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Infrastructure assets are the structures and networks used to provide essential services to society. These assets, and the businesses set up to manage them, are crucial to the sustainable economic and industrial development of a country.
The rationale behind CitySpring’s investment focus on this sector is mainly due to the sector’s healthy growth prospects. Asia (excluding Japan) is projected to invest about US$200 billion per annum over the next few years to fund new infrastructure investment and maintain existing facilities, according to the Asian Development Bank.
Within the infrastructure sector, CitySpring is primarily focused on three broad categories, namely utilities, transportation/logistics and communications. Some of the assets in these categories include gas, water, electricity, roads, ports, airports, railways, broadcast towers and related infrastructure, satellite infrastructure, wireline infrastructure and mobile telephony infrastructure. |
The Trustee-Manager makes distributions to CitySpring’s unitholders on a quarterly basis. The amount of distribution is calculated as at 31 March, 30 June, 30 September and 31 December each year for the three month period ending on each of these dates. Any proposed distribution is made by the Trustee-Manager within 90 days after the end of each distribution period. The distributions are made in Singapore dollars.
CitySpring’s distributions are funded by the cash earnings of its four businesses which provide essential utility services to the communities they serve. Each business enjoys sustainable cashflow underpinned by either long-term contracts with government entities or by stable market demand.
We ensure distributions are made only after debt servicing requirements and working capital needs are met. We also take into consideration any significant non-recurring items affecting cash earnings or capital expenditure. With the strong fundamentals of our underlying businesses, we expect to continue to provide investors with long-term stable distributions in future. |
SingSpring and Singapore’s national water agency, the PUB, have a 20-year Water Purchase Agreement (WPA) which commenced in December 2005. Under this WPA, SingSpring receives monthly capacity payments and output payments. Capacity payments are payable to SingSpring, irrespective of actual water output to PUB, for making available the full water capacity of the SingSpring Plant to PUB. The WPA therefore provides SingSpring with predictable contracted cash flows until December 2025.
As for Basslink, its principal source of revenue from the operations of the interconnector is a monthly facility fee based on a 25-year term Basslink Services Agreement (“BSA”) with Hydro Tasmania, an entity owned by the State of Tasmania. The facility fee is based on availability and is payable in full if Basslink’s cumulative availability, based on calendar year-to-date, is greater than 97%. If Basslink’s cumulative availability is less than 97%, the facility fee is reduced with increasingly greater deductions the greater the shortfall from 97%.
The BSA also provides a Commercial Risk Sharing Mechanism (“CRSM”) to share the market risk associated with participating in the National Electricity Market of Australia between Hydro Tasmania and Basslink. The CRSM payments are based on the differences between the high and low Victorian electricity pool prices, subject to caps of a +25% increase (i.e. a payment to Basslink) and -20% decrease (i.e. a payment from Basslink) to the unadjusted facility fee. The stated intention of this mechanism is to have a neutral impact on both parties over the longer term. |
It is not uncommon for infrastructure assets to show accounting losses due to the fairly large amount of non-cash depreciation expenses associated with infrastructure assets (which are typically capital intensive).
As CitySpring is structured as a business trust, it is able to make distributions to its unitholders in excess of its net profit after tax or even when it records a loss after tax as such net profit or loss includes non-cash items such as depreciation and amortisation of intangible assets. CitySpring structures its investment to enhance cashflow. Such structures may have the effect of lowering accounting profits or even cause the investment to record accounting losses, without affecting distributable cashflow. As an example, CitySpring enters into long-term hedges to protect its cashflow from movements in, for example, interest rates. Accounting standards require that CitySpring records changes in the fair value of these hedges in its balance sheet and income statement, even though these changes in fair value are non-cash in nature and do not affect the fundamentals of the underlying businesses.
For the above reasons, CitySpring uses cash earnings as it is a more appropriate measure of performance.
Cash earnings is defined as EBITDA adjusted for non-cash items and lease receivable, less cash interest, cash tax, upfront financing fees and maintenance capex, and before principal repayment of debt and minority interest. |
Given that our subsidiaries raise non-recourse debt structured specifically to match the cashflow profile of their underlying assets, traditional measures of leverage are not relevant to us. Our general philosophy on leverage is to ensure that our businesses have sufficient financial flexibility to meet their capital expenditure and operational needs, and at the same time, service their debt obligations promptly and reliably. The fact that Basslink is rated investment grade by the ratings agencies is a good endorsement of this philosophy.
The Trustee-Manager aims to optimise the overall capital structure of CitySpring and its infrastructure businesses. In doing so, it will seek diversified funding sources, through the appropriate use of debt and equity, from both financial institutions and the capital markets as CitySpring grows in size and scale. |
The management fee comprises a base fee and a performance fee.
The base fee is 1% per annum of the market capitalisation of CitySpring, subject to a minimum of S$3.5 million per annum. This is structured to cover the ongoing operating costs of the Trustee-Manager.
The performance fee structure is based on 20% of a benchmark index outperformance. The performance fee is payable only when the Trustee-Manager outperforms the benchmark index on a total return basis and takes into account any underperformance in prior periods.
In addition, the Trustee-Manager does not receive any fees for acquisitions or divestments made.
CitySpring’s management fee structure is in line with market practice. It aligns the interest of the Trustee-Manager with those of unitholders. |
| Basslink operates in Australia with its earnings denominated in AUD. Any weakening of the AUD against the SGD is not expected to have any impact on CitySpring’s ability to service its debt or meet projected distributions for FY2011. Our investment in Basslink is 75% funded by AUD bonds and 25% by equity contribution from CitySpring. Borrowings in local currency provide a natural hedge against foreign exchange exposure. CitySpring has accumulated significant cash over and above its distribution requirement. |
On a long-term basis, changes in fuel costs should not have an impact on City Gas as fuel costs can be passed through to customers via tariff adjustments. However, at any point in time, the actual tariff may not exactly match fuel costs as tariff changes are subject to a periodic regulatory review process whereas fuel prices change daily. Short term impact may be evident if there are sharp changes in fuel prices. City Gas was granted tariff adjustments by EMA to cover the changes in the fuel costs during the financial year.
Fuel costs changes have no impact on SingSpring as energy cost of producing water is borne by the PUB in accordance with the principles set out in the Water Purchase Agreement.
At Basslink, energy costs do not form a substantial portion of its operating expenses relative to its other operating costs. |
Price-to-earnings (“P/E”) ratio is not an appropriate measure for a business trust like CitySpring. As a business trust and unlike a company, we are allowed to distribute surplus cashflow that is greater than our accounting profits. Our businesses, namely City Gas, SingSpring and Basslink, are structured to be tax-efficient to enhance cashflow which could adversely impact accounting profits and, hence, our results may show low profit or even a loss. This translates into a high or negative P/E ratio.
This however does not affect our businesses in any way. Our distributions are more than adequately covered by operating cashflow. |
| CitySpring is actively seeking growth opportunities which fit with our requirements for stable cashflow, adequate risk mitigation and value creation. We are highly disciplined in our approach, and would turn away transactions that do not meet these criteria. Consequently, although from time to time, the Trustee-Manager may be reviewing any number of potential opportunities, there is no certainty as to whether any of these opportunities would result in a completed transaction. |
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