Utilities provider Spark Infrastructure Group (ASX: SKI) reported its half-year results earlier today. Total income was down 21.9% to $136.9 million and net profit fell 56% to $39.2 million on a statutory basis. However underlying figures were more positive with total income up 1.6% to $146.9 million and net profit up 5% to $70.8 million.
Two adjustments explain the difference between the statutory and underlying figures and why the underlying figures more closely reflect the true performance of the business.
- In June 2015, Spark signed an agreement with the ATO regarding interest deductions on loans. The group recognised a loss of $31.7 million as a result of cancelling deductions from prior years.
- Between reporting periods Spark changed the way it accounts for certain fixed assets. If both sets of accounts had been prepared using the new method then profits in the last half year would have been $21.5 million lower.
Earlier today the stock traded at a 5.2% discount to its net tangible asset value of $1.92 per security as at 30 June 2015. Spark plans to pay an interim unfranked dividend of 6 cents per stapled security up from 5.75 cents last year. The group also advised distributions for the 2015 financial year will be 12 cents per stapled security equating to a yield of 6.6% unfranked.
Operating cash flows rose 16.7% to $101.2 million and were up 7.3% to 6.90 cents on a per share basis underpinning the 6 cents distribution. Including those retained in subsidiaries, operating cash flows were $166.4 million and so the group can afford to pay off debt and invest in new infrastructure after paying dividends.
Spark is targeting a ratio of borrowings to its regulatory asset base (RAB) of 75% which may seem a lot but its assets generate stable returns in all economic conditions and so can service a high level of debt. As at 30 June 2015 Spark's net debt to RAB ratio was 76.2% and has fallen steadily since 2011 when it was 81.5%.
Spark owns 49% stakes in two electricity distributors, Victoria Power Networks and SA Power Networks. In addition Spark owns a $745.6 million debt with Victoria Power Networks which generated interest of about $40.1 million in the half.
SA Power Networks saw a 4.5% fall in volumes to 5,136 gigawatt hours (GWhs) but managed to increase revenues 12.8% to $633.3 million thanks to higher prices and an increase in National Broadband Network revenues. Meanwhile, Victoria Power Networks saw a 2.7% increase in volumes to 8,180 GWhs and realised a 10.6% increase in revenues to $639.3 million.
The Australian Energy Regulator (AER) sets a revenue cap for electricity distributors which depends on the size of their RAB. This has two key implications for Spark.
- If Spark can grow its RAB then it can increase revenues and profits and this explains why the group has increased its RAB from $6.7 billion in 2010 to $9.2 billion today.
- If electricity volumes fall then revenue will not be affected. Volumes fluctuate year to year for weather reasons but there is also a long-term negative trend due in part to increasingly energy efficient appliances.
In late 2015, the AER will determine what these revenues are for the next five years and the ruling will have a major impact on Spark's profitability over this period.
