Keppel Infrastructure Trust (A7RU) Earnings Call Transcript & Summary

Good morning, everyone. On behalf of the Trustee-Manager, thank you for joining Keppel Infrastructure Trust Second Half and Full Year 2023 Results Webcast. My name is Emmulin from the Investor Relations team. Hosting the session this morning are our CEO, Mr. Kevin Neo; our CFO, Mr. Eric Ng; as well as our Head of Portfolio Management and Optimization, Mr. Marc Liu. We will begin the session with an update on KIT's FY 2023 results before we open the session for questions. Participants with questions can post them using the chat box on the webcast platform. For analysts who are joining us on the Webex platform, please be reminded to only unmute your mike during the Q&A session. With that, I will now hand the time over to Kevin for the presentation. Kevin, please?

All right. Thanks, Emm. Good morning, everyone, and thank you for joining us today. I will start with Slide 4. KIT delivered another set of record performance for 2023. Distributable income increased 42% year-on-year to $316.8 million, supported by strong portfolio performance as well as the crystallization of $131.2 million in capital optimization at Ixom, which was distributed to unitholders as a special distribution in November 2023. Including the special distribution of $0.0233 per unit, total DPU for FY 2023 saw a significant 62% increase to $0.0619, up from FY 2022's $0.0382. KIT outperformed STI delivering total returns of 7% for FY 2023 and a strong yield of 14.3% as at end 2023. Moving to the next slide. We continue to grow through acquisitions and value creation. Our ability and track record in creating value continues to differentiate us from our peers. We made our first solar investment on 2 January this year, and this brings our AUM to $8.1 billion as at 2 January 2024. We have also secured the extension of the Senoko Waste-to-Energy concession with Singapore's NEA for another 3 years with an option to further extend by up to 1 year. Eric, the CFO, will also share more details on this extension in the business updates. In 2H 2023, we crystallized $273 million in value creation at Ixom and City Energy, which were utilized to partially fund the FY 2022 acquisitions and with the remaining distributed to unitholders. Going to the next slide. Further to our commitment to increase KIT's exposure to the renewable energy sector, we are acquiring a 45% interest in our residential solar portfolio in Germany. This marks KIT's first acquisition in the solar energy sector and expands KIT's exposure to the green energy sector beyond onshore and offshore wind. Compressing over 60,000 bundled solar PV systems with a combined generating capacity of 585 megawatts, the solar assets are leased to German households under 20-year agreements, providing long-term, highly predictable and derisked cash flow to KIT. It will provide a 2% accretion to our unitholders. The acquisition will also allow KIT to participate in the growing adoption of solar energy in Germany, which is supported by the country's ambition to achieve carbon neutrality by 2045. The investments will increase our exposure to clean energy to 1.3 gigawatts. KIT has completed the acquisition of 53,500 installed PV systems, following the first closing on 2 January 2024, with the remaining 6,500 systems to be acquired by end June 2024 in phases. Our aim is expected to reach $8.4 billion once order closing are completed. With this, I will hand the call to Eric, who will go through the financial performance and business updates in greater details.

