AE Portfolio Conservative Holding Transurban Group (ASX: TCL, OTC: TRAUF) suffered a rather rough road in the early days of its US expansion, undertaken via its interest in the DRIVe joint venture with Australia-based specialty infrastructure investment firm CP2.

In 2012 Transurban wrote off its AUD138 million investment in the Pocahontas 895 toll road near Richmond, Virginia, as hoped-for development along the route fell victim to the Global Financial Crisis/Great Recession.

And traffic on the 495 Express Lanes near Washington, DC, which opened in November 2012, was initially much lower than expected. A third project in the US, the 95 Express Lanes, also near the Capital Beltway region, is currently under construction.

But the demonstrated resilience of Transurban’s overall portfolio, the importance of its roads to local transportation networks in Sydney and Melbourne and the relative stability of the Australian economy support revenue, cash flow and dividend growth for what remains a solid, defensive investment.

And though the DRIVe portfolio currently makes up a very small part of Transurban’s proportional earnings, a strengthening economy in the Capital Beltway region is translating to accelerating traffic and toll revenue growth on the 495 Express Lanes.

A solid foundation in Australia coupled with improving prospects in the US make for a good defense and opportunistic offense.

Traffic volume is the key driver of Transurban’s results. Road expansion work and somewhat slower economic growth in Australia impacted volume during fiscal 2013. But completion of expansion and upgrade projects and an improving economy Down Under are well reflected in fiscal 2014 numbers:

Transurban’s concession agreements allow it to increase tolls at a rate equivalent to inflation, in some cases at a higher rate if the Australian Consumer Price Index is below a certain level.

Management expertise comes into play amid robust traffic growth, which inevitably creates higher congestion and slower traffic, decreasing the value of using toll roads versus competing transportation choices. The difficulty is raising tolls at a level that doesn’t lead to traffic declines, as drivers look for less expensive alternatives.

Transurban has so far effectively managed this potential problem through road expansion, although this strategy will eventually reach a limit as traffic corridors are fully utilized.

Road operations and maintenance is conventional, low-risk work undertaken by experienced contractors. Transurban has successfully completed several large projects, in Australia and the US, in recent years, under fixed-price, fixed-time contracts.

Agreements for expansion projects have provided for a level of cost recovery through higher tolls or extended concession periods.

Transurban has a proven track record of refinancing its debt well in advance of maturity. It’s also expanded its lender base across banks. Lengthy concession periods for Transurban’s roads–expiration dates range from 2026 to 2087–also facilitate balance-sheet management, as does its high level of interest-rate hedging on its debt portfolio.

Fiscal 2014 fourth-quarter statutory toll revenue increased by 13.1 percent compared to the prior corresponding period to AUD234.1 million. Proportional toll revenue–which management believes is the most accurate reflection of the portfolio’s performance–increased by 11.8 percent AUD286.7 million.

Fiscal 2014 statutory toll revenue was up 13.1 percent to AUD906.5 million. Proportional toll revenue for the 12 months ended June 30, 2014, was up 12.6 percent to AUD1.117 billion.

Transurban’s Sydney network continued to deliver strong traffic growth during the quarter, driven principally by traffic growth in the northwest corridor of the orbital network resulting from the M2 upgrade, which was completed in August 2013.

Average traffic growth across Westlink M7, Hills M2 and Lane Cove Tunnel was 10.3 percent for the quarter.

Revenue growth for the 495 Express Lanes was outstanding, reaching a new daily high of USD161,945 on May 29, 2014. Average daily revenue during the quarter grew 100.3 percent compared to the prior corresponding period.

Transurban increased its ownership interest in the 495 Express Lanes to 94 percent during the period after it completed a capital restructure of the project and acquired Fluor Corp’s (NYSE: FLR) 10 percent stake.

Management declared a final distribution for fiscal 2014 of AUD0.18 per share, up from AUD0.152908 a year ago and in line with management’s guidance for a full-year payout of AUD0.35.

Transurban has guided to a fiscal 2015 distribution of AUD0.39, which represents year-over-growth of 11.4 percent. The fiscal 2015 distribution will be 100 percent covered by free cash flow.

Transurban recently acquired Queensland Motorways for AUD7.057 billion. Queensland Motorways has a high-quality, established portfolio of assets–with all the characteristics of the toll road operator’s existing networks in Sydney and Melbourne and the attractive demographics of the Queensland market–that fits well with Transurban’s long-term strategy and will help it support and grow distributions over time.

The consortium includes Transurban, with an equity interest of 62.5 percent; pension fund AustralianSuper, with a 25 percent interest; and Tawreed, a wholly-owned subsidiary of the Abu Dhabi Investment Authority, with a 12.5 percent interest. Transurban will operate the network on behalf of the owners.

