value at date of grant. 2 Awards granted prior to the Senior Executive becoming a member of KMP. Awards vested while the Senior Executive was a member of KMP. The FY2012 PAP vested on 30 June 2014. The outcome of the performance tests were as follows: Test type TSR Free Cash Flow Overall vesting Result of test Transurban ranked 14 out of 31 companies (56.66%) % units vest 63.32% 93.8 cents adjusted to 97.9 cents 79.86% 71.59% Current Senior Executives A Head S Hogg Former Senior Executives FY2012 PAP - Lapsed FY2012 PAP – Vested Number Value ($)1 Number Value ($)1 30,616 28,785 116,784 109,799 77,150 72,535 314,102 295,314 M Kulper 31,739 121,070 79,982 325,629 1 Based on the fair value at date of grant. The Board exercised its discretion to ensure that participants in the FY2012 PAP were neither advantaged nor disadvantaged as a result of the Queensland Motorways (QM) acquisition and associated capital raising. The issuance of 404.5 million new securities in May 2014 associated with the funding of the QM acquisition occurred in FY2014, while financial close of the QM acquisition occurred in FY2015. The Board exercised its discretion to, in effect, exclude the new securities issued to fund the QM acquisition from the number of securities used to calculate the FY2014 Free Cash Flow (FCF) per security for the purposes of calculating the FCF outcome for the FY2012 PAP. Interest income on the equity raised prior to year end was similarly excluded from the calculation. The targets set at the beginning of the performance period (1 July 2011) were not adjusted. 285 285 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) Number of performance awards on issue as at 30 June 2014 The number of performance awards held by members of KMP as at 30 June 2014 is provided below. Comparative data is shown for those Senior Executives who were members of KMP during both FY2014 and FY2013. Balance at start of year Granted during year as remuneration Matured and paid during year Lapsed or forfeited during year Balance at the end of year Current Senior Executives* S Charlton 2014 2013 J Aument 2014 2013 W Ballantine 2014 2013 A Head 2014 2013 S Hogg 2014 2013 S Johnson 2014 2013 T Steinhilber 2014 2013 L Tobin 2014 2013 V Vassallo 2014 2013 684,6561 – 382,292 684,6561 (78,752) – – – 988,196 684,6561 21,597 39,3652 24,441 44,4712 311,043 257,636 292,851 214,633 29,626 52,7712 28,755 53,7712 – – – – 74,494 – 62,630 – (18,684) (17,768)3 (21,144) (20,030)3 (2,913) – (3,297) – 74,494 21,597 62,630 24,441 94,767 112,754 (155,462) (59,347) (42,827) – 207,521 311,043 105,633 125,754 (129,489) (47,478) (37,666) – 231,329 292,851 62,630 – 78,267 – 79,980 – 79,980 – (25,630) (23,145)3 (24,876) (25,022)3 – – – – (3,996) – (3,879) – – – – – 62,630 29,626 78,267 28,755 79,980 – 79,980 – Former Senior Executives M Kulper 2014 2013 508,549 491,675 – 178,830 (219,353) (161,956) (223,903)4 – 65,293 508,549 All Performance Awards granted or matured in FY14 (where applicable) in the table above were issued by Transurban and resulted or will result in one ordinary Transurban stapled security (or cash equivalent, as determined by the Board) per Performance Award granted or matured. * Lisa Tobin and Vin Vassallo joined the Group in February 2013 and did not receive a pro rata LTI grant in respect of FY2013. 1 Scott Charlton’s number of performance awards granted during FY2013 includes 236,256 performance awards granted in September 2012 as a sign-on award, to vest, subject to his continued employment, in three equal tranches on the first, second and third anniversaries of his commencement with the Group. The first tranche (78,752) awards vested on 16 July 2013, and a second tranche (78,752) awards vested on 16 July 2014. Therefore as at the date of this report, Scott Charlton has 909,444 performance awards yet to vest of which 78,752 awards relate to his sign-on award. 2 Opening balance held prior to the Senior Executive becoming a member of KMP. 3 Awards matured and paid during the year occurred prior to the Senior Executive becoming a member of KMP. 4 Awards lapsed/forfeited includes pro rata forfeiture of grants made in FY2011, FY2012 and FY2013 in line with good leaver treatment. 286 286 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) G REMUNERATION PAID TO THE CEO AND OTHER SENIOR EXECUTIVES Short-term employee benefits Cash salary and fees Cash STI2 Non- monetary benefits3 Deferred STI4 Post- employment benefits Termination benefits Super- annuation Current CEO S Charlton 2014 2013 1,858,493 1,039,250 7,042 492,200 17,774 1,789,850 738,300 22,379 246,100 15,098 Current Other Senior Executives J Aument1 2014 516,456 244,487 1,250 126,054 11,274 2013 W Ballantine1 2014 2013 A Head 2014 2013 S Hogg 2014 2013 S Johnson1 2014 2013 T Steinhilber1 2014 2013 L Tobin1 2014 2013 V Vassallo1 2014 2013 27,260 10,775 - 5,204 916 393,737 207,225 1,462 107,433 230,757 81,150 3,398 44,498 604,875 294,000 2,418 111,497 589,279 241,395 2,366 77,012 676,275 131,100 2,018 117,353 656,561 284,935 2,030 76,648 423,737 136,800 1,496 127,917 280,971 112,325 3,823 60,277 572,856 309,886 30,165 177,462 269,441 259,550 52,658 53,001 507,741 174,675 1,753 30,000 185,869 - 710 15,000 507,741 228,275 1,753 30,000 176,134 - 710 15,000 17,774 9,836 17,774 16,470 17,774 16,470 17,774 12,043 17,774 6,388 17,774 6,863 17,774 6,863 - - - - - - - - - - - - - - - - - - Long- term benefits Long service leave - - - - 21,430 15,368 13,053 12,696 21,368 13,674 8,661 23,829 Shared based benefits5 Total 1,484,748 4,899,507 1,302,848 4,114,575 192,748 1,092,269 3,534 47,689 96,404 26,851 845,465 411,858 474,344 1,517,961 441,434 1,380,652 485,938 1,451,826 407,426 1,457,744 98,710 38,665 815,095 531,933 8,531 208,931 1,325,605 - - - - - 58,491 699,529 109,235 841,178 - 208,442 109,235 894,778 - 198,707 287 287 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) Short-term employee benefits Cash salary and fees Cash STI2 Non- monetary benefits3 Deferred STI4 Post- employment benefits Termination benefits Super- annuation Shared based benefits5 Total Long- term benefits Long service leave Former CEO C Lynch 2014 2013 - - - - - 144,951 178,652 555 504,275 5,490 Former Other Senior Executives - - - - - (62,121) - 6,103,6656 - 6,875,467 - - - 8,346 (341,435) 499,569 K Daley 2014 2013 M Kulper 2014 2013 E Mildwater 2014 2013 - 816,330 583,403 - - - - - - 53,262 (50,659) 13,725 2,912 300,6297 2,791 333,356 - 385,1687 1,608,259 1,067,296 362,264 15,482 120,168 10,997 - 485,161 - - - - - 1,525 (37,627) 13,725 - - - 28,977 1,441,431 3,046,615 - - - (15,434) (274,631) 172,719 1 The dates on which the Senior Executives who were promoted or appointed during FY2013 are the dates that those Senior Executives commenced being a KMP. Their remuneration for the period during which they were members of KMP is disclosed in the table only. 2 The amount represents the cash STI payment to the Senior Executive for FY2014, which will be paid in August 2014. Jennifer Aument and Tim Steinhilber also received a second and final payment in relation to the successful delivery of the 495 Express Lanes of $82,093 and $164,186 respectively (paid in August 2013). 3 Non-monetary benefits include Group insurance and expatriate allowances (where relevant). 4 A component of STI award is deferred into securities. In accordance with Accounting Standards, the deferred component will be recognised over the three year service period. The amount recognised in this table is the FY2014 accounting charge for unvested grants. 5 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 34 to the audited financial statements. 6 The value for share based benefits for C Lynch includes all unvested LTI awards. In accordance with Accounting Standard AASB 2, these have been accounted as an acceleration of vesting. The amount that would have been recognised for services received from Chris Lynch as CEO of the Group over the remainder of the vesting period has been included in the table above. These awards will continue on foot in accordance with the original terms, with the applicable measures for each grant to be tested at the end of the applicable original performance period. These LTI awards may or may not vest. Also included is a cash payment of $1,060,000 which was made to Chris Lynch in lieu of an LTI earned but not received for a six month period during his tenure in line with his contractual entitlement to receive an LTI award for every day employed by the Group. This payment was made in cash in August 2012. 7The value for Deferred STI and share based benefits for M Kulper includes all unvested awards. In accordance with Accounting Standard AASB 2, these have been accounted as an acceleration of vesting. The amount that would have been recognised for services received from M Kulper as President, North America of the Group over the remainder of the vesting period has been included in the table above. These awards will continue on foot in accordance with the original terms. The LTI awards may or may not vest. 288 288 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) H 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. Under these agreements, the CEO and other Senior Executives are eligible to participate in STI and LTI plans. Some other key aspects of the agreements in place for FY2014 are outlined below: CEO Other Senior Executives Period of notice to terminate (Executive) 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. I ADDITIONAL REMUNERATION INFORMATION Employee Security Plans The Group operated the following broad employee based security plans in FY2014. ShareLink Incentive Plan Under the ShareLink Incentive Plan, subject to Board approval, an allocation of Transurban securities 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 21 February 2014. Due to legal restrictions on the issue of securities to USA residents, eligible employees in the USA 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. Securities granted under the plan carry a three year holding lock from the grant date and can only be traded once the holding lock expires or when employment with the Group ceases, whichever is earlier. 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 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. 289 289 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) Dealing 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. Securities held by Senior Executives as at 30 June 2014 The number of securities held by members of KMP as at 30 June 2014 is provided below. Comparative data is shown for those Senior Executives who were members of KMP during both FY2014 and FY2013. Current Senior Executives Balance at start of year Changes during year Balance at end of year S Charlton 2014 2013 J Aument 2014 2013 W Ballantine 2014 2013 A Head 2014 2013 S Hogg 2014 2013 S Johnson 2014 2013 T Steinhilber 2014 2013 L Tobin 2014 2013 V Vassallo 2014 2013 10,000 – – – 3,988 2,8891 3,041 3,041 11,553 1,553 29,596 19,1291 – – – – 10,538 10,0181 Former Senior Executives M Kulper 2014 2013 1 Opening balance held prior to the Senior Executive becoming a member of KMP. 2 Balance removed on departure from the Group during FY2014. 