Thank you, Kevin, and good morning to all of you. This is Eric. I'll take you through the financial performance of the business. Turning to Slide 8. I'm pleased to share that KIT's strong financial performance for FY 2023 with our portfolio of businesses, City Energy, Ixom and Philippine Coastal, all achieving record EBITDA for FY 2023. KIT's distributable income, or DI in short, from the Energy Transition segment, increased by 36.5% year-on-year to $147.7 million, supported by contributions from City Energy as well as the Trust's investment in Aramco Gas Pipelines company and the European wind farm assets. This is despite KMC's contribution within this segment being negative during FY '23 with the commencement of its loan amortization in June 2023. For the Environmental Services segment, we also saw higher DI, which increased by 19.1%, supported by the full year contribution from EMK. Contributions from the Singapore waste and water assets remained steady at $72.3 million. Distributable income for the Distribution and Storage segment declined by approximately 29%, largely due to one-off refinancing related fees as well as higher interest expense, CapEx and taxes at Ixom. However, in AUD terms, Ixom's EBITDA continued to grow by 5%, setting another record year for the business. Philippine Coastal has also done very well with higher distributable income contribution supported by higher tank utilization rate and pricing. Next, moving to the next slide, more on our energy transition segment. On City Energy, it achieved full plant availability in FY 2023 and continues to maintain a sizable base of over 900,000 residential, commercial and industrial customers, [ island white ] as at end December 2023. In October 2023, City Energy completed the acquisition of 51% stake in Tan Soon Huah, liquified petroleum gas, or TSH in sort, as the second largest LPG cylinder distributor in Singapore. The acquisition of TSH will allow City Energy to grow into a new market and expand its customer network. Since the launch of its EV charging services business in April 2022, City Energy GO has exclusive rights to extend EV charging services to 20,000 carpark lots in private residential and mixed developments, leveraging its long-established relationships with real estate developers. For the KMC plant, it saw lower availability of about 96% due to an unplanned outage, but we are glad to say that the plant has resumed operations in December of last year. Over in Europe for the wind farms, these wind farms continue to deliver stable distributions to KIT. In Sweden, we completed our investment in Fäbodliden II as part of the exclusive pipeline that's dropped down from Fred.Olsen's Renewables. Over in Germany, our offshore wind farm investment, BKR2, has been granted additional grid capacity, there we'll see its upper capacity increasing to 486-megawatt following equipment upgrade works. And as Kevin mentioned earlier, we have completed the Phase 1 acquisition of the German solar portfolio, which will start contributing to KIT this year. In the Middle East, demand at the AGPC continues to be underpinned by the Kingdom's economic growth and favorable demographics. Moving on to the Environmental Services segment. EMK maintained full utilization rate for its incineration business and saw higher volume and pricing for its landfill businesses with new contracts secured from blue chip customers. Over in Singapore, for this segment, operations at our 2 waste and 2 water plants also remained stable, fulfilling their contractual obligations in 2023. KIT secured the extension of the Senoko with the energy concession with Singapore's National Environment Agency, NEA, for another 3 years with an option to further extend by another year for fourth year. As part of the extension, Keppel figures the plant operations and maintenance O&M operator has been appointed to refurbish the plant and the O&M service contract with capital figures will also be extended in line with the concession extension. The Trustee-Manager has assessed that the CapEx investment alongside its growth of our pipeline, and we have decided only to fund a small portion of the $80 million refurbishment CapEx. As such, the DI contribution from the extension of the plant will not be significant. That's it, the extension is still a pure upside to KIT, and we will -- which will enable the plant to continue operating beyond its current expiry of the concession in August this year. Lastly, on our Distribution and Storage segment. In Slide 11, firstly, on Ixom. In Australia, Ixom continue to see strong demand from its manufactured chemicals business due to higher coagulant and chlorine volumes. Demand in its New Zealand business also saw strong -- also saw stronger results with good weather conditions contributing to a strong dairy season for that segment. At Philippine Coastal, we continued to benefit from higher contract volumes and additional storage revenue at its tank storage facilities. Philippine Coastal saw higher fuel storage utilization rate at -- of almost 100% as at end December 2023, underpinned by increased demand and the robust outlook in the Philippines. This is a significant increase from the 66% utilization rate when KIT acquired that business back in January 2021, and is a testament of the Trustee-Managers' ability to create value of our assets. We are also pleased to share that the Philippine Coastal asset has secured a contract renewal with a major customer at an attractive pricing for 4 years. The asset's construction of new tank is part of its capacity expansion plans is also well underway to support the growth of its business. Moving on to the next slide. We are glad to say that to continue to improve portfolio transparency and better reflect asset values, which is recognized largely at book value in our statutory board, KIT is -- has conducted our second annual voluntary independent portfolio valuation, and the exercise done by independent valuator, Ernst & Young, reflects approximately $100 million increase in AUM to $7.4 billion as at 31st December 2023, supported by higher valuation from its existing portfolio, a key testament to our ability as a Trustee-Manager to create value out of our portfolio assets. Following the first phase of completion of our German solar portfolio, KIT's AUM increased and stood at $8.1 billion as at the 2 January 2024, when we closed the first tranche of that investment. And KIT remains anchored by a resilient and diversified portfolio that is well insulated from inflation, having over 90% of the Trust businesses and assets with cost -- either cost pass-through mechanism or on an availability-based revenue model. Moving on to Slide 14, on our distributable income. This slide shows the breakdown of our DI, which I've shared in detail for the business segment earlier. A little bit on the corporate expense part of the DI. It is higher due to higher management fees, strong -- driven by the increase DI from capital optimization of Ixom of $131 million that we distributed to unitholders in November, and also due to higher interest expense because we have issued medium-term notes in the middle of 2022 and used $580 million of equity bridge loans in the latter half of 2022 to the first half of 2023 to fund acquisitions of EMK and offshore wind from BKR2. Next, on our balance sheet on Slide 15. This provides a good snapshot of our balance sheet position. We maintained a healthy and strong balance sheet that is well capitalized to support our growth aspirations. The trust net gearing stood at 39.9% as at end of last year, which provides approximately $549 million in that headroom to support KIT's growth ambition if we take it at 4.5% internal net gearing cap. This represents the equity check that we can use for investments. It should be -- continue our growth this year. As business trust KIT has the flexibility actually to go beyond our 45% internal gearing care, but the trustee manager has taken a very prudent approach to tack it at 45% for good capital management. The Trustee-Manager continued to monitor this exposure and safeguards against evolving market conditions that we see -- continue to see and to mitigate against this fluctuating interest rates, approximately 83% of KIT's total loans are fixed and hedged as at 31 December 2023. The next slide on capital management. KIT has repaid and refinanced most of its loans for the next 2 years. The Trust has also obtained $100 million corporate loan facility in the fourth quarter of last year to further support our acquisitions and visions in the current year. The Trustee-Manager has also hedged approximately 67% of our foreign distributions to mitigate the impact of currency fluctuations and continue to -- on KMC, we continue to review our KMC's capital structure, and we will share any updates in due course. With this, I'll hand the time back to Kevin, who will share more on the market outlook as well as KIT growth and value creation strategy. Kevin, please?

