AE Portfolio Conservative Holding Transurban Group (ASX: TCL, OTC: TRAUF) boosted its fiscal 2013 interim distribution by 6.9 percent this month.

It’s the seventh successive payout increase (including interim and final distributions) since the company retrenched under new management during the first half of fiscal 2009, and it’s further validation of a new strategy that’s seen the Melbourne-based toll road developer reduce debt, add assets and build a foundation for long-term growth.

The board, “consistent with the expectation of continuing free cash flow growth,” also confirmed previous guidance that Transurban’s distributions for fiscal 2013 will total AUD0.31, with at least 95 percent cash coverage. That’s 5.1 percent higher than the fiscal 2012 total of AUD0.295, which in turn was 9.3 percent higher than what was paid for fiscal 2011.

CEO Scott Charlton took over for Chris Lynch in July 2012. Mr. Lynch was responsible for righting a ship that was listing under its debt burden, transforming it into a leaner machine with a strong balance sheet, a healthy growth pipeline and a commitment to controlling costs and making disciplined investments.

Mr. Charlton has been “hands on” during his brief tenure, making site visits to Transurban’s Australian roads and also visiting its two key US projects before signing off on the financial closings in support of these investments. His vision for the company is consistent with the trajectory established by Mr. Lynch.

Specifically, Mr. Charlton is focused on continuing Transurban’s emerging track record of dividend growth and adding value to the existing portfolio by extending management contracts for existing roads and investing in new developments that are “synergistic” and satisfy the company’s standards of being needed right now and are supported by favorable demographics.

Notably, the new CEO’s analysis suggests that within three to four years Transurban’s existing portfolio will generate sufficient cash flow not only to continue growing distributions but to reduce indebtedness to a level such “that capital management options would need to be explored.”

Mr. Charlton noted that a dividend growth rate of 8 percent to 10 percent is “realistic” based on underlying cash flows, and Transurban will still be able to invest in projects There’s significant value embedded in the company’s portfolio, including opportunities to widen roads and add lanes and ramps as well as to leverage technology to improve traffic flow.

During the first quarter of fiscal 2013 and in subsequent weeks Transurban delivered on this promise.

Subsequent to the end of the quarter Transurban announced that the 495 Express Lanes opened to tolled traffic on Nov. 17, 2012, on budget and ahead of time. The 495 Express Lanes is 90 percent owned by Transurban DRIVe; Fluor Corp (NYSE: FLR) owns the other 10 percent.

Due to its agreements with the Virginia Department of Transportation (VDOT) 495 Express Lanes won’t contribute to free cash flow until 2016.

The project involved the construction of a 14-mile stretch of electronically tolled express lanes on the I-495 Capital Beltway. It includes a HOV (high occupancy vehicles) lane and express lanes in both directions. The Express Lanes section forms part of the 64-mile ring-road around Washington, DC.

The fixed-price, USD1.9 billion construction project included the addition, upgrade or replacement of USD260 million of aging infrastructure, including more than 50 bridges and overpasses; upgrades to 12 key interchanges and two new access points; the replacement of existing sound-walls and construction of new sound-walls for surrounding neighborhoods; and construction of the last phase of the Springfield Interchange.

Transurban DRIVe’s concession is for 80 years, including a five-year construction term, and a 75-year operating term ending in December 2087. Tolls will use variable dynamic pricing under a congestion management policy to achieve a “free flow commute” with vehicles averaging between 45 and 55 miles per hour.

VDOT has estimated that the average trip would cost between USD5 and USD6. This assumes an average trip length of five to six miles with a cost-per-mile range between USD0.20 and USD1. According to the operating agreement rates won’t be capped but will reflect the level of congestion on the toll lanes.

In mid-2012 Transurban broke ground on the adjoining 95 Express Lane project, a 29-mile stretch of toll road that will run parallel to frequently congested toll-free general purpose lanes in Northern Virginia.