3 Includes the FY2012 PAP awards which vested 30 June 2014. Refer section 4F. 80,000 80,000 290 290 124,622 10,000 134,622 10,000 – – 697 1,099 84,7193 – 129,4893 10,000 14,167 10,467 – – – – 510 520 (80,000)2 – – – 4,685 3,988 87,760 3,041 141,042 11,553 43,763 29,596 – – – – 11,048 10,538 – 80,000 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) Securities held by Non-executive Directors as at 30 June 2014 Current Non-executive Directors Balance at start of year Changes during year Balance at end of year L Maxsted 2014 2013 N Chatfield 2014 2013 R Edgar 2014 2013 S Mostyn 2014 2013 C O'Reilly 2014 2013 R Slater 2014 2013 I Smith 2014 2013 Former Non-executive Directors R Officer 2014 2013 1 Balance removed on resignation as a Director during the relevant year. 30,000 30,000 30,910 20,910 24,590 23,733 14,000 10,300 4,363 – – – 36,559 – 19,514 10,000 5,734 857 3,256 3,700 9,609 4,363 – – 66,559 30,000 50,424 30,910 30,324 24,590 17,256 14,000 13,972 4,363 – – 71,772 70,000 20,970 1,772 92,742 71,772 – 20,115 – (20,115)1 – – 291 291 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (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 2014, 20 per cent of the STI award was 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 275. STI is an ‘at risk’ component of remuneration – payments are determined based on the following three measures, and could result in zero payout if targets are not met. The maximum payment available to any Senior Executive is 150% of target. Proportional EBITDA The proportional EBITDA result for FY2014 was $934.1 million. Excluding the effect of 495 Express Lanes, this resulted in the payment of 113.7 per cent of STIs attributable to proportional EBITDA. The growth in EBITDA was driven by the completion of the Hills M2 Upgrade in August 2013 and continued cost and revenue recovery initiatives across all assets in the portfolio. Proportional net costs The proportional net costs result for the year ended 30 June 2014 was $182.6 million, an 11.8 per cent increase from the prior year result. This resulted in the payment of 150% of STIs attributable to proportional net costs. On an underlying basis, shown in the table below, net costs increased 7.5% from the prior year result. The increase includes the impact of project development and acquisitions work in the current financial year. Net costs as reported Prior year one-off items TTMS impact – both periods Safety FY14 182.6 - 4.2 FY13 % increase 163.4 11.8% 1.0 9.4 186.9 173.8 7.5% For the year ended 30 June 2014, the safety performance measure resulted in a 100 per cent STI outcome. The target was a lead indicator that required the completion of safety development action plans. The target was split with equal weighting between employee/contractor (5 per cent) and customer (5 per cent) safety targets. The Group achieved the completion of 76 per cent of the defined safety development action plans. 292 292 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) B GROUP PERFORMANCE AND LTI For the year ended 30 June 2014, LTIs were linked to relative TSR and FCF per security. Relative TSR Relative TSR for the year ended 30 June 2014 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. FCF per security The performance target for performance awards granted during the year ended 30 June 2014 was a range for compound growth in FCF per security of between 12 per cent and 15 per cent per annum over three years. It was 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 2015, the performance target range for compound growth in FCF per security per annum is between 10.0 per cent and 13.0 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 2010, Transurban’s distribution policy has been to align distributions with 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. Group Performance Measure Security price at year end Distribution paid per security Underlying proportional EBITDA - $m1 TSR performance2 TSR rank position3 2014 $7.39 35.0c 934.1 17% 2013 $6.76 31.0c 828.0 25% 33 / 934 14 / 315 12 / 896 2011 $5.23 27.0c 718.7 32% 2010 $4.24 24.0c 635.4 10% n/a n/a 2012 $5.69 29.5c 784.0 15% 35 / 86 6 / 86 19 / 867 29.8c 33.9 FCF per security performance - weighted average 1 In the current and prior year, LTIs were linked to relative TSR and FCF per security. In earlier years, LTIs were linked to relative TSR and proportional EBITDA. 2 The TSR performance is the total security holder return for that financial year 3 This is the TSR ranking position for the LTI that vests during the financial year 4 FY2011 PAP that vested 1 November 2013 5 FY2012 PAP that vested 30 June 2014 6 FY2010 PAP that vested November 2012 (testing as at 30 June 2012) 7 FY2009 PAP tested in three tranches 27.4c 30.1c 27.5c 293 293 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) 6 Non-executive director remuneration A REMUNERATION POLICY The diagram below sets out the key objectives of the Group’s Non-executive Director remuneration policy and how they are achieved 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 and workload expected, the Director’s experience and expertise, and market benchmark data provided by remuneration consultants Director remuneration consists of base (Director) fees and Committee fees. No element of Director remuneration is 'at risk' (i.e. 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 Annual General Meeting. No change to this amount is proposed for FY2015. The aggregate fee pool and the manner in which it is apportioned amongst Non-executive Directors are reviewed annually. The Remuneration and Human Resources Committee undertakes this review and makes recommendations to the Board. In conducting the review, the Committee considers market benchmark data from independent remuneration consultants. Non-executive Director fees for FY2014 Non-executive Director (base) fees have not increased since 2010. Current base fees and Committee fees per year are set out below: Board Audit and Risk Committee Nomination Committee Remuneration and Human Resources Committee Chair fee $ Member fee $ 455,000 40,000 10,000 30,000 170,000 20,000 10,000 20,000 The Chair of the Board does not receive any additional fees for Committee responsibilities. The Chair of each Committee only receives the Chair fee (and not a member fee). Non-executive Directors are permitted to be paid additional fees for special duties or exertions. No such fees were paid during FY2014. 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. 294 294 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) Retirement benefits Non-executive Directors are not entitled to any retirement benefits. 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 each year. No securities were issued to Non-executive Directors under the plan during FY2014. C REMUNERATION PAID TO NON-EXECUTIVE DIRECTORS Non-executive Director remuneration for FY2014 and FY2013 is set out below: Short-term benefits Fees Post-employment benefits Superannuation1 Current Non-executive Directors L Maxsted 2014 2013 N Chatfield 2014 2013 R Edgar 2014 2013 S Mostyn 2014 2013 C O'Reilly 2014 2013 R Slater 2014 2013 I Smith 2014 2013 Former Non-executive Directors R Officer (resigned 7 August 2012) 2014 2013 Total 2014 2013 437,925 438,716 222,825 223,625 212,825 211,119 183,570 183,608 183,570 181,229 197,023 194,070 155,973 155,967 - 18,832 1,593,711 1,607,166 17,774 16,470 17,774 16,470 17,774 16,470 16,980 16,470 16,980 16,247 - - 14,427 14,037 - 1,695 101,709 97,859 Total 455,699 455,186 240,599 240,095 230,599 227,589 200,550 200,078 200,550 197,476 197,023 194,070 170,400 170,004 - 20,527 1,695,420 1,705,025 1 Superannuation contributions made on behalf of Non-executive Directors to satisfy the Group’s obligations under applicable superannuation guarantee legislation. 295 295 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) D NON-EXECUTIVE DIRECTOR RELATED PARTY INFORMATION Rodney Slater is a partner in the public policy practice group of Squire Patton Boggs (US) LLP. Transurban used Squire Patton Boggs (US) LLP during the year ended 30 June 2014 for various lobbying activities in the USA. This relationship is based on normal commercial terms. US$180,144 was paid to Squire Patton Boggs (US) LLP during FY2014. Lindsay Maxsted is Chairman and 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. Neil Chatfield is Chairman and a Non-executive Director of Seek Limited. Seek provides employment advisory services to Transurban. This relationship is based on normal commercial terms. Neil Chatfield is also Chairman of, and Samantha 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. Christine O’Reilly is a Non-executive Director of Energy Australia. Energy Australia is one of Transurban’s electricity providers in NSW and Queensland. This relationship is based on normal commercial terms. 296 296 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (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. 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: Amounts received or due and receivable by PricewaterhouseCoopers Audit and review of financial reports Total remuneration for PricewaterhouseCoopers Total auditors remuneration 2014 $ 2013 $ 52,000 52,000 52,000 52,000 52,000 52,000 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 299. 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 0.1 million dollars, or in certain cases, to the nearest dollar. 297 297 2014 Transurban Annual Report Transurban International Limited Directors' report 30 June 2014 (continued) 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 5 August 2014 298 298 2014 Transurban Annual Report 299 2014 Transurban Annual ReportTransurban International Limited ABN 90 121 746 825 Annual report - 30 June 2014 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 301 302 303 304 305 306 356 357 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 23 727 Collins Street Docklands VIC 3008 The financial statements were authorised for issue by the Directors on 5 August 2014. The Directors have the power to amend and reissue the financial statements. 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 300 300 2014 Transurban Annual Report Transurban International Limited Consolidated income statement For the year ended 30 June 2014 Notes 4 5 6 10 7 Revenue Toll, fee and other road revenue Construction revenue Management, business development and other revenue Administration costs Road operating costs Business development costs Construction costs Profit before depreciation and amortisation, net finance costs, equity accounted investments and income tax Depreciation and amortisation expense k Finance costs Share of net profits / (losses) of equity accounted investments Loss before income tax Income tax benefit/(expense) Loss for the year Loss is attributable to: Ordinary equity holders of the Group Non-controlling interests Loss per share for loss attributable to the ordinary equity holders of the Group: Basic earnings per security Diluted earnings per security 31 31 2014 $M 3.8 37.2 37.9 78.9 (11.2) (22.9) (8.9) (33.0) (76.0) 2013 $M - 31.2 40.9 72.1 (9.0) (9.9) (19.5) (21.8) (60.2) 2.9 11.9 (4.0) (0.4) (126.5) (26.1) 93.8 (28.2) (33.8) 22.8 (11.0) 19.5 (30.5) (11.0) (42.8) (4.4) (47.2) (47.2) - (47.2) Cents Cents 1.3 1.3 (3.2) (3.2) The above consolidated income statement should be read in conjunction with the accompanying notes. 301 301 2014 Transurban Annual Report Transurban International Limited Consolidated statement of comprehensive income For the year ended 30 June 2014 Loss for the year Other comprehensive income Items that may be reclassified to profit or loss Changes in the fair value of cash flow hedges, net of tax Exchange differences on translation of foreign operations, net of tax Blank Other comprehensive income for the year, net of tax Total comprehensive income for the year Total comprehensive profit for the year is attributable to: Members of the Group Non-controlling interests 2014 $M (11.0) 61.0 (42.1) 18.9 7.9 38.4 (30.5) 7.9 2013 $M (47.2) 27.4 (26.0) 1.4 (45.8) (45.8) - (45.8) The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. 