All right. Thanks, Eric. Going to Slide 18 on market outlook. The outlook for infrastructure is very positive, and KIT is well placed to ride this trend. Due to the critical and defensive nature of infrastructure assets, listed infrastructure stock funds have historically produced above average returns amid uncertain macroeconomic backdrop due to their strong inflation-protected cash flows and profitability. As the effects of climate change continue to alter the business landscapes globally, we see many opportunities in the energy transition and environmental services sectors, underpinned by the global climate agenda to decarbonize amid continued growth in urban population and urbanization. Being at the forefront of sustainable development, the Trustee-Manager will continue to actively manage the Trust portfolio and create value to achieve sustainable growth for unitholders. Moving to Slide 19. To meet KIT's [ $18 billion ] AUM target within this decade, we will continue to focus on the sustainable urbanization thematics and ethically pursue businesses and assets that will support energy transition and climate change, rapid urbanization and ageing population and digitalization. Running on KIT's strong yield origination network, we will continue to cast our net wide on third-party evergreen businesses and yield-accretive transactions in our 3 core verticals and explore opportunities in the digital sector such as fiber networks, subsea cables and cable-laying vessels. We will focus on the developed markets of Asia Pacific and Europe. We will continue to focus on evergreen assets. We like businesses that provides a promising growth path where we can add value and create synergies and ultimately unlock value to achieve further growth. If executed successfully, this strategy will allow us to create a multiplier effect to then recycle capital to deliver greater returns to our unitholders in the years to come. We will also actively look to be more efficient with our capital requirements through asset recycling. Next, we believe that our ability to create value will set us apart from the rest. We have proven this with Ixom and City Energy. Our work at Ixom and City Energy is not done yet. We will continue to see value creation opportunities at Ixom and City Energy, and we're also doing so for Philippine Coastal and EMK. We have a dedicated portfolio and management and optimization team that will focus on [ setting ] assets harder through improving our performance, business optimization and realizing greater synergies through leveraging the deep engineering capabilities and network of the Keppel Group. Going to Slide 21. As part of the one Keppel ecosystem, we have the clear advantage of being able to draw on Keppel's strong development and engineering capabilities and track record as demonstrated over the past years. Looking ahead, we look to expand on this collaboration further. Moving to sustainability. KIT plays a critical role in managing Singapore's waste and contributing to Singapore's water security. Hence, sustainability management is imperative to the continued success of KIT and its ability to create value. Recognizing the importance of energy efficiency and to reduce our carbon footprint, the Trustee-Manager continues to champion innovative solutions in our businesses and assets. This includes collaboration to develop a green hydrogen pipeline and accelerate the commercial usage of hydrogen and development of an off-grid hydrogen fuel cell solution at City Energy and explore low-carbon water solutions at our water plants. We are also progressing our decarbonization program. Our commercial emission intensity has reduced by approximately 20% year-on-year to approximately 6,900 tonnes of carbon dioxide per $1 million. This is a 36% reduction from the 2019 base year. We have also increased our exposure to renewables from 10% to 19% of AUM with the acquisition of the German solar portfolio, well progressing towards a 25% equity-adjusted AUM target by 2030. I would like to emphasize that we place sustainability at the core of our strategy to create value and achieve growth. We maintained a responsible approach to managing our portfolio, which has been integral to our ability to ensure economic sustainability and deliver long-term value to our stakeholders. All right. Thank you. And I will now hand the call back to Emmulin.

Thanks, Kevin and Eric. [Operator Instructions] Izyan, I know that you have a question. Do you mind unmuting yourself?

I have a couple of questions and then 2 that are really more clarification. So I'll just go through them one by one. So the first one is in the debt maturity profile. 2026 seems to have quite a bit of maturities coming. So I just wanted to know if there are any plans to refinance early. And also the KMC point about trying to find a new refinancing at KMC to be able to allow cash flows has been there for a few quarters. So just wanted to know if there's any updates. And then the other 2 that are more clarification in nature. I just know it's mentioned that the CapEx for the new concession extension is $18 million, but KIT is not taking the full amount. So how much is KIT taking? And who is bearing the others? And then the 45% internal cap, what -- can you remind us what is the calculation for that ratio? Yes, that's all.

Yes. Izyan, you can hear me right. This is Eric. I think you have 4 questions. I wrote them down. And just remind me if I miss any one of them. The first one is on 2026, there seems to be a high refinancing requirement. So if you look at Slide 16, we have our debt maturity profile. The biggest component there is $521 million of debt from Ixom, which we have just recently refinanced from 2023 to 2026. So rightly pointed out, it is -- it looks -- it appears tall, but we manage our portfolio actively, especially in terms of refinancing. Usually, we refinance -- we start the refinancing process 12 months before the maturity of that loan being maturing. So sometime in 2025, mid to early 2025, we will start discussing with our portfolio company or refinancing strategies, tenure and how to best do it. And Ixom, obviously, you noted, we upsized the refinancing of the back of strong EBITDA. And the other point to note is, it's not -- this asset level, that is non-recourse, EMK, Ixom, Coastal or the other is not recourse to KIT. But that doesn't mean we don't care about them now. We do actively engage our assets to refinance them really. So I hope that answers your questions. Of course, the debt at the corporate level, same principle apply. We will look with our treasury folks all the way up -- 12 months beforehand to look at refinancing opportunities or even earlier if the interest rate environment is conducive. So the second question is on KMC on the progress of the restructuring. We -- all I can say right now is, we are working on the commercials of the plant, especially on the City Energy, and we will announce -- yes, I'll get Kevin to just add on a little bit more.

So thank you for the question on KMC. I think your question is well noted, and we can assure you that the restructuring of KMC is something that's very high on our agenda. We have been working on it for the last couple of months. That's still work in progress. But I'd like to assure you that we are doing our utmost to extend the CPA and then restructure the financing such that we can generate cash in the months to come. So hopefully, in the next couple of months, we have something good news to share.

