The bottom line–now–for Melbourne-based thoroughfare operator Transurban Group (ASX: TCL, OTC: TRAUF) is that solid traffic and toll-rate trends coupled with realistic opportunities for new-projects support strong free cash flows and long-term dividend sustainability and expansion for investors.

That’s a bold if circuitous statement and a particularly aggressive way to introduce a stock we’re adding to the AE Portfolio Conservative Holdings. It’s striking, too, when you consider that Transurban eviscerated its dividend in June 2008.

This story begins in 2004, when Transurban announced a “re-gearing” strategy (“gearing” generally refers to taking on debt), which meant functionally that management in place at the time thought it prudent to take advantage of what were historically low interest rates to borrow and “bring forward a share of future revenue” from cash flows its roads will generate to pay an outsized divided to shareholders now.

Transurban adopted this policy “in times of easy credit and low debt costs.” In early 2007 an HSBC securitized-mortgage vehicle crashed, establishing bona fides as “wreck zero” in what’s commonly referred to by many names, none of them good: the “Great Financial Crisis,” or GFC, in Australia, the “Great Recession” in America, a construction meant to evoke the event from the 1930s that continues to color political debate in the US and abroad. And the times Transurban management planned for changed.

What we know is a ridiculous approach now was a ridiculous approach then, at least from the perspective of an investor concerned with long-term dividend strategy. By making its distributions to shareholders more variable by introducing the factor of interest rates management offset the positive and more tangible fundamental aspects of the business such as traffic and toll growth. When global credit markets froze the folly of it all was revealed, as management realized it would have been much more difficult to borrow money to partially fund distributions and the costs of borrowing would also have been significantly higher.

Chris Lynch joined Transurban in April 2008 and immediately began a review of the business. Conditions continued to deteriorate around him and Transurban, culminating in Lehman’s Sept. 15, 2008, bankruptcy filing. He concluded, and the board agreed, that Transurban had to be able to navigate volatile market conditions. Key to this would be cutting the anchor that was the 2004 re-gearing strategy.

Strengthening the balance sheet and simplifying the Transurban story became the goals. In June 2008 Transurban raised AUD659 million via an equity placement. It also underwrote its distribution reinvestment plan (it’s not open to American investors; listing on a major US exchange is a prerequisite) to 75 percent, freeing AUD239 million. It also announced a “share purchase plan” for existing investors that generated another AUD10 million. Management confirmed a distribution of AUD0.29 per share for the six months ending Jun. 30, 2008. And then, dropping the bomb, management noted, “…distributions beyond that date will be reduced to more closely align to free cash flow.” What had been a AUD0.56 annual distribution fell to about AUD0.22 per share.

When he pitched the new plan at the company’s Oct. 27, 2008, annual general meeting, Chairman of the Board David Ryan was up against a shareholder base that had just endured a 13-month slide from AUD8.51 on the Australian Securities Exchange (ASX) as of May 23, 2007, to AUD3.98 on Jun. 25, 2008, the last AUD1.69, or 37 percent, of which was caused by the Jun. 19 revelation of then-new CEO Chris Lynch’s updated vision for the company.

It was a tough sell to make, that this short-term destruction was in the long-term interests of shareholders. But, coming on three years later, it’s hard to argue with the conclusion drawn by Mr. Ryan in the moment, that “as a business, we are now well placed to ride out the turmoil on financial markets.”

The best validation of the change brought about by Mr. Lynch is the 11.5 percent distribution increase Transurban announced along with fiscal 2012 first-half earnings. Transurban is on course to pay more than 100 percent of free cash flow in fiscal 2012, when it will distribute “at least” AUD0.29 per share to security holders. But that’s after accounting for maintenance capital costs. The company has been able to put AUD4.5 billion to work over the past three years, and still has capacity to pursue new projects, in addition to maintaining its existing assets.

