The Spark Infrastructure Group (ASX: SKI) share price has edged higher today after the company announced it has turned in a solid half year of results, despite the impacts of coronavirus. Specifically, distribution and transmission revenues rose by 3.8%, in accordance with agreed regulatory pricing. Consequently, earnings before interest, taxes, depreciation and amortisation (EBITDA) rose by 4.8% year on year. By the market’s close, the Spark Infrastructure share price has risen 1.83% to $2.23.
The infrastructure fund owns $6.6 billion of regulated and unregulated assets in the electricity transmission, distribution and generation sectors. The Australian Energy Regulator (AER) agrees the company’s allowable revenues over a 5 year period. As a result, it delivers consistent, predictable results unless there are major unforeseen circumstances.
A final important note is that the company saw a 10.5% increase in growth CAPEX during the period. This is important because under the regulated model, the company draws part of its income from the value of its regulatory asset base.
Spark infrastructure results
The only asset that is 100% owned by the fund is the Bomen Solar Farm project north of Wagga Wagga in NSW. It was delivered on time and on budget and is now fully operational. This is an interesting step into unregulated revenues. The fund is also planning new solar projects. These include, Jemalong and Melbourne Airport Solar Projects in Victoria, and commercial solar and battery solutions in South Australia.
On one hand, solar farms produce an annuity style income stream because they are low cost energy producers. On the other hand, they are easily impacted by weather changes and ambient environmental issues. For example, New Energy Solar Ltd (ASX: NEW) reported impairments to its FY20 production plans due to rainfall and grass fires.
In terms of risk management, the company saw minimal impacts from COVID-19, highlighting its very defensive nature. Spark Infrastructure is supporting business customers via network tariff relief. The company also paid all remaining historical taxes to remove downside risk and minimise potential ATO interest costs.
Best performing subsidiary
According to the 2019 AER benchmarking report, some of the Spark Infrastructure assets have consistently been among the most productive service providers in the national electricity market (NEM) across the past 11 years.
Spark Infrastructure owns 49% of distribution companies; Victoria Power Networks (VPN) and SA Power Networks (SAPN). VPN saw an increase in net capital expenditure of 41% due to the need to replace zone power stations. This has helped increase the regulatory asset base (RAB) by 5.4%, therefore contributing to future revenues.
SAPN saw its RAB increase to $4.372 million. It also managed to reduce operating costs by 6.1%. However, the company also owns 15% of Transgrid, which saw its overall capital expenditure grow by 64.6%. This was mainly due to investment in augmentation projects including Powering Sydney’s Future, Stockdill Switching Station, and higher maintenance capex.
The company will pay an unfranked dividend of 7 cents per share. With the current Spark Infrastructure share price at the close of trading on Tuesday, that represents a payment yield of 3.2%. The fund has a trailing 12 month dividend yield of 6.58%, and has reconfirmed guidance of 13.5 cents per share across all of CY20.
This fund delivers high cash flows and appears to be well managed. It has pledged to maintain at least 85% of revenue streams from regulated sources, thus sustaining its defensive nature. While it is planning growth across its entire portfolio, the growth pipeline at Transgrid is particularly significant.
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