Yes. I'll just move on to your third question, Izyan, on the refurbishment CapEx for Senoko. So I did mentioned that we are funding only a small portion of it. The remainder is actually funded by the -- our sponsor and also owner of the O&M. So we have when as a group do negotiate with NEA on this outcome. The outcome was very favorable for all 3 parties, and the extension has been granted based on this outcome.

Sorry, I didn't ask this question just now. But since you mentioned that this extension, right, the underlying land lease of this is until which year again?

The end of land lease, I think, is about essentially...

Maybe let me take this question? So for, specifically on Senoko Waste-to-Energy, the lease will be running out together with concession this year. But as part of the extension, we are -- together with NEA, we are getting, approaching SLE together to extend the land lease, and we do not foresee any issues over there.

Okay. So it will at least match the...

Yes.

Izyan, you had a fourth question on the...

Yes, the 45%, yes.

Sorry, can you refresh my mind? What was the question again?

Sure. I just wanted to -- I mean, I have asked this in the past, but I just wanted to know the -- you mentioned you have an internal target of 45% for gearing. So what is the calculation for that gearing number?

Yes, it's a good question. What we do is we assume that we can borrow an EBL of the -- first, we set the cap. So this is our internal capital discipline to see how much we can borrow, then we calculate how much loans we can take on to fund our equity and to fund our equity check into our investments. And this equity investment do actually expand the denominator, which is the total asset base. And from that, we calculate that headroom. That's how we did the calculations.

So it's a debt to -- consolidated debt to equity number?

No, it's a consolidated debt to total assets. Yes. So -- and maybe I'd like to emphasize that the 45% is not something that the market impose on us. It's something that we put in place for capital prudence. So it basically means that we are very comfortable with the gearing of up to 45%. If our gearing does go beyond that, then you need to raise the amount of investment and so on.

And your total asset number is based on the balance sheet, the statutory number or your valuation that you are doing?

It's the statutory number, which is a lower number because obviously you see...

Now cost of valuation is higher.

Yes.

So this is where sometimes I speak to -- when I speak with analysts and investors, I feel that our statutory gearing is probably not reflective of our ability to gear because our AUM, our market AUM is a lot higher than the -- our statutory balance sheet, our statutory total assets. So a 45% headroom of capital is basically increased to, I'll say, 30% to 35% gearing level, which is very, very conservative, I would say, for an infrastructure counter, right? And then maybe for the rest, there's -- the reasons quite -- there's a difference between our market valuation and our total assets because of KIT how we do our accounting, our investment is carried at cost. So even, let's say, using Ixom as an example, we have grown EBITDA from $120 million to $200 million over a space of 4 years. Valuation or value of the business has grown over time. But Ixom is still carried at cost, right, on our balance sheet.

Yes. This underpins our capital recycling strategy also because of his cost accounting. If we eventually recycle assets, those were intrinsic value can get captured in our statutory accounts.

Right. So sorry, just one last thing, just to make sure I understand this.

Yes, Izyan, sorry, would you mind if we put -- we let other analysts?

Okay. Sure, sure, sure.

We'll take your questions later. So I think we have questions from [ Joel Su ]. Would you mind unmuting yourself?

Yes. Just have a couple of questions. The first is regarding the -- I understand you have an internal gearing cap. I just want to know whether the banks have any loan covenants and gearing caps for you? And my second question is regarding to Page 19 on your near-term pipeline. Could you share what's the potential value of all these assets and how much it will cost? And my last question is regarding Page 14 on energy transition. Just wondering whether there's some seasonality with regards to City Energy and Aramco gas given the large swings in DI? I think the first half was higher, and the second half is lower. And also year-on-year, there's that swing. So I'm just wondering what is happening there.

Maybe I'll take the first question. First, Joel, on the bank covenants. We do have covenants on gearing. I'd like to just -- I can't review these covenants, but I'd like to say that it is higher than the internal capital in both ourselves -- that creates a safety margin for us also.

All right. And what's the second question?

I think the second question is on the total on the pipeline. And what's the total value of the near-term pipeline.

Right. Okay. So I think you're specifically again on Slide 19. So I would say -- I mean I'll just take the thing in parts, right -- with the rights. So we have an MOU with Jinko where we will look to invest in certain solar assets that they have developed as a trend so on. Then this is the MOU, and we are still in discussion with them, but there's nothing concrete coming out of this for the time being, right? So I would not put the value over there. For the Keppel [indiscernible] plan, I would say the EV, right, is, I would say, in the 1,500 units, and this will be funded with a mixture of debt and equity. And the -- I'll say the equity outlay is not too big because this is a concession backed by PUB, which can then allow us to take on -- take more gearing than the other assets. For the urban onshore wind farm, we have about, I think, 6 projects consented, almost 500 megawatts. And the total EV is about -- just let me give you the numbers here.

Okay. We will come back on this question, Joel.

Sure. I have one more question regarding the seasonality on City Energy and Aramco Gas.