302 302 2014 Transurban Annual Report 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 Intangible assets Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables Provisions Other liabilities Total current liabilities Non-current liabilities Provisions Deferred tax liabilities Borrowings Derivative financial instruments Total non-current liabilities Total liabilities Net liabilities EQUITY Contributed equity Reserves Accumulated losses Non-controlling interests Total equity Transurban International Limited Consolidated balance sheet As at 30 June 2014 Notes 8 9 10 12 13 14 15 17 18 17 13 16 11 19 20 20 27 2014 $M 146.7 11.9 - 158.6 - 1.4 55.2 1,965.2 2,021.8 2,180.4 947.1 5.8 8.1 961.0 9.0 54.6 1,171.3 41.4 1,276.3 2,237.3 2013 $M 4.8 19.3 0.5 24.6 228.6 1.8 8.9 - 239.3 263.9 521.1 6.6 6.0 533.7 - - - - - 533.7 (56.9) (269.8) 276.3 (46.2) (394.7) 107.7 (56.9) 216.0 (71.6) (414.2) - (269.8) The above consolidated balance sheet should be read in conjunction with the accompanying notes. 303 303 2014 Transurban Annual Report Transurban International Limited Consolidated statement of changes in equity For the year ended 30 June 2014 Attributable to members of Transurban International Limited Notes Contributed equity $M Reserves $M Accumulated losses $M Non- controlling interests $M Total $M 205.1 (72.8) (367.0) (234.7) - - - - 1.4 1.4 (47.2) (47.2) - 1.4 (47.2) (45.8) 19 20 8.0 2.6 0.1 0.2 10.9 216.0 - - (0.2) - (0.2) (71.6) - - - - - 8.0 2.6 (0.1) 0.2 10.7 (414.2) (269.8) 216.0 (71.6) (414.2) (269.8) - - - - - - - - - - - Total equity $M (234.7) (47.2) 1.4 (45.8) 8.0 2.6 (0.1) 0.2 10.7 (269.8) (269.8) - - - 59.4 0.9 - - - 60.3 276.3 - 18.9 18.9 - - (0.4) 6.9 - 6.5 19.5 - 19.5 - - - - - - 19.5 18.9 38.4 59.4 0.9 (0.4) 6.9 - 66.8 (46.2) (394.7) (164.6) (30.5) (11.0) - (30.5) 18.9 7.9 - - - (6.9) 145.1 138.2 107.7 59.4 0.9 (0.4) - 145.1 205.0 (56.9) Balance at 1 July 2012 Comprehensive income Loss for the year Other comprehensive income Total comprehensive income Transactions with owners in their capacity as owners: Contributions of equity, net of transaction costs Distribution reinvestment plan Changes in value of share- based payment reserve Deferred Short Term Incentives securities issued Balance at 30 June 2013 Balance at 1 July 2013 Comprehensive income Profit for the year Other comprehensive income Total comprehensive income Transactions with owners in their capacity as owners: Contributions of equity, net of transaction costs Distribution reinvestment plan Changes in fair value of share- based payment reserve Transactions with NCI Equity contributions 19 19 20 20 Balance at 30 June 2014 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 304 304 2014 Transurban Annual Report 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 Interest paid Tax refunds Net cash (outflow) from operating activities Cash flows from investing activities Payments for acquisition of subsidiary, net of cash acquired Payment for investments in equity accounted investments Payments for intangible assets Net cash (outflow) from investing activities Cash flows from financing activities Loans from related parties Repayment of loans to related parties Proceeds from issue of shares Proceeds from borrowings Net cash inflow from financing activities Net increase/(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 year 8 Transurban International Limited Consolidated statement of cash flows For the year ended 30 June 2014 Notes 30 3 2014 $M 81.9 (77.3) (0.5) (10.1) 0.5 (5.5) (232.0) (38.5) (5.0) (275.5) 731.1 (339.5) - 19 32.4 424.0 143.0 4.8 (1.1) 146.7 2013 $M 58.1 (61.2) - (1.5) - (4.6) - (207.8) - (207.8) 216.5 (16.4) 8.0 - 208.1 (4.3) 9.1 - 4.8 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. 305 305 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 Contents of the notes to the consolidated financial statements Summary of significant accounting policies Segment information Business combinations Revenue Expenses Net finance costs Income tax expense Current assets - Cash and cash equivalents Current assets - Trade and other receivables 1 2 3 4 5 6 7 8 9 10 Equity accounted investments 11 Derivative financial instruments 12 Non-current assets - Property, plant and equipment 13 Deferred tax assets and liabilities 14 Non-current assets - Intangible assets 15 Current liabilities - Trade and other payables 16 Borrowings 17 Provisions 18 Current liabilities - Other current liabilities 19 Contributed equity 20 Reserves and accumulated losses 21 Dividends 22 Remuneration of auditors 23 Intra-group Guarantees 24 Commitments 25 Related party transactions 26 Subsidiaries 27 Non-controlling interests 28 Parent entity financial information 29 Events occurring after the reporting period 30 Reconciliation of profit after income tax to net cash inflow from operating activities 31 Earnings per share 32 Share-based payments 33 Key management personnel compensation 34 Critical accounting estimates and judgements 35 Financial risk management Page 307 322 325 327 328 328 328 329 329 329 332 333 334 335 336 336 337 339 339 341 342 342 342 343 344 345 345 346 347 347 348 349 352 352 353 306 306 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (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 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 $802.4 million as at 30 June 2014. This reflects a number of specific factors primarily related to an intercompany loan payable of $351.0 million to another entity within the Transurban Group and term debt of $400.0 maturing within 12 months. As at 30 June 2014, the Transurban Group comprises Transurban Holdings Limited, Transurban Holding Trust and Transurban International Limited, traded and quoted on the Australian Stock Exchange as one triple stapled security. 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. The financial report has been prepared on a going concern basis. Compliance with International Financial Reporting Standards (IFRS) The consolidated financial statements of Transurban International Limited also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board (IASB). New and amended standards adopted by the group The Group has amended some of its accounting policies as the result of new or revised accounting standards which became effective for the annual reporting period commencing on 1 July 2013. The affected policies and standards are: (i) AASB 2012-2 Amendments to Australian Accounting Standards - Disclosures - Offsetting Financial Assets and Financial Liabilities. AASB 2012-2 resulted in amendments being made to AASB 7 Financial Instruments - Disclosure which requires additional disclosures when entities offset financial assets and liabilities within their financial statements. As a result of this amendment to AASB 7 the Group has expanded its disclosures about the offsetting of financial assets and liabilities (see Note 11). 307 307 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) 1 Summary of significant accounting policies (continued) (a) Basis of preparation (continued) Compliance with International Financial Reporting Standards (IFRS) (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, AASB 128 Investments in Associates and Joint Ventures, AASB 2011-7 Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements Standards and AASB 2012-10 Amendments to Australian Accounting Standards - Transition Guidance and Other Amendments. 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. In accordance with the transitional provisions of AASB 10, the Group reassessed the control conclusions for its investments at 1 July 2013. Based on this reassessment no changes have been made regarding our assessment of control over any entities where the Group has an equity interest. 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. The Group has re-evaluated its involvement in its joint arrangements at 1 July 2013 and has re-classified its investments from jointly controlled entities to joint ventures. Notwithstanding the reclassification, these investments continue to be accounted for using the equity method and accordingly there has been no impact on the recognised assets, liabilities and comprehensive income of the Group. 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. As a result of IFRS 12, the Group has expanded its disclosures about its interests in subsidiaries (see Note 26) and equity accounted investees (see Note 10). Amendments to AASB 128 provide clarification that an entity continues to apply the equity method and does not re-measure 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 has determined that these amendments have no impact on the financial statements of the Group. 308 308 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) 1 Summary of significant accounting policies (continued) (a) Basis of preparation (continued) Compliance with International Financial Reporting Standards (IFRS) (continued) (iii) AASB 13 Fair Value Measurement and AASB 2011-8 Amendments to Australian Accounting Standards arising from AASB 13 AASB 13 establishes a single framework for measuring fair value and making disclosures about fair value measurements, when such measurements are required or permitted by other AASBs. In particular, it unifies the definition of fair value as the price at which an orderly transaction to sell an asset or to transfer a liability would take place between market participants at the measurement date. It also replaces and expands the disclosure requirements about fair value measurements in other AASBs, including AASB 7 Financial Instruments: Disclosures. As a result, the Group has included additional disclosures in this regard (see Note 35). In accordance with the transitional provisions of AASB 13, the Group has applied the new fair value measurement guidance prospectively, and has not provided any comparative information for new disclosures. Notwithstanding the above, the change has not had a material impact on the measurement of the Group’s assets and liabilities. (iv) AASB 2011-4 Amendments to Australian Accounting Standards to Remove Individual Key Management Personnel Disclosure Requirements The AASB has 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. This amendment has reduced the disclosures required in the notes to the financial statements however it has not affected any of the amounts recognised in the financial statements. Early adoption of standards The Group has elected to early adopt AASB 2013-3 Amendments to AASB 136 - Recoverable Amount Disclosures for Non-Financial Assets, which amends the disclosure requirements in AASB 136 Impairment of Assets. The amendments include the requirement to disclose additional information about the fair value measurement when the recoverable amount of impaired assets is based on fair value less costs of disposal, and may result in additional disclosures if the group recognises an impairment loss or the reversal of an impairment loss during the year. The application date for the Group would have been 1 July 2014, but the Group has early adopted as of 1 July 2013. The adoption of this new standard has not had a significant impact on the disclosure within the financial statements. 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 statements. Amounts in the financial statements have been rounded off in accordance with that Class Order to the nearest 0.1 million dollars, or in certain cases, to the nearest thousand `dollars. (b) Principles of consolidation Subsidiaries Subsidiaries are all those entities which the Group controls. The Group controls an entity when the group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to govern the financial and operating policies of the entity. 