The approximately USD925 million project primarily consists of nine miles of a two-lane extension to HOV lanes; six miles of operational improvements to the existing HOV lanes; 14 miles of widening of the existing HOV lanes from two to three lanes; eight new or improved entry/access points and associated electronic and toll traffic management infrastructure.

Toll terms are similar to the 495 Express Lane arrangement.

Management reported continued revenue growth across the portfolio during the three months ended Sept. 30, 2012, with one exception, despite an uncertain economic environment and construction disruptions on its Sydney roads.

The September quarter has seen continued revenue growth across the portfolio, with the exception of Hills M2, despite the uncertain economic climate and construction disruption on the Sydney network.

Statutory toll revenue increased by 1.3 percent compared to the prior corresponding period to AUD195.1 million. On a proportional basis toll revenue increased by 2.5 percent compared to the first quarter of fiscal 2012 to AUD242.11 million.

Transurban’s largest asset, the CityLink system in Melbourne, posted a 4.9 percent increase in revenue to AUD123.1 million, as average daily traffic grew by 1.2 percent to 779,269 transactions.

Major upgrade works on the Hills M2 Motorway in Sydney continued to impact traffic. Hills M2 experienced a reduction in traffic relative to the prior corresponding period. But management noted “significant progress” toward completing the upgrade.

The Windsor Road west-facing ramps opened to traffic on Jul. 25, 2012, and the widening of the eastbound Norfolk Tunnel is complete and is now in use. Widening of the westbound lanes has commenced, with the whole project on track for completion in mid-2013.

For the September 2012 quarter Hills M2 toll revenue decreased 4.5 percent to AUD34.9 million, as average daily traffic was down 3 percent to 90,729 trips.

The M1 Eastern Distributor in Sydney benefitted from a toll-price increase for cars, which contributed to a 7.3 percent revenue increase to AUD25.1 million relative to the prior corresponding period. Average daily traffic was down 1.3 percent to 50,486 trips.

The toll price for cars and motorcycles increased on Jul. 1, 2012, by AUD0.50 AUD6.00. No changes were made to the truck toll price.

Average daily traffic for the Lane Cove Tunnel and Military Road E-Ramp (LCT/MRE) in Sydney slid 1.2 percent to 69,092 trips. LCT/MRE traffic is still hampered by construction activity on the connecting Hills M2 road.

Toll revenue, however, increased 0.3 percent to AUD15.3 million, as prices increased by AUD0.01 Jul. 1, 2012, to AUD2.94 for LCT cars and motorcycles and MRE trucks.

Westlink M7 toll revenue increased 3.3 percent to AUD52.3 million, as average daily traffic grew by 1.6 percent to 142,251 trips. Westlink M7 traffic also is still being impacted by construction on the connecting Hills M2.

The toll price increased from AUD0.358 to ADU0.3585 per kilometer on Jul. 1, 2012, as the average tolled trip length ticked up to 12.84 kilometers from 12.79 for the prior corresponding period.

M5 South West Motorway toll revenue increased 12.8 percent to AUD48.6 million, though average daily traffic was 0.1 percent lower to 125,546 trips. M5 car tolls increased from AUD3.80 to AUD4.40 on Nov. 25, 2011.

Preliminary construction work commenced during the quarter for the widening of the M5.

The bête noire of fiscal 2012 full-year results, the Pocahontas Parkway near Richmond, Virginia, posted a 6.9 percent increase in toll revenue to USD3.9 million, as average daily traffic grew by 6.5 percent to 15,214 trips.

Transurban booked a 50.4 percent decline in fiscal 2012 statutory net profit after tax (NPAT) after it wrote down the value of Pocahontas.

Management had previously announced in June that it would reduce the carrying value of the asset based on revised lower revenue forecasts. The company booked an equity accounting charge for the year ending Jun. 30, 2012, of AUD138.1 million.

This writedown created an accounting charge only; there was no cash impact at the shareholder level.

Pocahontas isn’t a material investment for Transurban. There were, however, lessons for management in the experience.