Yes, I'll take this question, Kevin, yes, yes. So City Energy, I think some of you who have followed us for quite a while, you will know that City Energy has a quarterly tariff reset that passed through the underlying fuel cost to end consumer. And that's the formula set by the regulator. So that creates a little bit of seasonality in terms -- especially if the fuel price is going up, the statutory reported EBITDA and DI will -- late by 1 quarter, so it will go down. But 1 quarter later, the tariff we adjusted upwards. And if the fuel price is on a down trend, then the statutory results will be better by 1 quarter because we are paying cheaper fuel for high fuel prices. So that, in itself, created some seasonality because we just call it the regulatory pass-through seasonality. Besides that, we don't really see much seasonality on the regulated assets of City Energy. In fact, we are seeing EBITDA grow quite strongly with the nonregulated business that we are going in, especially now we have completed the bolt-on acquisition of TSH, and we are also pushing the EV charging business and also increase our service income of the underlying business. So that's on CE. For AGPC, a stronger year in FY '23 because we have seen 3 distributions received from AGPC. We recorded in our P&L when the distributions are declared by the assets, so -- versus 2 in FY '22. So it's upside year-on-year, but AGPC is a fairly stable lease on 20-year lease and leaseback assets. So we expect some stability going forward, barring the timing difference I explained earlier.

Thanks, Eric. I think we will take a couple of questions from the webcast platform. I have a question from Terence Chua from Mizuho. Hi, Kevin and team, congrats on the great performance. Can I please get a sense of your acquisition pipeline and whether you think you will need to embark on an equity fund raising to bank up your [indiscernible] for this?

Thanks, Terrence. Just to answer this one, just maybe go into a bit of specifics on how we look at investments and how we fund them. So right now, I think our gearing is about 40%. As and when we do a transaction, we usually take on an equity bridge loan type. The site that we take on depends on the business size of transactions. And we typically fund the transaction with a mixture of debt and equity because debt is actually at the asset level on the business level. That's not a cost of ID. So the EBO would then be seen as a debt in the KIT balance sheet. And if it goes past the 45% threshold, then that's where we will say that we will look to undertake an EMR, right, or issue more perpetual securities to bring our gearing down to a lower level, right? This is the first method. And the second method is that we are now -- we have mentioned earlier that we are being more open to asset recycling. We will be open to selling assets better than this rate. And the proceeds from the sales can also be used to fund our investments going forward.

Thanks, Kevin. We'll take another question from the webcast platform. This is from Aaron. So to begin, congratulations on KIT's impressive record performance. I have 2 queries. Could you provide an update on the divestment plans for Ixom? And secondly, considering the relatively dry year in 2023 deal-wise, can we anticipate a more aggressive approach in pursuing deals true-up 2024?

First, on Ixom, right. I think back some time in 2020 or 2021, we embarked on a strategic review of Ixom. We have opened a number of offers, but we think that they do not reflect the full value of Ixom, which is why we decided to call off the strategic review, right? We have kind of -- we think that they did not -- potential buyers, they're not pricing the full value of Ixom because the macro environment then was quite challenging, right? We have since then decided to focus on growing the business, right, because this is what will create value for investors. Of course, as a brand, if we receive offers for Ixom, and we think that reflects the full value of Ixom, we will look to monetize that. But for now, I would say, we are focused on growing Ixom for the long time to come. You mentioned that we have a relatively dry year for 2023. Yes, we did not make any major acquisitions over there. But on 2 January this year, we announced the investments in the German solar portfolio. That was something that we actually worked very hard in the last -- over the second half of 2023. And it closed on 2 January this year and will continue to close for Phase 2 and Phase 4 over the next few months. Do we anticipate a more aggressive approach in pursuing deals? We will want to grow, right? However, we will grow in a very measured manner. We wouldn't grow or invest or acquire assets just for the sake of doing so. Any investments that we may have to be value accretive to our investors. And we are very highly selective, right? In any given year, we review hundreds of transactions and we actually funnel it down to just only 1 or 2 that we focus on. So this is probably my long way of saying that if you find the right deal, we will pursue that, yes.

Okay. We have a couple of questions from the webcast platform. This is; from Edmund Lee from [indiscernible] Asset Management. Please comment on revenue, cash flow outlook from Ixom. How much of the decline in FY 2023 was due to macro factors versus others such as higher insurance expense capital optimization? And he also has a question on DPU policy. Was the special DPU purely a function of the one-off capital optimization exercise at Ixom? Regular DPU seems to have fluctuated a bit, and please comment on that.

So I think there's a question on DPU policy. Was the special DPU purely a function of the one-off capital optimization? And what do we think about it? So -- and there's also -- there's a question around regular DPU. So I will probably just take it in parts. I would say that our regular DPU actually has not fluctuated. In fact, we have been growing our regular DPU by 1% to 2% per annum, right? And you can look at the -- our historical track record and it is showing such a growth trend. We have also kind of mentioned last year that value creation is something that we are pursuing quite actively, and we are always looking to grow our businesses. And at the right time, we will crystallize the value that we created at any of our portfolio companies. That can be done through maybe a monetization effort or that extends to refinancing of the loans at our asset level. And as a plan, we realize or crystallize those value creation. We think that it is only right that we share some of the value created with our investors in the form of a special distribution. We also used the proceeds to really pay down debt or keep the cash for reinvestment. And that's basically how we look at our distributions, right? And I'd like to emphasize that I do not see the special distribution as a one-off exercise. We are always looking to create value. So hopefully, [ internal account ], we will provide the second special distribution to our investors.

Thanks, Kevin. A few questions on the WebEx platform. Edda from EOS, would you mind unmuting yourself to ask your question?

I think just 2 questions from me. Firstly, where do you see increased base growing this year vis-a-vis the 4.25% reported this quarter? Can we expect it to remain relatively stable given that there isn't a significant amount of debt coming due this year? And secondly, in terms of strategy, I think I have missed this earlier. But KIT seems to be exploring a new asset class under the digital segment. So I was wondering what kind of assets you are looking at in this space? And how does it fit into your overall portfolio?