309 309 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) 1 Summary of significant accounting policies (continued) (b) Principles of consolidation (continued) Subsidiaries (continued) Subsidiaries are fully consolidated from the date on which control is transferred to Group. They are de- consolidated from the date that control ceases. The acquisition method of accounting is used to account for business combinations by Group (refer to note 1(h)). Associates and joint ventures Associates are all entities over which 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 10). Investments in associates and joint ventures are accounted for using the equity method of accounting, after initially being recognised at cost. Under AASB 11 Joint Arrangements investments in joint arrangements are classified as either joint operations or joint ventures. The classification depends on the contractual rights and obligations of each investor, rather than the legal structure of the joint arrangement. The Group has joint ventures and does not have any joint operations. 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. (c) Segment reporting Financial results of the 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). This includes a proportional income statement per operating segment and consolidated financial statements for the Group. (d) Foreign currency translation 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. 310 310 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) 1 Summary of significant accounting policies (continued) (d) Foreign currency translation (continued) 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:  Toll charges and related fees are recognised when the charge is incurred by the user.  Business development revenue is recognised when earned, and to the extent of costs incurred and that these costs will be recovered.  Interest income is recognised using the effective interest rate method.  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 construction 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. 311 311 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) 1 Summary of significant accounting policies (continued) (f) Income tax (continued) 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 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 Group as lessee are classified as operating leases (note 24). 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. (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. 312 312 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) 1 Summary of significant accounting policies (continued) (h) 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 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. 313 313 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (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 9) 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 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. 314 314 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (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) 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. 315 315 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (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 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 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). 316 316 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (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. 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. (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 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. Borrowings are classified as current liabilities unless Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting period. 317 317 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (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 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. 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 in payables. An expense for non-accumulating sick leave is recognised when the leave is taken and measured at the rates paid or payable. 318 318 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) 1 Summary of significant accounting policies (continued) (s) Employee benefits (continued) 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. 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. Equity-based compensation benefits 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. 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 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. 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. 319 319 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) 1 Summary of significant accounting policies (continued) (t) Contributed equity Stapled securities 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 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. 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. (u) Parent entity financial information The financial information for the parent entity, Transurban International Limited, disclosed in note 28 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. (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 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. (w) Net asset deficiency As at 30 June 2014 the Group has a net asset deficiency represented by net liabilities of $56.9 million. This deficiency reflects a number of specific factors primarily related to an intercompany loan payable with another entity within the Transurban Group. (x) New accounting standards and interpretations Certain new accounting standards and interpretations have been published that are not mandatory for 30 June 2014 reporting periods. The Group's assessment of the impact of these new standards and interpretations is set out below. 320 320 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) 1 Summary of significant accounting policies (continued) (x) 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 2015) AASB 9 Financial Instruments addresses the classification, measurement and derecognition of financial assets and financial liabilities. The standard is not applicable until 1 January 2015 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. (ii) IFRS 15 Revenue from Contracts with Customers (effective 1 January 2017) IFRS 15 establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. IFRS 15 supersedes: (a) IAS 11 Construction Contracts (b) IAS 18 Revenue (c) IFRIC 13 Customer Loyalty Programmes (d) IFRIC 15 Agreements for the Construction of Real Estate (e) IFRIC 18 Transfers of Assets from Customers (f) SIC-31 Revenue-Barter Transactions Involving Advertising Services The core principle of IFRS 15 is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity recognises revenue in accordance with that core principle by applying the following steps: (a) Step 1: Identify the contract(s) with a customer (b) Step 2: Identify the performance obligations in the contract (c) Step 3: Determine the transaction price (d) Step 4: Allocate the transaction price to the performance obligations in the contract (e) Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation Although a formal assessment has not been completed, the impact of the application of the new standard is not expected to be material. 321 321 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) 2 Segment information Segment information - Proportional Income Statement The segment information provided to the Executive Committee is presented on a proportional basis. 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, tax, depreciation and amortisation 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 Group operates in one business sector only, being the development, operation and maintenance of toll roads, therefore It has been determined that the segment information provided to the CEO and Executive Committee shall be defined by geographical regions, being the USA. The table below lists the assets included in each operating segment, together with the proportional ownership interests held by the Group for both the current and previous financial year: Segment Assets USA Transurban DRIVe 2014 75% 2013 75% Proportional ownership % Pocahontas 1 July 2013 to 14 May 2014 - 75% 75% 15 May to 30 June 2014 - nil% 495 Express Lanes 1 July 2013 to 11 May 2014 - 67.5% 67.5% 12 May to 4 June 2014 - 77.5% 5 June to 30 June 2014 - 94% 95 Express Lanes 1 July 2013 to 11 April 2014 - 67.5% 67.5% 12 April to 30 June 2014 - 77.5% 322 322 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) 2 Segment information (continued) Segment information - Proportional Income Statement (continued) 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 2014 and 30 June 2013 is as follows: 30 June 2014 $M USA Pocahontas 895 495 Express Lanes Other Transurban DRIVe Total Transurban DRIVe Corporate Total Toll revenue from external customers Fee and other revenue Total revenue Proportional EBITDA Interest revenue Interest expense Depreciation and amortisation Gain on transfer Proportional profit (loss) before tax Income tax benefit (expense) Proportional net profit (loss) 11.4 - 11.4 6.7 - (14.9) - 249.7 241.5 (173.9) 67.6 19.2 4.8 24.0 2.9 0.1 (119.9) (15.6) - (132.5) - (132.5) - - - (4.5) - (5.1) - - (9.6) 59.3 49.7 (79.0) 108.5 (49.7) 30.6 4.8 35.4 5.1 0.1 (139.9) (15.6) 249.7 99.4 (114.6) (15.2) (20.2) 30 June 2013 $M Pocahontas 895 75.0% USA 495 Express Lanes 67.5% Other Transurban DRIVe 75.0% Total Transurban DRIVe Toll revenue from external customers Fee and other revenue Total revenue Proportional EBITDA x Interest revenue Interest expense Depreciation and amortisation Foreign exchange Proportional profit (loss) before tax Income tax benefit (expense) Proportional net profit (loss) 11.3 0.1 11.4 6.9 - (14.2) (3.5) - (10.8) 8.0 (2.8) 4.8 1.3 6.1 (5.5) 0.7 (27.4) (8.3) - (40.4) - (40.4) - - - (4.4) - (2.0) - - (6.4) 21.5 15.1 16.1 1.4 17.5 (3.0) 0.7 (43.6) (11.8) - (57.7) 29.5 (28.2) - 7.0 7.0 1.9 - (46.3) (0.4) - (44.8) (11.5) (56.3) 49.4 30.6 11.8 42.4 7.0 0.1 (186.2) (16.0) 249.7 54.6 (126.1) (71.5) 29.2 Corporate Total 100.0% - 20.1 20.1 11.9 - (26.0) (0.4) (0.1) (14.6) (4.4) (19.0) 16.1 21.5 37.6 8.9 0.7 (69.6) (12.2) (0.1) (72.3) 25.1 (47.2) 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. 323 323 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) 2 Segment information (continued) Segment information - Proportional Income Statement (continued) 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 of non-controlled assets Less: Revenue of equity accounted assets Add: Business Development revenue (offset against Business Development costs for proportional results) Construction Revenue Other Total revenue (note 4) 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 495 Express Lanes Less: Proportional EBITDA of DRIVe Statutory (loss) profit before depreciation and amortisation, net finance costs, equity accounted investments and tax Statutory net finance costs Statutory depreciation and amortisation Share of associates profit (loss) Income tax expense Loss for the year 324 324 2014 $M 42.4 0.2 (31.6) 34.9 33.0 - 78.9 2014 $M 0.1 (0.1) - 2014 $M 6.9 (6.7) (1.4) 4.1 2.9 (126.5) (4.0) 93.8 22.8 (11.0) 2013 $M 37.6 - (17.5) 30.0 21.8 0.2 72.1 2013 $M 0.7 (0.7) - 2013 $M 8.9 (6.8) 5.4 4.4 11.9 (26.1) (0.4) (28.2) (4.4) (47.2) 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) 3 Business combinations DRIVe, 495 Express Lanes and 95 Express Lanes Transurban DRIVe Holdings LLC (DRIVe) has historically been reported by the Group as an equity accounted investment. Transurban owns 75 per cent of DRIVe, but although the ownership represents greater than half of the voting rights of DRIVe, it was determined that Transurban did not have power to govern its key activities and it was therefore accounted for as a joint venture. At 1 July 2013 DRIVe owned 100 per cent of Pocahontas 895, 90 per cent of 495 Express Lanes and 90 per cent of 95 Express Lanes, all located in Virginia, USA. During the year several transactions have occurred impacting the investments held by DRIVe, resulting in a reassessment of control over the assets and DRIVe. (i) On 11 April 2014 Transurban purchased a 10% interest directly in each of 495 Express Lanes and 95 Express Lanes from Fluor Enterprises LLC (ii) On 14 May 2014 Pocahontas was transferred to