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Spark Infrastructure’s profits take a dip down

Infrastructure investment fund Spark Infrastructure (ASX: SKI) announced in the 2013 half-year report that total income was $156.6 million, up 2% from $112.5 million in the previous corresponding period. Net profit was down 14.3% from $88.7 million to $76 million.

The fund invests in utilities and infrastructure such as electricity and gas distribution and transmission, as well as regulated water and sewerage assets. Some of the utility assets partially owned by the fund also deal in the roll out of the NBN high speed internet program. One such is SA Power Networks, which is projected to install connections to around 300,000 SA residents, starting with works in second-half 2013.

It stated that each of its asset companies are in a period of strong growth due to the capital expenditure program started in 2010 over a five-year period. Some of the extra expenditure will bring down net profit in the short term, but long-term production capacity is increased for future earning power, so investors have to think on the same time horizon.

The fund believes it will be able to increase distributions by about 3%-5% annually to 2015. The fund pays distributions of approximately 80% of standalone operating cash flows. In 2012, the full-year distribution was 10.5 cents per security. The 2013 half-year distribution was declared to be 5.5 cps, up 4.7% from the previous 5.25 cps, so that is in line with their projections.

When dealing with utilities, or in this case, a fund that derives its earnings from utilities, the growth of earnings may seem slow and unattractive. However, utilities can play a part in a portfolio as being the bedrock of stable earning when the rest of the market takes a dive or is just as dull itself.

In some areas there may be only one energy or utility provider for the whole region, so revenue and profit can be banked on because even when money gets tight, people don’t switch off their electricity for a couple weeks to catch up with payments.

Foolish takeaway

Other utility and power infrastructure funds like DUET Group (ASX: DUE) and utility operators such as SP Ausnet (ASX: SPN) or ERM Power (ASX: EPW) can benefit from the continued business of customers who may have no choice as to what utility company they pay. Their profits may be capped because of the regulatory restrictions placed upon them, but these regulations also allow for them to make a particular amount of profit, so periodically they can petition to raise their fees, and keep a steady, regular income stream flowing in.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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