Right. Maybe I'll let Eric take the question on interest rates.

Yes. I'll take that one. Firstly, I think the macro is fully looking good. So we are hoping to see interest rates go down this year. But on the interest rates that we have reported for the portfolio, we've seen the peak hopefully. I think it's crossed in 2023, and we do expect the weighted average interest rate of the portfolio to go sideways going forward because this number is calculated on a look back 12 months now. And as our interest rates have already been hedged at an 83% level, we shouldn't see major fluctuations the year ahead. Of course, that's true on the macro side or the softening of the interest rate, yes.

So I am not an interest rate expert, but all the signs seem to suggest that there will be some macro improvements this year. We think that this year should be better than last year. And hopefully, that also translates to a lower interest rate environment. But having said that, right, I think over the course of last year, we have always emphasized that KIT, we have a very decent portfolio, given that we own very critical infrastructure. We have a very strong opportunity to pass on additional costs, be it increasing operating expenses, albeit increase operating expenses to the end consumers. So I am not worried about inflation, I'm not worried about higher financing costs because given the nature of our portfolio.

Yes. Maybe to give some numbers, if a 100 basis point increase in our interest rate on our portfolio will only impact 1.5% of our world full year 2023 DI.

Yes, I think there's a question around our strategy. So I think -- and I think going -- maybe going a bit broader, right, we have currently, right now, 3 segments. I would say, is energy transition, distribution and storage as well as environmental services, right? I do not see them as a disparate segments. We have this overarching sustainable urbanization thematics. I think it's -- we believe -- we strongly believe that the world will increasingly urbanized, right? And we need to do it in a very sustainable way, which is why we focus on these 3 areas. These 3 areas plays very well to the sustainable urbanization thematics. And this also happened to be the areas where my parents, Keppel, has very strong operating technical engineering expertise, right? We want to invest in areas where we can we understand very well. We want to invest in areas where we can add value, which is why we desire to focus on this sector. Of course, these 3 sectors are not really sectors that will grow well -- will grow with sustainable authorization thematics. Digital is a very important plan to lead because as the world becomes more urbanized, the world will require more data. And we need -- we want to invest in infrastructure that will support this growth. Examples of asset classes, they were borne under the digital segment. I think that will include things like fiber networks, submarine cables as well as any infrastructure services that supports this network, all this segment, for instance, cable laying vessels. They are highly specialized, and they have not put contracts on a take-or-pay basis.

What about [ Ting Chong ], would you like to unmute yourself?

So I have some questions regarding the new German solar portfolio. So I just want to clarify -- have some clarity on the leases. So in an event of a lease default, I'm just thinking which party will be responsible for the recovery of the solar panels? And also, I assume that there will be a termination fee for any lease cancellations. So -- and if so, will the fees be paid to KIT?

All right. I will probably not go into too much details, but what I will assure you is that this is a highly derisked portfolio. We have 60 -- I think all in all, we will have 60,000 customers or 60,000 households. Each of them all are rated very highly in terms of the German equivalent of our credit rating, [indiscernible], right? And this -- we bought this portfolio or invested in this portfolio alongside Enpal, which is the largest solar panel provider to the residential homes in Germany, right? So far when they roll out the panels, they actually did a very stringent credit checks on the current consumers. So which is why we are very confident about the credit quality, right? And I think the second point to mention is that the solar panels actually provide value to the consumers, right. This is because by installing a solar panel, and by installing a battery as well as EV charging, right, they don't have to buy electricity from the grid. It's actually more economical for them to pay at least to us -- have to spend money to buy electricity from the grid. So which is why we think that people will always prefer, right, and not default on debts. Historically, can I say that there will be no defaults on the portfolio? No, I can't say that. But we have looked back a few years on the stability of this portfolio. The default rate is actually extremely low, right? I would say it's probably less than 1%, right? And if in the event, right, there is some of the efforts, I think our preference is to work out maybe a resolution with the household. We don't want to go into a household and start to dismantle the solar panel. We prefer to maybe work up a residual package with that particular home, right. And if we have to -- in a worst case event, if we have to dismantle the solar panels from the home, we will do it together with Enpal, who is the operator and maintaining this portfolio.

Thanks, Kevin. We will take our questions on the webcast platform. This is a question from Rahul from HSBC. So 2 questions, please. One, first on 2024 outlook. Could you share more on how you are thinking about bringing forward in terms of new investments and asset recycling in the current macro environment? Should we expect 2024 to be more like 2022 where significant investments were mixed? Second question, could you also talk about the opportunities and challenges relating to the EV business? And do you see that having potential to become a significant profit contributor over the next few years?