lenders (refer note 10) (iii) On 4 June 2014 Transurban contributed additional equity into Capital Beltway Express LLC, giving it an additional 66% direct interest in 495 Express Lanes Transurban now holds 10 per cent of 95 Express Lanes and 76 per cent of 495 Express Lanes directly, and 67.5 per cent of 95 Express Lanes and 18 per cent of 495 Express Lanes through DRIVe, resulting in effective interests in 95 Express Lanes of 77.5 per cent and 495 Express Lanes of 94 per cent. The direct holding of 76% gives Transurban power over all relevant activities of 495 Express Lanes. When 95 Express Lanes is complete, 495 Express Lanes and 95 Express Lanes will be directly connected and will be operated as if they were a single road. As a result, control of 495 Express Lanes has also given Transurban the power to direct the most significant activities of 95 Express Lanes. As DRIVe is primarily a holding entity for 95 Express Lanes and 495 Express Lanes, its relevant activities are identical to those of 95 Express Lanes and 495 Express Lanes. Therefore Transurban assumed control of DRIVe on 4 June 2014 and accounted for the acquisition of DRIVe, including 95 Express Lanes and 495 Express Lanes as a business combination on that date. (i) Purchase consideration Cash paid Fair value of DRIVe at 4 June 2014 Contingent consideration Total purchase consideration (ii) Purchase consideration – cash outflow Cash consideration Less: cash acquired Outflow of cash – investing activities 325 $M 345 358 - 703 $M 345 (113) 232 325 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) 3 Business combinations (continued) (iii) Acquisition related costs The Group did not incur any costs directly in the purchase of equity in either 495 Express Lanes or 95 Express Lanes during the year. (iv) Identifiable assets acquired and liabilities assumed 495 Express Lanes Cash and cash equivalents Trade and other receivables Intangible assets Other assets Trade and other payables Derivative financial instruments Borrowings Deferred tax liabilities Provisions Net identifiable assets Less: non-controlling interest share of net assets Net identifiable assets acquired DRIVe Cash and cash equivalents Intangible assets Held to maturity investments Deferred tax assets Other assets Trade and other payables Provisions Borrowings Deferred tax liabilities Net identifiable assets Less: non-controlling interest share of net assets Net identifiable assets acquired Fair Value $M 57 1 1,290 3 (25) (41) (828) (40) (10) 407 (98) 309 Fair Value $M 69 667 98 80 12 (56) (2) (346) (9) 513 (119) 394 At 4 June 2014 the assets and liabilities of the 495 Express Lanes and DRIVe / 95 Express Lanes were measured at fair value at the acquisition date with fair values having been determined on a provisional basis. No goodwill has been recognised on the fair value of assets and liabilities acquired. 326 326 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) 3 Business combinations (continued) (v) Revenue and profit contribution From the date of acquisition to 30 June 2014, revenue of $4 million and a loss after taxation of $79.8 million was included in the Consolidated Income Statement with regards to DRIVe, 495 Express Lanes and 95 Express Lanes. The loss included $73.1 million of break costs incurred on early termination of swaps included in finance costs. If the acquisition had occurred on 1 July 2013, consolidated revenue and loss before tax for the year ended 30 June 2014 would have been $33.4 million and $166.5 million respectively. These values exclude the impact of Pocahontas 895 and change in investment values within DRIVe that do not relate to the ongoing operations of the business. (vi) Accounting policy for non-controlling interests The Group recognises non-controlling interests in an acquired entity either at fair value or at the non-controlling interests’ proportionate share of the acquired entity’s net identifiable assets. This decision is made on an acquisition by acquisition basis. For the non-controlling interest in DRIVe, 495 Express Lanes and 95 Express Lanes, the Group elected to recognise the non-controlling interests in its proportionate share of the acquired net identifiable assets. 4 Revenue Toll revenue Fee revenue Other road revenue Total toll, fee and other road revenue Management and business development revenue Construction revenue Total business development and other revenue Total revenue Notes 4(a) 4(a) 4(b) 4(c) 4(d) 2014 $M 3.1 0.9 (0.2) 3.8 37.9 37.2 75.1 78.9 2013 $M - - - - 40.9 31.2 72.1 72.1 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. Management and Business development revenue (c) Management and business development revenue relates to the provision of management and development services to third parties. Construction revenue (d) Construction revenue is recognised during the construction phase of an intangible asset, and the development of assets for sale to third parties. 327 327 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) 5 Expenses Loss before income tax includes the following specific expenses: Employee benefits expense Rental expense 6 Net finance costs Finance costs Interest and finance charges paid/payable Foreign exchange gains/(losses) Total finance costs Net finance costs 7 Income tax expense Income tax expense Current tax Deferred tax (Over)/under provided in prior years Deferred income tax (benefit) /expense included in income tax benefit comprises: (Increase)/decrease in deferred tax assets (note 13) Increase in deferred tax liabilities (note 13) Numerical reconciliation of income tax benefit to prima facie tax payable Loss before income tax expense Tax at the Australian tax rate of 30.0% (2013 - 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 Sundry items (Over)/under provision in prior years Income tax (benefit)/ expense 328 328 2014 $M 12.3 0.5 2014 $M (127.1) 0.6 (126.5) (126.5) 2014 $M (33.5) 5.2 5.5 (22.8) (27.9) 33.1 5.2 2014 $M (33.8) (10.1) 10.3 15.3 (41.0) (2.8) 5.5 (22.8) 2013 $M 15.3 1.0 2013 $M (26.0) (0.1) (26.1) (26.1) 2013 $M 0.6 3.7 0.1 4.4 3.6 0.1 3.7 2013 $M (42.8) (12.8) 7.3 0.9 8.5 0.4 0.1 4.4 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) 56. 2014 $M 86.9 59.8 146.7 2013 $M 4.8 - 4.8 8 Current assets - Cash and cash equivalents Cash at bank and in hand Unavailable cash All cash balances are interest bearing. Funds not for general use The amount shown in Cash at Bank includes $59.8 million not available for general use at 30 June 2014 (2013: $nil). This comprises amounts required to be held under funding reserves which are restricted from general use. 9 Current assets - Trade and other receivables Trade receivables Loans to related parties Other receivables Prepayments 2014 $M 0.9 7.6 3.0 0.4 11.9 2013 $M - 5.9 13.4 - 19.3 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. 10 Equity accounted investments Transurban DRIVe Holdings LLC Ownership interest Carrying amount 2014 % 75.0 2013 % 75.0 - 75.0 2014 $M - - 2013 $M 228.6 228.6 On 14 May 2014, Pocahontas 895 was transferred to lenders. The non-cash profit realised on the transfer was A$103.1 million, inclusive of Transurban’s 75 per cent share of the profit after tax (US$128.1 million), unrecognised losses from operations (A$104.2 million), and unrecognised profits on the 2007 transfer of Pocahontas into the DRIVe vehicle (A$69.4 million). Tax losses in the Pocahontas Group were sufficient to offset the tax payable on the gain made on disposal. Until 4 June 2014 the Group equity accounted for its investment in DRIVe. On 4 June 2014 it was determined that the Group had control of DRIVe and from this date equity accounting ceased and DRIVe was consolidated by the Group (refer note 3). Post the cessation of equity accounting for DRIVe the Group’s investment in DRIVe was reduced to $nil. In addition, on consolidation of DRIVe as of 4 June 2014 (as disclosed in note 3) DRIVe’s cashflow hedge reserve and foreign currency translation reserve were required to be reversed to the Income Statement, resulting in a $15 million charge. Both of these items have been included within Share of net profits of equity accounted investments in the Income Statement. 329 329 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) 10 Equity accounted investments (continued) The amounts recognised in the income statement are as follows: Joint venture As at 30 June Total 2014 $M 93.8 93.8 2013 $M (28.2) (28.2) Summarised financial information of equity accounted investments Set out below is the summarised financial information for the Group’s investments accounted for using the equity method. Summarised balance sheet Cash and cash equivalents Other current assets Non-current assets Held for sale assets Current financial liabilities Other current liabilitiesv Non-current financial liabilities Other non-current liabilities Held for sale liabilities Net assets Summarised income statement Revenue Depreciation and amortisation Other expenses Gain on transfer of Pocahontas Interest expense Income tax expense Profit / (loss) Other comprehensive income Total profit and total comprehensive income Proportional profit and total comprehensive income Losses not recognised OCI not recognised Reserves transferred to the income statement Group's recognised share of profit and total comprehensive income Dividends received Transurban DRIVe 75% Total 2014 $M 2013 $M 2014 $M 2013 $M - - - - - - - - - - 356.5 0.9 1,917.8 369.5 - (78.4) (1,433.8) (328.4) (544.2) 259.9 - - - - - - - - - - 356.5 0.9 1,917.8 369.5 - (78.4) (1,433.8) (328.4) (544.2) 259.9 42.2 (8.8) (32.9) 326.2 (69.2) (103.7) 153.8 37.7 191.5 143.9 (34.4) - (15.7) 93.8 - 23.3 (15.7) (27.1) - (56.7) 39.4 (36.8) (0.8) (37.6) (28.2) - - - (28.2) - 42.2 (8.8) (32.9) 326.2 (69.2) (103.7) 153.8 37.7 191.5 143.9 (34.4) - (15.7) 93.8 - 23.3 (15.7) (27.1) - (56.7) 39.4 (36.8) (0.8) (37.6) (28.2) - - - (28.2) - 330 330 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) 10 Equity accounted investments (continued) Reconciliation of summarised financial information Opening net assets on 1 July Investments in subsidiary Profit / (loss) for the period Other comprehensive income Foreign exchange differences Dividends paid Closing net assets Proportional interest in associates Goodwill Losses not recognised Transfer of reserves to the income statement on gain of control OCI not recognised Elimination of unrealized profit on intragroup transfer Cessation of equity accounting on gain of control Carrying value Space Share of expenditure commitments Capital commitments Operating commitments Contingent liabilities Share of contingent liabilities incurred jointly with other investors Space Contingent liabilities of associates and joint ventures As at the reporting date there are no contingent liabilities. Transurban DRIVe 75% Total 2014 $M 259.9 52.9 153.8 36.7 (25.6) - 477.7 358.3 - - - - - (358.3) - 2013 $M (41.3) 274.7 (36.8) 35.6 27.7 - 259.9 194.2 - 34.4 - - - - 228.6 2014 $M 259.9 52.9 153.8 36.7 (25.6) - 477.7 358.3 - - - - - (358.3) - 2013 $M (41.3) 274.7 (36.8) 35.6 27.7 - 259.9 194.2 - 34.4 - - - - 228.6 - - - - - 311.0 229.1 540.1 - - - - - - - - - - 311.0 229.1 540.1 - - - 331 331 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) 11 Derivative financial instruments Non-current liabilities Interest rate swap contracts - cash flow hedges Total derivative financial instrument liabilities 2014 $M 41.4 41.4 41.4 2013 $M - - - 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 35). The instruments used by the Group are as follows: 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 0.3 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 100 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 4.8 per cent. Offsetting financial assets and liabilities The Group has not settled any financial assets or financial liabilities on a net basis during