CitySpring – OCBC

Updates on Basslink

New CEO at Hydro Tasmania. Effective 21 Jun, state-owned Hydro Tasmania has appointed Mr Roy Adair as its new CEO. Hydro Tasmania is CitySpring Infrastructure Trust (CitySpring)’s counterparty on the 25-year revenue agreement for the Basslink asset. Mr Adair was formerly the President and CEO of Singapore’s Senoko Power (previously owned by Temasek) for six years. With Mr Adair’s experience working with Temasek, we believe CitySpring’s relationship with Hydro Tasmania should remain intact under the new regime.

Inquiry into Hydro Tasmania. The Tasmanian state government has launched an independent inquiry into the operations of state-owned energy companies Hydro Tasmania, Transend and Aurora Energy. Apart from its relationship with Hydro Tasmania, Basslink also has an agreement with Aurora relating to its new telecoms business. A deal to increase Aurora’s profits, which is believed to be having some financial difficulties, by intervening in the regulation of power prices was apparently conditional on the establishment of this inquiry. The independent panel will investigate issues including the effectiveness of current regulation; the causes behind increases in power prices; and the impact of major infrastructure development issues. It will also give advice on the formation of a new energy strategy for the state.

Manager sees limited impact on Basslink. A major threat to infrastructure investments is the risk of expropriation or creeping expropriation, where the government squeezes a project by taxes, regulation, access, or changes in law. The local community’s perception and acceptance of the project and its owners (particularly overseas owners) – is another key risk. We met up with CitySpring’s manager this week, who does not expect any impact to its contractual relationship with Hydro Tasmania, especially in light of Basslink’s strategic importance to the state. We do note that discussions are still ongoing with Hydro Tasmania on its demand for an additional A$6.9m in Commercial Risk Sharing Mechanism payments from Basslink for CY2009.

City Gas negotiations continue. We have previously highlighted the ongoing discussions with Singapore’s Energy Market Authority (EMA) regarding the conversion, and ensuing liberalization, of the City Gas town gas network (refer to our 25 May report for more details). The manager told us it was re-assured by the consistent and fair nature of EMA’s decisions so far as a regulator. Still, we believe the uncertain outcome (whether positive or negative) merits a higher risk premium in the absence of greater information. Maintain HOLD rating and our DDM-derived S$0.60 fair value [7.2% discount rate, 0% terminal growth].