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Spark Infrastructure earnings rise as tax bill looms

Emma Rapaport  |  26 Feb 2019Text size  Decrease  Increase  |  
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Spark Infrastructure has met its earnings expectations, sending shares up 2 per cent in early trade, but the utility investor warns shareholders it faces a growing tax burden.

The owner of electricity networks in Victoria, South Australia and NSW reported adjusted earnings before interest, tax, depreciation and amortisation of $825.4 million, up 4.8 per cent on fiscal-2017, driven by cost efficiencies and business growth.

Standalone net operating cash flow rose 8.5 per cent to $290 million, while total income for the year to 31 December rose 1 per cent.

Spark owns 49 per cent of Victorian Power Networks, 49 per cent of SA Power Networks and 15 per cent of NSW-based TransGrid. At 3.45pm, Spark Infrastructure (ASX: SKI) was trading at $2.37 – on par with Morningstar’s fair value estimate.

Managing director and chief executive Rick Francis said the company was continuing to maintain efficiency and support Australia's transition to a lower carbon future.

"We continue to invest to facilitate Australia's transition to a lower carbon emissions footprint for the future through TransGrid's renewable energy connection business in NSW," he said.

"This has been an area for growth for some time, and the financial benefits of this investment are now coming through."

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Morningstar senior equity analyst Adrian Atkins said the result registered broadly in line with his expectations, with Spark-owned businesses in Victoria and NSW delivering good earnings growth.

"Victoria Power Networks - operator of the CitiPower and Powercor electricity distribution networks - delivered EBITDA growth of 6.3 per cent to $829.7 million, a good return above the regulatory tariff increases, driven by cost-saving initiatives," he said.

"SA Power Networks - the sole electricity distributor in South Australia - contributed flat adjusted EBITDA, up 0.8 per cent to $649.9 million.

"TransGrid - manager and operator of the high-voltage electricity transmission network in NSW and the ACT – delivered strong earnings up 12.7 per cent to $668.9 million on the back of cost control and growth in the unregulated business connecting new wind farms."

Court decision forces Spark to reduce distributions

Earlier this month the Federal Court sided with the Australian Taxation Office in ruling that Victoria Power Networks must pay tax on consumer contributions. An example of consumer contributions is where a large property developer pays a utility to move a power line so it doesn't interfere with its development project.

Morningstar's Atkins was surprised by the court's ruling. He argues earnings from customer contributions represent an accounting quirk and should not represent real earnings.

In today's announcement, Spark confirmed a $270 million writedown in SA Power Networks. Spark said the decision may result in the need to "restate tax losses" and "recognise a potential tax liability" of $65 million to $70 million for all years up to and including to 31 December 2018.

"Following the Federal Court tax decision, Spark Infrastructure may become a taxpayer earlier than previously anticipated, and tax payments would need to be funded from net cash flow from operating activities," Francis said.

Spark also confirmed an 9 per cent downgrade in distribution payout for 2019 to at least 15 cents per share, which it said was more closely aligned with the five-year regulatory periods of its businesses. Spark pays distributions to investors, not dividends, as it operates as a listed trust, not a company.

"While this reduction is of course disappointing, we have confidence in the robustness of our investment businesses and their continued outstanding performance," Spark chairman Doug McTaggart said.

Last December, the Australian Energy Regulator cut rates of return (ROR) and revenue tax allowances for owners of gas and power networks.

In Atkins’ view, this decision could curb profits and distributions, and could affect shareholder returns more so than the adverse Federal Court decision.

Spark today said changes to the ROR and tax allowances could cut yearly revenue by between $60 million to $75 million post-2020.

Looking ahead, Francis said Spark had a strategy to "become a leader in delivering essential service infrastructure" and was aiming for capital growth and continuing distributions to shareholders.

"We aim to do this by growing and diversifying our portfolio through disciplined acquisitions and/or building sustainable businesses arising out of the technology, climate and customer-driven transformation occurring across the energy sector," he said.

The company will pay an unfranked final distribution of 8 cents per share, up from 7.63 cents a year ago.

Spark issued distribution guidance for 2019 of at least 15 cents per share. Atkins noted the company will not provide guidance for subsequent years because of concerns about future cash flows.

He says the planned regulatory resets for Victoria Power Network and South Australia Power Networks in 2020 could force the company to cut distributions further.

As Spark begins paying tax, it should be able to distribute franking credits to shareholders "to the extent possible", the company said.

is the editorial manager for Morningstar Australia. Connect with Emma on Twitter @rap_reports. You can email Morningstar's editorial team editorialAU[at]morningstar[dot]com

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