the financial year. Currently there is no right or basis to present any financial assets or financial liabilities on a net basis, and as such no financial assets or financial liabilities have been presented on a net basis in the Group's balance sheet at the end of the financial year. 332 332 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) 12 Non-current assets - Property, plant and equipment At 1 July 2012 Cost Accumulated depreciation Net book amount Year ended 30 June 2013 Opening net book amount Additions Disposals Depreciation charge Movement in foreign exchange rates Closing net book amount At 30 June 2013 Cost Accumulated depreciation Net book amount Year ended 30 June 2014 Opening net book amount Additions Disposals Depreciation charge Movement in foreign exchange rates Closing net book amount At 30 June 2014 Cost Accumulated depreciation Net book amount 333 Equipment, fittings, operating systems $M 5.6 (3.6) 2.0 2.0 - - (0.4) 0.2 1.8 6.2 (4.4) 1.8 1.8 - - (0.1) (0.3) 1.4 5.2 (3.8) 1.4 333 2014 Transurban Annual Report 13 Deferred tax assets and liabilities Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) Assets Liabilities Net 2014 $M 2013 $M 2014 $M 2013 $M 2014 $M 2013 $M The balance comprises temporary difference attributable to: Accrued expenses Provisions Current and prior year losses Unearned income Fixed Assets/Intangibles Cash flow hedges Unrealised foreign exchange Tax assets/(liabilities) Set off of tax 7.2 6.1 77.0 3.1 0.5 14.5 0.3 108.7 (53.5) 1.6 2.5 2.6 2.4 - - - 9.1 (0.2) - - - - (108.1) - - (108.1) 53.5 - - - - (0.2) - - (0.2) 0.2 7.2 6.1 77.0 3.1 (107.6) 14.5 0.3 0.6 - Net tax assets/(liabilities) 55.2 8.9 (54.6) - 0.6 Movements: Opening balance at 1 July Credited /(charged) to the income statement Credited /(charged) to equity Acquired on consolidation of DRIVe Foreign exchange movements 9.1 27.9 6.0 80.0 (14.3) 12.6 (3.6) - - 0.1 (0.2) (33.1) (26.7) (48.8) 0.7 - (0.2) - - - Closing balance 30 June 108.7 9.1 (108.1) (0.2) Deferred tax assets/(liabilities) to be recovered after more than 12 months 108.7 108.7 9.1 9.1 (108.1) (108.1) (0.2) (0.2) 8.9 (5.2) (20.7) 31.2 (13.6) 0.6 0.6 0.6 1.6 2.5 2.6 2.4 (0.2) - - 8.9 - 8.9 12.6 (3.8) - - 0.1 8.9 8.9 8.9 334 334 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) 495 Express Lanes $M Assets under construction $M Total $M - - - - - 1,290.4 - (1.7) 1,288.7 1,290.4 (1.7) 1,288.7 - - - - - - - - - 667.0 9.7 - 676.7 - 1,957.4 9.7 (1.7) 1,965.4 676.7 - 1,967.1 (1.7) 676.7 1,965.4 14 Non-current assets - Intangible assets At 1 July 2012 Net book amount Year ended 30 June 2013 Closing net book amount At 30 June 2013 Net book amount Year ended 30 June 2013 Closing net book amount Year ended 30 June 2014 Opening net book amount Intangible assets acquired on acquisition Additions Amortisation charge Closing net book amount At 30 June 2014 Gross value Accumulated amortisation Net book amount Concession assets Service Concession Arrangements have been accounted for in accordance with AASB Interpretation 12 and therefore the concession assets have been classified as Intangible Assets. Capital Beltway Transurban has the right to toll the Express Lanes on the Capital Beltway until December 2087. At the end of the concession period, the concession asset is returned to the Virginia State Government (USA). The Concession Deed requires Transurban to maintain and operate the Express Lanes to specified conditions. Tolling for the 495 Express Lanes is variable, allowing the operator to adjust pricing to manage congestion and provide road users with predictable travel times. Assets under construction The I95 Express Lanes which are being constructed under a Concession Arrangement and are due to be completed in late 2014. Impairment testing of other intangible assets Impairment testing The Group tests whether other intangible assets have suffered any impairments, in accordance with the accounting policy stated in note 1(i). When required, 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. 335 335 2014 Transurban Annual Report 15 Current liabilities - Trade and other payables Trade payables and accruals Loans from related parties (note 25) 16 Borrowings Non-current Capital Markets debt TIFIA Total borrowings Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) 2014 $M 60.9 886.2 947.1 2014 $M 493.4 677.9 1,171.3 2013 $M 4.5 516.6 521.1 2013 $M - - - Notes 16(a) 16(b) 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) Capital markets debt The Group’s US entities have issued Private Activity Bonds (PABs) comprising the following: • • $238.5 million of US dollar denominated ($224.7 million USD) PABs raised by Capital Beltway Express LLC (CBE). $256.8 million of US dollar denominated ($242.0 million USD) PABs raised by 95 Express Lanes LLC (95 Express). The Capital Beltway Express LLC Private Activity Bonds (CBE PABs) were issued in June 2008 and mature in December 2047. They are marketed weekly on the SIFMA index at a variable interest rate. The Group has entered into interest rate hedging to provide protection from movements in the variable interest rate. The CBE PABs are supported by bank-issued irrevocable direct-pay letters of credit (maturing June 2016). Agreements are in place for the letters of credit issuers to purchase the bonds should they fail to market. The collateral against the bonds is a first ranking pledge of toll revenues generated from the operation of the 495 Express Lanes. The Virginia Small Business Financing Authority Senior Lien Revenue Bonds (95 Express Lanes LLC Project), Series 2012 PABs were issued in July 2012 at a fixed interest rate of 5 per cent. The term bonds mature 1 July 2034 ($71.7 million USD) and 1 January 2040 ($170.3 million USD). The collateral against the bonds is a first ranking pledge of toll revenues generated from the operation of the 95 Express Lanes. (b) TIFIA The TIFIA program provides US federal credit assistance to transport infrastructure projects in the form of secured loans from the United Stated Department of Transport. These facilities comprise the following: • • $589.2 million of US dollar denominated (face value: $686.2 million USD) TIFIA funding raised by Capital Beltway Express LLC (CBE). This debt has been recorded at fair value (refer to note 3). $88.7 million of US dollar denominated (face value: $198.0 million USD) TIFIA funding raised by 95 Express Lanes LLC (95 Express). This debt has been recorded at fair value (refer to note 3). 336 336 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) 16 Borrowings (continued) The CBE TIFIA facility limit is $589.0 million USD (plus accreting interest), of which $589.0 million USD is drawn and $97.2 million USD of interest has accreted against the facility. Interest accrues at 4.45 per cent and is initially accretive until five years post substantial completion of the project construction. Substantial completion was achieved on 16 November 2012 per the Amended and Restated Comprehensive Agreement. The facility matures on 31 December 2047 and is second ranking in priority to the CBE PABs. The 95 Express TIFIA facility limit is $300 million USD (excluding capitalized interest). At 30 June 2014, $195.9 million USD is drawn and $2.1 million USD of interest has accreted against the facility. Interest accrues at 2.77 per cent and is accretive until five years post substantial completion of the project construction. The 95 Express TIFIA facility matures on 1 January 2048 and is second ranking in priority to the 95 Express PABs. Covenants The Group's debt has the following Interest Coverage Ratio (ICR) covenants:  495 Express Lanes - DSCR greater than 1.15 times *  95 Express Lanes – non applicable * Senior lenders provided a waiver with respect to the DSCR ratio requirement for 30 June 2014, 31 December 2014 and 30 June 2015. 17 Provisions Current Employee benefits Onerous lease provision Maintenance provision Non-current Maintenance provision Notes 17(a) 17(b) 17(c) Notes 17(c) 2014 $M 3.5 1.5 0.8 5.8 2014 $M 9.0 9.0 2013 $M 2.3 4.3 - 6.6 2013 $M - - 337 337 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) Movements in provisions Movements in each class of provision during the financial year are set out below: Current provisions Consolidated - 2014 Carrying amount at start of year Amounts provided during the year Amounts paid/utilised during the year Acquired provision Movements in foreign exchange rates Carrying amount at the end of year Non-current provisions Consolidated - 2014 Carrying amount at start of year Amounts provided during the year Amounts paid/utilised during the year Acquired provision Movements in foreign exchange rates Carrying amount at the end of year (a) Employee benefits Restructuring and onerous lease provision $M Maintenance provision $M 4.3 0.4 (3.2) - - 1.5 - - - 0.8 - 0.8 Maintenance provision $M - - - 9.0 - 9.0 Employee benefits relate to the provision for annual leave, bonuses and long service leave. (b) Restructuring and onerous lease provision An onerous lease is recognised when the Group has lease commitments on property no longer used. A restructuring provision is recognised when the Group has a detailed formal plan for restructuring. (c) 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. On consolidation of Capital Beltway the Group has recognised its maintenance provision. 338 338 2014 Transurban Annual Report 18 Current liabilities - Other current liabilities Unearned income (a) Unearned income Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) Notes 18(a) 2014 $M 8.1 8.1 2013 $M 6.0 6.0 Unearned income represents amounts received in advance and will be recognised when the income is earned. 19 Contributed equity Share capital Fully paid ordinary securities 2014 Number M 1,896.4 1,896.4 Details Opening balance at 1 July 2012 Distribution Reinvestment Plan Placement to Unisuper Limited Deferred Short Term Incentives New shares issued on vesting of LTI Purchase of Performance Awards Plan shares Closing balance at 30 June 2013 Opening balance at 1 July 2013 Distribution Reinvestment Plan Deferred Short Term Incentives New shares issued on vesting of LTI Institutional share offer (May 2014) Share placement (May 2014) Retail share offer (June 2014) Closing balance at 30 June 2014 2013 Number M 1,481.6 1,481.6 Notes 2014 $M 276.3 276.3 Number of securities M 2013 $M 216.0 216.0 $M 1,458.3 205.1 15(a) 15(b) 15(c) 15(a) 15(c) 15(d) 15(d) 15(d) 5.8 16.2 0.5 0.8 - 1,481.6 1,481.6 9.5 0.2 0.5 264.4 57.6 82.6 1,896.4 2.6 8.0 0.2 0.2 (0.1) 216.0 216.0 0.9 - - 38.6 8.8 12.0 276.3 (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. 339 339 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) (b) Unisuper Limited Placement On 7 January 2013 Transurban issued 16,260,163 ordinary stapled securities under a placement to Unisuper Limited (as trustee of the superannuation fund known as UniSuper). (c) Deferred Short Term Incentives Mandatory STI deferral of a portion of the overall STI award, as detailed in the Remuneration Report, was introduced for the CEO and other Senior Executives in the year ended 30 June 2012. For Australian Senior Executives deferral is into securities. (d) Institutional and retail entitlement offer and placement On 1 May 2014, the Group successfully completed the fully underwritten institutional component of its accelerated renounceable 10 for 43 pro rata entitlement offer at an offer price of $6.75, raising approximately $1.79 billion. The retail component of the offer was successfully completed on 29 May 2014 and raised gross proceeds of approximately $557 million. As part of the entitlement offer, the Group also completed a placement of securities to its Queensland Motorways consortium bid partners AustralianSuper and Tawreed, raising gross proceeds of approximately $400 million. The total gross proceeds from the entitlement offer and placement were approximately $2.74 billion, and were used to fund the Group’s equity contribution for the Queensland Motorways acquisition, which completed on 2 July 2014. Ordinary shares The number of securities on issue is 1,896,384,073 (2013: 1,481,594,818). 