Okay. I will take the first part -- first part of the question first, right. We hope to make regular investments. So I'm expecting some investments to come up over the course of this year. And I think I'm hopeful to realize some of the energy advertising, right? We will do an investment only if it makes sense for our investors. Basically, it must be very accretive to our investors. I cannot comment on what's the size, the number of transactions that we do this year because it's uncertain at this stage. But I'm confident to say that we will probably do 1 or 2 investments. In terms of divestments, we are always looking to review our portfolio, right? And we do receive offers nonbuying offers, or EOIs for assets. But we will act on them only if we feel that it meets our requirements. So if we do want to activate any sale process, we will inform or disclose as and when necessary. Then I think this question on EV charging infrastructure. I think this is a very attractive and upcoming sector, not just in Singapore but other parts of the world. And I think we are also participating in this trend through City Energy. I think, City Energy has done very well in terms of the EV rollout. I think we have a very unique and highly differentiated strategy with City Energy. We focus on the private compartments or the convenience where we secure exclusive rights to build and roll out the EV charging lots for condo and CSD on an exclusive basis for a long period of time. So this will help to ensure that we are able to roll out the EV charging infrastructure in a sustainable manner. And this will position us well as for growth, right, when the government starts to phase out our ICEs vehicles and so on. Two key points on that. I think the government has said that they will stop the sale of ICE vehicles in 2030, and they will phase out all ICE vehicles by 2040. This basically means that -- again, don't quote me on that, but we think that there will be an inflection point about EV charging infrastructure sometime in the -- maybe 2026, 2027 to 2028, sometime along there, and we want to position ourselves for the uptrend.

Thanks, Kevin. We have a question from Gula from the Edge. Congratulations on KIT's FY 2023 results. Where would your special distribution come from? Is it likely to be from a sale of assets? What is the payout ratio of your cash earnings? And do you -- if you value your assets at historical costs along with the accompanying depreciation, how much do you retain to top-up the capital as there are accumulated losses in your unitholders funds? And as a result of the -- of that NAV has fallen at the end of 2023 versus 2022.

All right. I think there's a few sources of our special distribution. The first is, if we do sell an asset and realize significant gains, we will look to share that with our investors through special distribution and keeping the rest for our reinvestments. That's one source. The second source is to -- and which we are a lot focused on is really to grow our business, increasing the internal business such that they have -- we can actually do what we call capital optimization at the asset. This will actually release cash from the capital business. And again, likewise, we will take part of that to share and reward our unitholders and keeping some for reinvestments. What is the payout ratio of our cash earnings? We don't have a target payout ratio in mind. If you follow us, if you look at our historical track record, we aim to grow our DPU on a very sustainable manner. I would say that's probably 1% to 2% on annual. And then we will look to make a special distribution as and when we crystallize value at any of our assets. There's -- I think you have a third part question, right? Okay. So I think your concern is whether -- about accumulated process in our unitholder funds and so on. So okay, let me know if I misunderstood the question, but I think for KIT, we are associated as a business trust, we are able to pay out of cash flows and not based on retail earnings or NAV and so on.

Maybe this one, I'll also add on to what Kevin said. So it links to the question on special distribution. The special distribution, Kevin mentioned, it can come from asset recycling, it can come from capital optimization and also the focus, of course, growing the underlying EBITDA. The NAV reduction, as Kevin mentioned, we are business trust. We are allowed to pay distribution out of retained cash. And that will result in a reduction of an NAV if we don't do any capital recycling to recognize the intrinsic value of the assets that can be sold for the benefit of the unitholders. And when we do that from an accounting point of view, the gain from -- it's recognized because there's a transaction, and that would increase the profit of KIT and reduce the accumulative loss. And that's part of the overall strategy that we are trying to do to show that NAV will increase with growth in recycling strategy. And this is what the Trustee-Manager has done in the last 5 years, and we want to continue to provide that source of steady distribution and on and off create events that will be booked as a capital gain to the unitholders. Meanwhile, we have done capital optimization of assets that we've done very well [indiscernible] but these are optimization projects. And so on the books you can see the gain. So separately, we have also done AUM valuation to actually show the market that the intrinsic value of our assets as well. So I hope that gives you a good idea of our strategy.

Okay. Next question from the WebEx platform. Hi, Suvro, can you unmute yourself?

Yes. So firstly, sorry, maybe a bit of repetition. But in terms of the Senoko extension, what is -- that you does the 300 million contract value refer to? And what -- if KIT is paying $18 million of the CapEx, who is paying for the rest? And what kind of distributable or cash flow do we expect from the extension of the construction compared to what we were getting previously?

Yes, sure. So the CapEx required on the extension is $18 million. In KIT, we are paying or responsible for a very small amount of -- a small percentage of debt. So as a result, which, because we put in a small amount, the DI, going forward, from this asset will not be significant to us. So this is a case where the amount that we invested is small, but we get good IR out there.

Thanks, Kevin. Yes. Suvro, do you have further questions?

Yes. Just one last question. On Ixom, despite the EBITDA growth that we see this year, I think DI has fallen because of certain expenses and one-offs. So going into 2024, do we expect distribution income to bounce back? There's still any -- some charges or expenses that we need to be considering?

So for Ixom, I think last year, the DI has come down, I think, primarily for a few reasons. One-off financing costs that we took on, again, that will not be recurring. Second, FX, right? So I can't control how AUD will move against the SGD. But what I would say is that Ixom has done very well, and we expect them to continue performing just as well going forward. I think, just for information, their financial year is September. In October to date, they have been performing very well, and we expect that to continue. So maybe another way to answer that is that we expect Australian dollar DI from Ixom to grow.

Kevin, I'll add a little bit there. Also, a little bit of timing effect 2022 versus 2023, DI is computed off also CapEx. So one of the reasons why CapEx is higher in '23 is because of timing -- because in 2022 there's still the tail end of COVID and people are still trying to ramp up and catch up on the CapEx. So some of the CapEx overflow to 2023. So that's also one of the reasons contributing to that. And Ixom, in AUD terms, our EBITDA has grown, therefore taxes will increase as well. So these are some of the reasons that's contributing to this weaker performance during 2023.