Transurban was able to refinance AUD520 million of non-recourse project debt for its 75 percent owned M1 Eastern Distributor, a four-mile motorway that links Sydney’s central business district with Sydney International Airport. It also negotiated a new AUD375 million syndicated bank facility to refinance AUD375 million of August 2012 debt.

Transurban has no maturities until April 2013. Its senior debt ratings have recently been affirmed at A-, Baa1 and A- (stable) by Standard & Poor’s, Moody’s and Fitch. The early refinance of the M1 debt will also result in interest-cost savings.

Major developments during the six months to Dec. 31, 2011, include reaching an agreement with the government of New South Wales through Interlink Roads Pty Ltd, of which Transurban is 50 percent owner, for a major upgrade of the M5 South Western Motorway, a 16-mile toll road in southwestern Sydney. Transurban also reached an in-principle, non-binding agreement with the Commonwealth of Virginia for work on the Interstate 95 HOV/HOT Lanes Project in the Washington, DC, metro area.

Management noted during its discussion of results that its USD2 billion Capital Beltway project passed the 80 percent complete mark and is now less than a year away from opening.

Despite experiencing disruptions at four of six assets, Transurban posted net profit for the six months to Dec. 31, 2011, of AUD93.2 million, up 25 percent from AUD74.7 million at the same point in 2010. Proportional earnings (representing Transurban’s shares in co-owned projects) before interest, tax, depreciation and amortization (EBITDA) grew 7.5 percent to AUD390 million. Toll revenue, meanwhile, rose 6.5 percent to AUD385.6 million. Free cash for the period was AUD184.2 million, down 2 percent from AUD188.1 million a year ago; this shortfall had to do with investments in maintenance as well as timing issues. Transurban will see a seasonal rebound in cash flow over the course of the second half of the fiscal year.

“Disruptions” during the period included the resurfacing of the CityLink, a system of toll roads in Melbourne that accounts for 49 percent of toll revenue. CityLink delivered 7.5 percent EBITDA growth despite the extensive work undertaken to improve the road during the period; this is “once a decade” work ensures the viability of the road as a cash-generating assets. Traffic on the system actually grew by 2.3 percent.

Transurban also made what management describes as a “value accretive investment in Hills M2,” a new project serving the Northwestern Sydney corridor that’s now 50 percent complete.

Now that his work here appears to be complete, Mr. Lynch is stepping down in July 2012, a decision announced in late January. Mr. said Transurban is in excellent shape and that the time was right to hand over to a new CEO. Current Chairman of the Board noted, “Transurban’s clear and concise strategy will remain–to maximise security holder value through continuing to grow the wedge of free cash available for distribution.”

Transurban reports operating and financial results in February (first-half) and August (second-half and full fiscal year); like the majority of Australian companies its fiscal year begins Jul. 1 and ends Jun. 30. Management declares dividends in late May and early December; ex-dividend dates are typically Jun. 24 and Dec. 23. These dividends are typically paid to shareholders of record as of Jun. 30 and Dec. 30 in mid-August and mid-February.

It’s organized in Australia as a “stapled security,” a single trading security that combines two or more securities that are generally related and bound together through a single vehicle. Transurban Group binds together Transurban Holdings Ltd, Transurban International Ltd and Transurban Holdings Trust. The “staped security” distinction in Australia is not relevant for US tax purposes. Transurban’s distribution is deemed to be a “dividend” paid by a “corporation” and is therefore considered “qualified” within the current meaning of the US tax code. It’s subject to 15 percent withholding for those who hold in taxable accounts.

Transurban, with Chris Lynch’s help, was able to course-correct before a silly distributions-through-debt strategy had a chance to eat the company from the inside. A great collection of assets can still be had, and it continues to get less encumbered.

Agile enough to maintain its roads, grow toll revenue and boost distributions, Transurban, yielding a modest, solid and growing 5 percent, is a buy up to USD6 and a new addition to the Australian Edge Conservative Holdings.