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. There have been no breaches of the covenant. 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. 340 340 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) 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 Movement in equity accounted investment's reserve (note 10) Transfer to net profit Previously unrecognised equity accounted investment’s reserve Balance 30 June Share-based payments Balance 1 July Employee share plan expense Transfer vesting portion of LTI to contributed equity Deferred Short Term Incentive issue Balance 30 June Foreign currency translation Balance 1 July Currency translation differences arising during the year Deferred tax Transfer to net profit Balance 30 June Transactions with non-controlling interests Balance 1 July Transfer of values on acquisition Balance 30 June Accumulated losses Movements in (accumulated losses) were as follows: Profit 1 July Net (loss) for the year Balance 30 June Nature and purpose of other reserves 2014 $M - 0.1 (44.0) (2.3) (46.2) 2014 $M (77.0) - 40.0 37.0 - - 0.5 0.2 (0.1) (0.5) 0.1 14.1 (35.8) (0.3) (22.0) (44.0) (9.2) 6.9 (2.3) 2014 $M (414.2) 19.5 (394.7) 2013 $M (77.0) 0.5 14.1 (9.2) (71.6) 2013 $M (104.3) - 27.3 - - (77.0) 0.8 0.5 (0.6) (0.2) 0.5 40.1 (26.0) - - 14.1 (9.2) - (9.2) 2013 $M (367.0) (47.2) (414.2) 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. 341 341 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) 20 Reserves and accumulated losses (continued) Nature and purpose of other reserves (continued) Share-based payments (continued) 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). 21 Dividends No dividends were paid or declared during the year. 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 services Audit and review of financial reports Total remuneration for PricewaterhouseCoopers 23 Intra-group Guarantees 2014 $ 52,000 52,000 2013 $ 52,000 52,000 As at 30 June 2014, 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. 342 342 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) 24 Commitments Capital commitments Capital expenditure contracted for at the reporting date but not recognised as liabilities is as follows: Property, plant and equipment and intangibles Payable: Within one year Later than one year but not later than five years Later than five years Operating commitments Operating commitments Within one year Later that 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 343 2014 $M 113.7 - - 113.7 2014 $M 21.7 16.5 38.2 2014 $M 0.3 1.2 0.3 1.8 2013 $M - - - - 2013 $M 20.0 13.8 33.8 2013 $M 1.0 2.8 0.4 4.2 343 2014 Transurban Annual Report 25 Related party transactions Transactions with related parties The following transactions occurred with related parties: Revenue from services provided to related parties 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 Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) 2014 $ 2013 $ 37,935,013 37,935,013 40,898,575 40,898,575 2014 $M 5.9 27.7 (26.3) 0.3 7.6 516.6 1,776.3 (1,450.7) 44.0 886.2 2013 $M 4.4 28.6 (27.6) 0.5 5.9 245.3 279.0 (55.1) 47.4 516.6 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. 344 344 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) 26 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 DRIVe Management LLC Transurban (USA) Holdings Inc. Transurban (USA) Inc. Transurban International Holdings Pty Limited Transurban (USA) Operations Inc. Transurban Express Lanes LLC Transurban DRIVe Holdings LLC* Transurban DRIVe USA LLC* DRIVe USA Investments LLC* Transurban (895) US Holdings LLC Transurban (895) LLC Transurban (895) Finance Inc. Capital Beltway Express LLC* 95 Express Lanes LLC* *These entities were equity-accounted for in prior financial years. 27 Non-controlling interests USA USA USA Australia USA USA USA USA USA USA USA USA USA USA Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary 2014 % 100 100 100 100 100 100 75 75 75 75 75 75 94 77.5 2013 % 100 100 100 100 100 - 75 75 75 - - - 67.5 67.5 Set out below is summarised financial information for each subsidiary that has non-controlling interests that are material to the Group. The amounts disclosed for each subsidiary are before inter-company eliminations. Transurban DRIVe Capital Beltway Express LLC 95 Express Lanes 25% 6% 22.5% Summarised balance sheet Current assets Non-current assets Current liabilities Non-current liabilities Net assets Carrying amount of NCI 2014 $M 15.4 84.9 (57.6) (7.8) 34.9 (8.7) 2013 $M - - - - - - 2014 $M 57.7 1,289.0 (11.3) (878.1) 457.3 (27.4) 2013 $M - - - - - - 2014 $M 60.7 689.1 (43.7) (388.1) 318.0 (71.6) 2013 $M - - - - - - Transurban DRIVe Capital Beltway Express LLC 95 Express Lanes 25% 2014 2013 Summarised statement of comprehensive income Revenue Profit for the period Other comprehensive income Total comprehensive income Profit allocated to NCI OCI allocated to NCI $M - (102.8) - (102.8) 25.7 - $M - - - - - - 6% 2014 $M 4.0 (79.8) - (79.8) 4.8 - 345 22.5% 2013 2014 2013 $M - - - - - - $M - - - - - - $M - - - - - - 345 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) 27 Non-controlling interests (continued) Transurban DRIVe Capital Beltway Express LLC 95 Express Lanes from flows flows from operating Summarised balance sheet Cash activities Cash activities Cash activities Net increases in cash and cash equivalents financing investing flows from 25% 2014 $M 1.2 - - 1.2 2013 $M - - - - 6% 22.5% 2014 $M (4.4) - (5.7) (10.1) 2013 $M - - - - 2014 $M - (33.5) 31.8 (1.7) 28 Parent entity financial information Summary financial information The individual financial statements for the parent entity show the following aggregate amounts: 2013 $M - - - - 2013 $M 216.4 - 216.4 (0.3) - (0.3) 2014 $M 272.5 - 272.5 - - - (817.5) 272.5 (650.1) 216.1 276.3 (4.3) 0.5 272.5 216.0 - 0.1 216.1 Balance sheet Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets Shareholders' equity Contributed equity Reserves Accumulated losses 346 346 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) 28 Parent entity financial information (continued) Summary financial information (continued) Profit for the year xx Exchange differences on translation of US operations, net of tax xx Total comprehensive income Contingent liabilities and guarantees of the parent entity The parent entity has no contingent liabilities. 0.3 (3.9) (3.6) 0.9 19.7 20.6 29 Events occurring after the reporting period At the date of this report the Directors are not aware of any circumstances that have arisen since 30 June 2014 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. 30 Reconciliation of profit after income tax to net cash inflow from operating activities Loss for the year Depreciation and amortisation Share of net (profit) losses of equity accounted investments Change in operating assets and liabilities: (Increase) in prepayments Decrease (Increase) in trade and other receivables (Decrease) increase in related party operating loans (Decrease) in trade payables and accruals Increase in provisions Increase (Decrease) in unearned income Movement in current taxes and deferred taxes Net cash inflow from operating activities 347 2014 $M (11.0) 4.0 (93.8) (0.4) 13.4 (39.2) (23.7) 17.9 2.1 125.2 (5.5) 2013 $M (47.2) 0.4 28.2 - (7.9) 24.6 (1.4) 1.8 (6.7) 3.6 (4.6) 347 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) 31 Earnings per share Basic earnings per share Earnings / (loss) per share attributable to the ordinary equity holders of the company Diluted earnings per share Earnings / (loss) per share attributable to the ordinary equity holders of the company Reconciliation of earnings / (losses) used in calculating earnings per share Basic and diluted earnings per share Loss for the year Loss attributable to non-controlling interests Weighted average number of shares used as denominator 2014 Cents 1.3 3.6 2014 Cents 1.3 1.3 2014 $M (11.0) 30.5 19.5 2013 Cents (3.2) (3.2) 2013 Cents (3.2) (3.2) 2013 $M (47.2) - (47.2) 2014 Number 2013 Number Weighted average number of ordinary and potential ordinary shares used as the denominator in calculating earnings per share 1,539,476,092 1,470,495,508 Earnings per share Basic earnings per share Basic earnings per share is calculated by dividing the earnings / (loss) attributable to shareholders 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 earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings 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. 348 348 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) 32 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. Grant date Vesting / Expiry date Fair value at grant date ($) Balance at start of the year Granted during the year Vested during the year Forfeited during the year Balance at end of the year TSR EBITDA FCF Number Number Number Number Number 2014 1 Nov 2010 1 Nov 2013 23 Dec 2010 1 Nov 2013 26 Sep 2011 30 Jun 2014 11 Nov 2011 30 Jun 2014 15 Aug 2012 30 Jun 2015* 19 Oct 2012 30 Jun 2015* 14 Aug 2013 30 Jun 2016* 30 Jun 2016* 1 Nov 2013 3.23 3.33 3.37 3.27 2.72 2.95 3.24 3.13 4.62 4.97 N/A N/A N/A N/A N/A N/A N/A N/A 4.63 4.81 4.99 5.43 6.07 6.21 Total BLANK 922,476 684,683 420,872 715,024 480,102 448,400 - - - - - - - - 728,380 382,292 (789,978) (592,320) (267,256) (511,886) - - - - (132,498) (92,363) (153,616) (203,138) (113,537) - - - - - - - 366,565 448,400 728,380 382,292 3,671,557 1,110,672 (2,161,440) (695,152) 1,925,637 * vesting / expiry date refers to the ending date of the performance period. Actual vesting / expiry date is determined within 30 days of the release of Transurban Group's financial results for that performance period. Grant date Vesting / Expiry date Fair value at grant date ($) Balance at start of the year Granted during the year Vested during the year Forfeited during the year Balance at end of the year TSR EBITDA FCF Number Number Number Number Number 2013 11 Dec 2009 1 Nov 2010 23 Dec 2010 26 Sep 2011 11 Nov 2011 15 Aug 2012 19 Oct 2012 Total 11 Dec 2012 1 Nov 2013 1 Nov 2013 30 Jun 2014 30 Jun 2014 30 Jun 2015 30 Jun 2015 3.33 3.23 3.33 3.37 3.27 2.72 2.95 4.97 4.62 4.97 N/A N/A N/A N/A N/A N/A N/A 4.63 4.81 4.99 5.43 1,625,994 1,201,077 684,683 661,932 715,024 - - - (1,624,766) - - - - - - - 747,201 448,400 - (1,228) (278,601) - (241,060) - (267,099) - - 922,476 684,683 420,872 715,024 480,102 448,400 4,888,710 1,195,601 (1,624,766) (787,988) 3,671,557 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. 