The Spark Infrastructure Group (ASX: SKI) share price is down 1.28% after the company released its financial results for the 6 months ending 30 June 2019.
What did Spark announce?
Spark's half-year report saw interim profit slip 12% on the back of lower returns from the company's Victorian distribution business and higher operating costs. Other highlights from the report included:
- Underlying net profit down 12.2% to $51.1 million
- Adjusted EBITDA up 1.9% from previous year to $426.4 million
- Net operating cash flow up 10.8% to $144.4 million
- Total revenue of $577.1 million, up 1.9%
- Distributions from investment businesses up 10.65 to $152.6 million.
Spark also reaffirmed dividend guidance for FY19 of 15 cents per share.
A closer look at Spark's performance
Spark owns stakes in electricity distribution networks in Victoria and South Australia and has invested in the NSW transmission grid with a 15% holding of TransGrid. Spark has interests in $17 billion of energy assets, however the tightening in the allowed rate of return and other regulatory changes have put pressure on the company's profits from its networks.
Due to high vegetation management and clearance costs, Spark experienced relatively flat revenue from its Victorian distribution networks. The company's South Australian Power Networks also experienced subdued revenue growth with higher operational costs offsetting growth. EBITDA for TransGrid increased 7.5% for the first half to $352.0 million as a result of increased transmission revenues and reduced operating costs.
Spark's Chief Executive Mr. Rick Francis criticised the rate of returns set by the Australian Energy Regulator. Mr Francis stated:
There is a pressing need to revisit the new Rate of Return Guideline (RORG) which has already become out-dated in a very short space of time due to the current uncertainty and volatility in the markets and with the historically low levels of inflation and interest rates.
Outlook for Spark
Spark expects that the new RORG and lower inflation will negatively impact the regulatory returns for SA Power Networks and Victoria Power Networks. However, the company does believe that future cash-flows will more closely align with the five-year regulatory periods. It is expected that lower rates of return and lower interest rates will prompt Spark to cut distributions from FY21.
According to analysts from RBC Capital, Spark should expect to face further headwinds in the future. Analysts noted that despite Spark reporting better operating performance for its core business, the company will need to cut distributions again in FY21.
