Keppel Infrastructure Trust’s Latest Earnings Highlights 2 Key Risks Investors Should Know
Keppel Infrastructure Trust (SGX: A7RU), or KIT for short, considers itself as a stable cash flow generator.
But its recent 2017 first quarter earnings report revealed two risks that investors should take note of. As a brief background, KIT is a business trust with six major business assets: City Gas, Concessions, Keppel Merlimau Cogen Plant (KMC), DataCentre One (DC One), CitiNet, and Basslink.
In an investor presentation last year, KIT highlighted its assets’ long-term leases and how they provide predictable cash flows:
Source: KIT’s investor presentation
Every rose has its thorn
However, in its latest earnings report, KIT said that there are situations where the contracted payments may not happen as described in the slide above. The business trust described scenarios where it (1) has its contracts cancelled and/or (2) may not receive full payment:
“KIT’s assets typically generate stable cash flows, with repairs and maintenance of the plants provided for as scheduled outages.
However, if such an outage lasts longer than anticipated and causes the availabilities of the plants to fall below their respective contracted levels, the plants will not be able to receive full payments due under their contracts.
In addition, if the plants incur significant downtime due to extraordinary or extensive repairs, it could also lead to termination of contracts and/or liabilities or compensation arising under such agreements.”
In a separate paragraph, KIT also highlighted a major incident at its Basslink business. Basslink is a 500 megawatt (MW) high-voltage cable link in Australia. KIT reported:
“On 20 December 2015, Basslink was taken out of service due to a cable fault incident. The cable returned to service on 13 June 2016.
The independent international cable expert charged with investigating the cable fault completed the investigations in December 2016 and concluded that the cause of the cable fault is “cause unknown”. Based on current circumstances and professional advice, Basslink maintains that the outage is a force majeure event.”
A force majeure is a standard contract clause that exempts a contracting party (KIT in this case) from fulfilling its contracted obligations due to natural disasters or unavoidable catastrophes. That said, Hydro Tasmania (KIT’s customer) is disputing the outage as a force majeure. At the moment, KIT is working with Hydro Tasmania to resolve this issue.
The two scenarios above highlight that nothing is certain in business. All companies will have risk. If we find a company without any risk, we might not have looked hard enough.