The acquisition closed on July 2, 2014.

On June 26 Transurban closed the acquisition of the Cross City Tunnel assets and motorway concession in Sydney.

Transurban now controls most of the major toll-road networks on the east coast of Australia.

Transurban has been studying Queensland Motorways for a number of years, deeming it the last significant piece of network it needed to secure its future as the leading toll-road operator in its home market. That’s the major reason it paid what many analysts consider a steep premium for the assets, basically to prevent Queensland Motorways from falling into the hands of a competitor.

Management is confident it can make operational enhancements that have enabled it to enjoy EBITDA (earnings before interest, taxation, depreciation and amortization) margins of more than 90 percent with its Melbourne toll road CityLink and more than 80 percent in the Sydney market.

Its in-house team of traffic modelers has been studying the Brisbane toll network for months, working out existing and potential traffic flows, where enhancements could occur and costs could be cut.

Transurban also reached an in-principle agreement with the Victorian government for a major, coordinated upgrade to the western section of CityLink, the Bolte Bridge-West Gate Freeway interchange and the Tullamarine Freeway.  The proposed project–the “CityLink-Tulla widening”–will address congestion and improve safety at critical points in the CityLink western corridor, with the additional capacity relieving pressure on surrounding non-arterial routes.

It will also set the corridor up for future traffic needs in growth areas in Melbourne’s west and north and will enhance the integration of the East West Link into CityLink.

The project is still subject to Victoria and Transurban reaching final agreement on terms and documentation, which is expected by late 2014.

Under the terms of the in-principle agreement Transurban will finance the total cost of the upgrade works. As a part of the project the CityLink concession will be extended by one year and truck tolls will be increased to become consistent with national pricing for trucks on other motorway networks. The CityLink toll price increases will remain at a minimum of 4.5 percent per annum for an additional year post-July 2015.

Construction of the M5 West widening project remains on schedule and on budget. The project is currently 80 percent complete, with full lane availability expected in October 2014.

The traffic impacts associated with construction remain in line with expectations.

Australian cash flow, supported by contracted toll-rate increases and relatively stable traffic-volume growth rates, especially for its integral central business district orbital roads in Melbourne and Sydney, provides a solid foundation.

The 495 Express Lanes and the 95 Express Lanes projects in the US will drive upside.

All told, Transurban is a solid defensive stock with meaningful growth characteristics, suitable for investors across the risk-tolerance spectrum.

Transurban, which is yielding 4.5 percent at current levels, is a buy under USD7.50 on the Australian Securities Exchange (ASX) using the symbol TCL or on the US over-the-counter (OTC) market using the symbol TRAUF.

Transurban’s fiscal year runs from Jul. 1 to Jun. 30. The company reports full financial and operating results twice a year; it typically posts first-half results in early February, with full fiscal year numbers out in early August.

Transurban also reports traffic and revenue figures for its toll roads on a quarterly basis.

Interim dividends are usually declared in early December, with payment made in the second week of February. Final dividends are usually declared in late May or early June, with payment made in mid-August.

Transurban declared a final dividend in respect of fiscal 2014 of AUD0.18 on May 23, 2014.

This dividend will be paid Aug. 14, 2014, to shareholders of record on Jun. 30, 2014. Shares traded ex-dividend on this dividend as of June 26.

The most recent interim dividend of AUD0.17 per share was declared Dec. 3, 2013. It was paid Feb. 14, 2014, to shareholders of record as of Dec. 31, 2013. Shares traded “ex-dividend” on this declaration as of Dec. 23, 2013.

Dividends paid by Transurban are “qualified” for US tax purposes. Based on the “fiscal cliff” compromise reached in Washington, DC, in early January 2013 dividends will be taxed at Bush-era rates of 5 percent to 15 percent for investors’ first USD450,000 a year of income for couples and USD400,000 for single filers. Above that the maximum tax rate is 20 percent.

The Australian government withholds 5 percent to 15 percent, based on the US-Australia tax treaty on double taxation. The two countries have not taken the step of eliminating withholding from dividends paid in respect of shares held in a US IRA, as have the US and Canada.

Among the 16 analysts who cover the stock nine rate it a “buy” according to Bloomberg’s standardization of brokerage house recommendation terminology, while four rate it a “hold.” Three brokerages that cover Transurban rate the stock a “sell.”

The “best consensus” 12-month target price among the 11 analysts that provide such a number is AUD7.79, with a high of AUD8.80 and a low of AUD6.

Including a current annualized dividend rate of AUD0.35 per share, the 12-month total return based on Transurban’s July 16 closing price on the ASX of AUD7.74 and analysts’ consensus price target is 5.2 percent.