Transurban’s portfolio has withstood the challenges of a particularly trying economic cycle because of an investment focus on highly urban, congested commuter routes–where a road is needed “now.” The company has also concentrated on areas with favorable demographics, including socioeconomic factors.

Management has acknowledged that Pocahontas was an investment made outside of these core investment principles. It was acquired based on the promise of future development in the area south of the state capital of Richmond, Virginia. As a result of the Great Financial Crisis this development hasn’t happened.

Net profit for fiscal 2012 fell to AUD54.9 million from AUD112.5 million a year earlier. But Transurban’s underlying proportional earnings before interest, tax, depreciation and amortization (EBITDA)–a better measure of operating performance–rose 9.1 percent to AUD784.0 million, boosted by higher toll revenue from CityLink.

Proportional toll revenue increased 5.9 percent to AUD943.9 million, an 8.5 percent increase on the prior corresponding period. Underlying free cash increased 11 percent to AUD433.4 million, driven by revenue growth and a continued focus on cost controls.

Transurban declared fully free-cash-backed full-year distributions of AUD0.295 per share for fiscal 2012, a 9.3 percent increase over fiscal 2011 and the company’s third consecutive year of distribution growth.

Key risks for Transurban include rising interest rates that would boost the cost of funding development projects. It would also be hurt if actual traffic falls below forecasts; higher toll rates could have a negative impact on traffic volumes, as could higher fuel prices.

Transurban’s debt load is well distributed, but it does have almost constant need to access credit markets. Anything that impairs the free functioning of global credit markets would impair its ability to refinance existing obligations.

This isn’t a problem right now. During fiscal 2012 Transurban refinanced approximately AUD2 billion of debt, comprising more than AUD700 million in corporate debt and more than AUD1.2 billion in asset debt, including the Eastern Distributor refinancing and the M5 West widening project and associated refinance.

In late September Transurban closed on AUD500 million of refinancing for Westlink M7, demonstrating its ability to attract interest from debt-market participants.

As for traffic, congestion is impacting all of Australia’s major cities, and it’s a big problem in the US markets where Transurban operates toll roads. And the gap between demand and supply of infrastructure is widening, a critical issue facing governments in Australia, the US and around the world.

According to the Australian Bureau of Transport and Regional Economics, in fact, the cost of congestion to the Australian economy alone is expected to be aboutAUD20 billion by 2020. The math in the US is very similar and getting worse.

But governments, in Australia and the US, are increasingly hamstrung and can’t fund all the projects necessary to alleviate congestion. Choices are limited, particularly when political priority is placed on maintaining credit ratings.

Ultimately, funds for infrastructure projects come primarily from two sources: increased taxes or user fees. It’s becoming increasingly clear that the private sector, by assuming a level of patronage risk, is a big part of the solution.

Transurban has demonstrated its ability to produce long-term outcomes that benefit governments and drivers. It’s also on the road to building wealth for investors.

Transurban is now a buy under USD6.50 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. 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.

The company will report results for the six months ending Dec. 31, 2012, on Feb. 5, 2013.

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.

The most recent interim dividend of AUD0.155 per share was declared Dec. 4, 2012. It will be paid Feb. 14, 2013, to shareholders of record as of Dec. 31, 2012. Shares will trade “ex-dividend” on this declaration as of Dec. 21, 2012. The fiscal 2013 dividend is up 6.9 percent from the interim dividend paid for fiscal 2011.

Transurban declared a final dividend in respect of fiscal 2012 of AUD0.15 on Jun. 18, 2012. This dividend, which represented a 7.1 percent increase over the final fiscal 2011 dividend, was paid Aug. 14 to shareholders of record on Jun. 29.

Dividends paid by Transurban are “qualified” for US tax purposes. The Australian government withholds 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 analysts who cover the stock seven rate it a “buy” according to Bloomberg’s standardization of brokerage house recommendation terminology, while seven rate it a “hold.” One brokerage covering Transurban rates the stock a “sell.”

The average 12-month target price among the eight analysts that provide a figure is AUD6.25, with a high of AUD6.50 and a low of AUD5.60.