CitySpring Infrastructure Trust (CitySpring) will distribute 1.75 S cents per share for 3Q09, flat QoQ and up 9.4% YoY. This translates to an annualized trailing yield of about 13.5%. The trust posted S$101.2m in 3Q revenue, up 4.3% YoY and 0.2% QoQ. Most importantly, cash earnings re-stabilized at S$20.3m versus S$1.1m a quarter ago when the trust was hit by timing lags and one-offs. For one, City Gas had been hit by the timing lag between tariff adjustments and actual fuel prices in the previous quarter - this effect was reversed during 3Q09. City Gas has since reduced its gas tariffs from 1 February 2009. Over time, the revenue model is designed to leave City Gas neutral to the effect of changes in fuel costs. Meanwhile, Basslink recovered A$1m in facility fee based on its cumulative availability at year end. We're maintaining our HOLD call on CitySpring and our S$0.57 fair value estimate. We will be attending an analyst briefing today and will have more subsequently.

3Q09 cash earnings increased significantly to S$20.3m compared to the S$1.1m in 2Q09. Cash earnings for 9M09 amounted to S$39.1m, representing 78% of our full year forecast. The Group will pay a DPU of 1.75 cts for 3Q09, representing a 42% payout from cash earnings for the quarter, and expects to meet its DPU commitment of 7 cts for FY09.

The underlying businesses continued to be cash generative. City Gas contributed the bulk of the increase in cash earnings due to the lower fuel costs this quarter and a 7.7% yoy increase in the volume of gas sold. The gas tariffs have been adjusted from 1 Feb 2009 to reflect the lower fuel costs. 75% of cash earnings for the quarter were attributable to City Gas.

The Group turned in a net loss after tax of S$21.2m due mainly due to a fair value loss on the hedging agreement (FIRD) linked to Basslink. In view of falling interest rates in Australia, the management is managing its exposure to interest rate movements below the benchmark rate by purchasing an interest rate floor for an over-hedged portion of the FIRD.

Group NAV/unit was $0.11 compared to $0.52 as at Sep-08, dragged down by negative hedging reserves of $210m mainly related to the interest rate hedging agreement with Hydro Tasmania on a notional debt level of A$625m. The 3-month bank bill rate, which declined about 40% between Mar and Dec-08, resulted in the huge movement in the fair value of the hedge. The depreciation of the A$ against the S$ between the two periods has also caused the reduction in NAV. Excluding the reserves, NAV is $0.60.

The DPU commitment of 1.75 cts for 4Q09 remains intact. The board has not committed to any DPU guidance beyond FY09. However, surplus cash accumulated so far is sufficient to cover DPU of 1.75 cts for the next four quarters. The downtrend in the A$ interest rate may widen the hedging reserves and result in a negative equity, but our valuation remains supported by stable cash flow from the businesses. With a forward yield of 13.5%, we maintain our Buy recommendation.