So whilst I have said that I can't control how the AUD will move in SGD, but we're still doing our best to make sure that we come up the current way. We have a hedging policy in place to make sure that we don't get on the wrong side of any FX movements.

Okay. We have a question from the webcast platform. This is from Aditya from Chartwell Capital. Congratulations on the solid results. Can we know the average duration of our interest rate hedge? And are the hedge aligned with the majority of the debt?

I'll take that, Aditya. The short answer is this 3.3 years is aligned to the underlying tenor of the loan because we typically hedge the -- we put in the interest rate hedges to align with most of our tenure of the underlying loan. And yes, I think that should address both questions, right, average duration and does it align with the maturity? Yes. Answer is yes, 3.3 years.

Thanks, Eric. Another question from Arthur. When you say Keppel Marina East Desalination Plant will be acquired by a mix of debt and equity, with respect to equity, do you mean cash from KIT into the asset as opposed to debt? Or do you mean KIT needs to issue new equity to raise cash? The second question, given the current high DPU yield, why do you not do share buyback? It seems a better use of funds than doing new acquisitions. I think we have addressed the first question earlier. So maybe we'll just address the second question on buybacks.

Yes. We did consider doing a share buyback when we did a review last year. We've already said that, that's probably not the best way to do it because in a way, I do not -- I can't control, right, how the share price of KIT will move, right. And even if I do a share buyback, I cannot guarantee that it will move in a way that we wanted. So -- which is why we prefer to actually within any cash that -- surplus cash that we have to invest. When we reinvest, we see the opportunities out there. That is -- that can give us very attractive adjusted returns, that's higher than our cost capital. So from a cost -- on a corporate finance capital allocation perspective, if we do see attractive investments that can add value to our portfolio, it makes sense for us to retain cash and invest.

Okay. We have a few questions on KMC. One is from Samantha. Why is KMC making a net loss for this year? And when will we see positive distributable income to resume from this asset?

Yes, I'll take this question. It's very, very sharp. It's a net -- although we have negated the contributions from KIT, from if -- we calculate the DI, it is a net loss -- it is a negative performance, and that's largely because of the outage that we had in the fourth quarter, but that outage has been quickly resolved in December. There's sort of some operational reasons behind that also because, backlog, a few requirements have increased in FY 2023. That contributed a little bit to backlog. Going forward, I think as Kevin has mentioned, once we have resolved the underlying commercials of KMC and we are able to restructure the loan, we should see contributions from KMC coming back.

Yes. So again, I'll just emphasize that the KMC situation is something that's high on our priority, and we are working hard on that.

Okay. A couple of questions on DPU growth. Is management able to provide a DPU growth forecast for the next 1 to 5 years.

Okay. We -- our objective and strategy is to increase our regular DPU by about 1% to 2% [ per annum ], by the way, something in line with long-term inflation growth and so on.

Okay. I think we also have a question on why is there a drop in distributable income for the European onshore wind platform in the second half of the year.

So what happened is that for -- I think we acquired this asset in -- I think, 2022, right? And we actually, we bought it in the second half of 2022, and that was the time where power prices is very high due to the fuel gas dislocation due to Russia-Ukraine war, right? But that's a one-off events, which we do not expect that to repeat. Indeed, in 2023, the power prices in Europe normalized and as a result, which revenue by DI from the European onshore wind farm has also come down as well. And I can assure you that we did not assume very high power prices in our underwriting cases.

Yes, it's all upside to us in 2022. I mean, second half is a bit weaker. But I -- we understand that second half -- the FORAS team also did make use of the opportunity during the low period to do maintenance.

So for the [ green farms ], there's still a seasonality there as well. So there will be some fluctuations between the year. But year-on-year, you shouldn't see too much of a fluctuation.

Okay. I think that's all the questions that we have received from the webcast platform. I would like to go back to Izyan from OCBC. Will you have further questions?

I think Izyan basically asked this question about what's the size of investments expected on the European onshore wind farm. I think we have 6 consented projects with a total capacity of 486 megawatts. I probably provide some guidance. The first is, we do not expect all these 6 projects to come at the same time. It will be done over a period of time. The total investment amount, it's -- that we are expecting on SG dollar terms is probably, I would say, in the SGD 100 million mark, right? And that's a very rough figure, right? Because I don't think it's appropriate for me to state what is the -- as per the size at this stage because we are still discussing these asset economics of the [indiscernible] at this point.

Okay. Izyan, if you have no further questions, then I will take one last question from the WebEx platform. Can management elaborate on Ixom DI and why it has significantly gone down from the same period last year?

I think from an SG dollar perspective, it has come down. So I think there's a few explanations for that. But before I go in there, I just want to emphasize that Ixom, the business has done very well, the whole last year and is still doing well. EBITDA has grown. Normalized pro forma AUD DI has also grown, right? The DI last year was a bit weaker because of few things, right? There was a one-off financing costs, right, which will not recur this year. There is also some capital expenses or capital projects that they have taken on. That will not be repeated every year. And third, last year, AUD was a bit weaker as compared to SGD, right, which is why when we translate them to SGD DI, it came down as well. So there's a bit of adverse FX movement over there. But like I said, we have a hedging policy in place and which will help them ensure that to mitigate any adverse FX movements from AUD.

Okay. I think with that, we have come to the end of the results webcast. Is there -- if there are no further questions, we will close this morning's call. Thank you for dialing in, and have a nice day.

Thank you, everyone.

Thank you.

Thank you.