349 349 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) 32 Share-based payments (continued) Assessed fair value (continued) The Free Cash Flow component of the Performance Awards has only a non-market based vesting condition which is not considered in the valuation. The valuation of these awards takes into account the security price at grant date, and the expected dividend yield which represents the dividends over the life of the Awards that the rights holder does not receive. A discounted cash flow model is used to perform this valuation. The Group is currently transitioning to a face value approach (discounted for distributions) for the FCF component. The transition is over 3 years and all things being equal there will be a decrease in the number of awards recipients receive until the new methodology is achieved. This transition will be completed for grants made during FY2016. Performance Awards Plan - CEO Sign On Award Plan Scott Charlton received a one-off grant of equity as a sign-on award in recognition of the incentives forfeited with his former employer by joining Transurban. The awards were awarded at no cost to Scott and will vest, subject to his continued employment with Transurban as described in his employment contract, in three equal tranches on the first, second and third anniversaries of his employment date. Upon vesting, the awards will automatically exercise and settle in securities. No dividends or distributions on securities are payable prior to vesting. Grant date 2014 14 Sep 2012 14 Sep 2012 14 Sep 2012 Total Grant date 2013 14 Sep 2012 14 Sep 2012 14 Sep 2012 Total x x Vesting / Expiry date Fair value at grant date Balance at start of the year Granted during the year Vested during the year Forfeited during the year Balance at end of the year Number Number Number Number Number 16 Jul 2013 16 Jul 2014 16 Jul 2015 $5.71 $5.71 $5.71 78,752 78,752 78,752 236,256 - - - - (78,752) - - (78,752) - - - - - 78,752 78,752 157,504 Vesting / Expiry date Fair value at grant date ($) Balance at start of the year Granted during the year Vested during the year Forfeited during the year Balance at end of the year Number Number Number Number Number 16 Jul 2013 16 Jul 2014 16 Jul 2015 5.71 5.71 5.71 - - - - 78,752 78,752 78,752 236,256 - - - - - - - - 78,752 78,752 78,752 236,256 Short Term Deferred Incentive Plan For the 2014 financial year, the CEO and other Senior Executives had a target STI opportunity of 30 per cent of their total remuneration package. Mandatory STI deferral of 50 per cent of the overall STI award now applies for all grants to the CEO and other Senior Executives. STI payouts can vary between zero (if targets are not met) and 150 per cent (for exceptional outperformance). The deferral period is two years. For Australian Senior Executives, deferral is into securities. Due to legal restrictions on the issue of securities to USA residents, the USA resident Senior Executives receive deferred cash awards. STI deferral grants are made in the form of awards. Each award is an entitlement to receive a fully paid security, or an equivalent cash payment, on terms and conditions determined by the Board. This 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). 350 350 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) 32 Share-based payments (continued) Short Term Deferred Incentive Plan (continued) Vesting / Expiry date Fair value at grant date Balance at start of the year Granted during the year Vested during the year Forfeited during the year Balance at end of the year Number Number Number Number Number 1 Jul 2014 1 Jul 2015 $5.68 $6.81 642,388 - - 443,736 642,388 443,736 - - - (79,668) - 562,720 443,736 (79,668) 1,006,456 Vesting / Expiry date Fair value at grant date Balance at start of the year Granted during the year Vested during the year Forfeited during the year Balance at end of the year Number Number Number Number Number 1 Jul 2014 $5.68 - - 642,388 642,388 - - - - 642,388 642,388 Grant date 2014 15 Aug 2012 15 Aug 2013 Total Grant date 2013 15 Aug 2012 Total Fair Value x x The fair value at grant dates in both the deferred STI plan and the CEO sign-on awards plan have been determined in accordance with AASB 2 by using a volume weighted average price (VWAP) over a specified period of time. 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 were eligible to participate in the Investment Tax Exempt Plan and the Investment Tax Deferred Plan for the year ended 30 June 2014. Under the plans, Transurban provides participants with a matching component toward the acquisition of the stapled securities. For the period 1 July 2013 to 30 June 2014, the cost of company matches was $139,918 (2013: $132,162) for the Investment Tax Exempt Plan and $314,667 (2013: $450,374) 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 2014, each participant was allocated 100 stapled securities at a value of $6.94 per security. Stapled Securities provided under the Plan were acquired on the open market. Eligible US based participants received an equivalent cash award. Shares purchased on the market under the plan and provided to participating employees Expenses arising from share-based payments 2014 Number 2013 Number 50,800 45,900 Total expenses arising from share-based payment transactions recognised during the period as part of employee benefit expense was $0.3 million (2013: $0.5 million) 351 351 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) 33 Key management personnel compensation The remuneration amounts below represent the entire amounts paid by the Transurban Group. Short-term employee benefits Post-employment benefits Long-term benefits Share-based payments Deferred STIs Termination benefits 2014 $ 11,056,992 257,966 73,043 3,645,461 1,620,545 333,356 2013 $ 10,755,270 232,743 25,335 9,208,279 1,128,897 - 16,987,363 21,350,524 Detailed remuneration disclosures are made in the Directors’ report. The relevant information can be found in the remuneration report in the Directors' report. 34 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). 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. As disclosed in Note 14, 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. Assessment of control The Group considered that, up to 4 June 2014, it jointly controlled (and therefore equity accounted) Transurban DRIVe Holdings LLC (“DRIVe”) even though it owned 75% of the equity, as at least 80% of the membership interests were required to pass key decisions relating to operating and financing of the entity. 352 352 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) 34 Critical accounting estimates and judgements (continued) (continued) Assessment of control (continued) As disclosed in Note 3, as of 4 June 2014, following the acquisition of Capital Beltway (and its subsequent recapitalisation), as well as the purchase of Fluor’s 10 per cent equity interest in both Capital Beltway and 95 Express Lanes, the Group re-assessed its control over DRIVe. Due to the operations of the Capital Beltway and the 95 Express Lanes (which DRIVe already had a direct ownership interest in) being closely linked, it was determined that the acquisition of Capital Beltway, along with the purchase of Fluor’s 10 per cent interest in both Capital Beltway and the 95 Express Lanes, gave the Group control over DRIVe and the 95 Express Lanes. 35 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 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: Cash and cash equivalents Receivables Payables Net exposure Exposure to other foreign exchange movements is not material. 2014 AUD$M 2013 AUD$M 0.3 1.0 (2.7) (1.4) - 0.4 (4.9) (4.5) 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 $68,000 lower (2013: $217,000 lower) or $82,000 higher (2013: $261,000 higher), as a result of foreign exchange gains/losses on translation of Australian dollar denominated financial instruments as detailed in the above table. 353 353 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) 35 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 intercompany borrowings and funds on deposit. As at the reporting period, the Group had the following variable rate exposures. Cash and cash equivalents Borrowings Floating rate borrowings Net exposure to cash flow interest rate risk Weighted average interest rate % 0.1% 0.3% 0.1% 2014 Balance $M (146.7) 238.5 (238.5) (146.7) Weighted average interest rate % -% -% -% 2013 Balance $M (4.8) - - (4.8) Sensitivity At 30 June 2014, 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 $895,000 lower / higher (2013: $30,000 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. 354 354 2014 Transurban Annual Report Transurban International Limited Notes to the consolidated financial statements 30 June 2014 (continued) 35 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 At 30 June 2014 Non-derivatives Non-interest bearing Variable rate Fixed rate Total non- derivatives Derivatives Net settled (interest rate swaps) Total derivatives 1 year or less $M Over 1 to 2 years $M Over 2 to 3 years $M Over 3 to 4 years $M Over 4 to 5 years $M Over 5 years $M Total contractual cash flows $M Carrying amount (assets)/ liabilities $M 62.8 885.5 947.5 1,895.8 - 3.2 13.4 16.6 - 3.3 13.7 17.0 - 3.3 13.8 - 3.3 54.9 - 414.3 3,462.4 62.8 1,312.9 4,505.7 62.8 238.5 1,817.1 17.1 58.2 3,876.7 5,881.4 2,118.4 8.3 8.3 7.5 7.5 5.9 5.9 4.7 4.7 3.9 3.9 22.6 22.6 52.9 52.9 41.4 41.4 There is no liquidity risk exposure to the Group in the current or prior periods other than as shown above. 355 355 2014 Transurban Annual Report Transurban International Limited Directors' declaration 30 June 2014 In the Directors' opinion: (a) the financial statements and notes set out on pages 300 to 355 in accordance with the Corporations Act 2001, including: (i) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements, and (ii) giving a true and fair view of the Group's financial position as at 30 June 2014 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 5 August 2014 356 356 2014 Transurban Annual Report 357 2014 Transurban Annual Report267 to 296 of the director’s report for the 358 2014 Transurban Annual ReportSecurity holder information Security holder information The security holder information set out below was applicable as at 15 August 2014. 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 67,063. 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 80.14 per cent. The distribution of holders was as follows: Security grouping 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 - 999,999,999 Rounding Total Stapled securities % of issued stapled securities Total holders 20,500 31,432 8,958 5,904 269 8,101,538 80,769,851 63,391,601 127,032,179 1,626,664,728 67,063 1,905,959,897 There were 3,557 holders of less than a marketable parcel of stapled securities. There were 1,905,959,897 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 BNP PARIBAS NOMS PTY LTD CITICORP NOMINEES PTY LIMITED AUSTRALIAN FOUNDATION INVESTMENT COMPANY LIMITED UBS WEALTH MANAGEMENT AUSTRALIA NOMINEES PTY LTD AMP LIFE LIMITED RBC INVESTOR SERVICES AUSTRALIA NOMINEES PTY LIMITED HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED ARGO INVESTMENTS LIMITED BNP PARIBAS NOMINEES PTY LTD UBS NOMINEES PTY LTD RBC INVESTOR SERVICES AUSTRALIA NOMINEES PTY LIMITED AUSTRALIAN UNITED INVESTMENT COMPANY LIMITED BOND STREET CUSTODIANS LIMITED MILTON CORPORATION LIMITED CS FOURTH NOMINEES PTY LTD DIVERSIFIED UNITED INVESTMENT LIMITED Total Number of stapled securities held 518,617,575 416,766,790 303,634,254 100,226,148 52,557,090 39,392,509 18,335,264 14,920,571 12,879,580 10,271,459 6,919,715 5,481,463 5,149,357 4,062,773 3,977,158 3,500,000 2,849,444 2,743,081 2,654,811 2,572,727 1,527,511,769 80.14 Substantial holders Substantial security holders as at 15 August 2014 were as follows: Name UNISUPER COMMONWEALTH BANK OF AUSTRALIA Number of stapled securities held 180,235,466 121,869,397 % of issued stapled securities 9.92 6.42 359 0.43 4.24 3.33 6.66 85.35 -0.01 100.00 % of issued stapled securities 27.21 21.87 15.93 5.26 2.76 2.07 0.96 0.78 0.68 0.54 0.36 0.29 0.27 0.21 0.21 0.18 0.15 0.14 0.14 0.13 2014 Transurban Annual ReportThis page left blank intentionally Enquiries 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 Ltd GPO Box 2975 Melbourne, Victoria 3001 Australia Phone (Australia ) 1300 555 159 (Overseas) +61 3 9415 4062 AUSTRALIA MELBOURNE (HEAD OFFICE) Level 23 Tower One, Collins Square 727 Collins Street Docklands Victoria 3008 SYDNEY Level 9 1 Chifley Square Sydney New South Wales 2000 BRISBANE Brisbane Technology Park 7 Brandl Street Eight Mile Plains Queensland 4113 MAILING ADDRESS Locked Bag 28 South Melbourne Victoria 3205 Phone +61 3 8656 8900 Fax +61 3 8656 8585 UNITED STATES WASHINGTON DC AREA 6440 General Green Way Alexandria VA 22312 USA Phone +1 (571) 419 6100 Email corporate@transurban.com 2 0 1 4 T r a n s u r b a n A n n u a l R e p o r t transurban.com 

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