Morningstar

Morningstar, Inc.

Equity Bottom-Up

Spark Infrastructure is a solid regulated utility, paying healthy dividends but with a tough outlook as the regulator looks for ways to reduce utility bills. Spark owns 49% of three electricity distribution networks: CitiPower and Powercor in Victoria (jointly known as Victoria Power Networks); and SA Power Networks in South Australia. It also owns 15% of electricity transmission network TransGrid and 100% of the Bomen solar farm development, both in New South Wales. Regulated revenue is secure…

No-moat-rated Spark Infrastructure acquired the Bomen solar farm development project near Wagga Wagga in New South Wales. The solar farm will start in mid-2020, will cost AUD 188 million, and should add around AUD 10.5 million, or 1.3%, to annual EBITDA. Management believes the acquisition is accretive to value and distributions, but we are not convinced. While tough regulatory conditions mean there’s logic in diversifying away from regulated assets, there are material risks with intermittent…

Spark Infrastructure posted a solid 2018 result, with proportional EBITDA up 5% to AUD 825 million. Distributions of AUD 16 cents per security were comfortably covered by look-through operating cash flow of 19.5 cps. The result was in line with our expectations. We have made minor adjustments to our earnings forecasts and remain comfortable with our AUD 2.40 fair value estimate. At current prices, Spark appears fairly valued. There is no change to our opinion that the firm lacks an economic…

The Federal Court has sided with the Australian tax office and decided Victoria Power Networks (49% owned by Spark) must pay tax on customer contributions. This controversial decision will impact the entire industry, including Spark’s other assets, unless successfully appealed. We have long maintained earnings from customer contributions are an accounting quirk and do not represent real earnings, so are surprised with this decision.
Analyst: Adrian Atkins

On Dec. 17, 2018, the Australian Energy Regulator, or AER, released its 2018 Final Report on the Review of Regulatory Tax Approach, where it outlined a list of recommended changes to its approach when setting tax allowances for regulatory energy networks. This initiative represents yet another regulatory attack to limit profitability of regulated utilities, after the cost of equity allowance was slashed in recent resets and limits were imposed on operating cost allowances. The systematic…

Australia

Spark Infrastructure Group invests in utility infrastructure assets in Australia.

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