SP Austnet - Half Year Report

Key Points:

• Revenues 10.1% higher
• EBITDA growth of 8.1%. NPAT growth of 22.6% driven by lower income tax expense
• On track to deliver a full year distribution of at least 8.000 cents per security
  
• Fully franked dividend component increased to 39.8% of total distribution
• Continuation of Distribution Reinvestment Plan for the 2010/11 interim distribution
• Higher net finance charges, mainly due to $11.8m of hedge de-designations. No economic loss as recovery will occur over the term of the hedge

Financial:

	30-Sep-10	30-Sep-09
Total Assets	A$8.8 bn	A$7.9 bn
Total borrowings	A$4.6 bn	A$4.0 bn
Net debt	A$4.1 bn	A$3.8 bn
Total Gearing	62%	59%
Net Gearing	59%	58%
NTA	S$1.15
EPS (Cents)	2.38	1.87

Operation Review:

(1) Electricity distribution business
SP AusNet’s electricity distribution business contributed A$361.6m in total revenues for the HY2010/11. Revenues were 19.5% higher than the previous corresponding period, principally driven by increased revenues from incentive scheme payments due to improvements in network reliability, additional revenues from the AMI (Advanced Metering Infrastructure) program, strong growth in customer numbers and favourable weather conditions. Total electricity distributed through the network was 4,163 GWh representing an increase of 2.7% from the previous corresponding period.

In the HY2010/11, 6,382 additional customers were connected to the network, representing an increase of 1.0% in total customers. Total capital expenditure for the period, excluding AMI, was A$129.6m, of which A$49.9m was customer initiated. The total capital expenditure for the period in relation to AMI was A$56.8m.

(2) Gas distribution business
SP AusNet’s gas distribution business contributed A$139.5m in total revenues for the HY2010/11, up 4.0% on the previous corresponding period due to a growth in consumer numbers and a colder winter resulting in higher volumes. Total gas delivered through the network was 46.1PJ, an increase of 1.8% over the previous corresponding period.

Demand in Victoria’s growth corridors is continuing to generate consumer connections to the network. In the HY2010/11, 9,477 additional customers were connected to the network, representing growth of around 1.7%. Capital expenditure for the period, excluding AMI, was A$30.9m of which A$22.1m was customer initiated.

(3) Electricity transmission business
SP AusNet’s electricity transmission business contributed A$291.5m in total revenues for the HY2010/11, up 2.8% on the previous corresponding period due to the increased revenues under the regulated price path. Total electricity transmitted through the network was 26,367 GWh, an increase of 3.0% from the previous corresponding period, due to higher demand in the second quarter combined with a more consistent winter demand. Transmission regulated revenue is not subject to volume risk.

The program of capital expenditure on the transmission network has progressed well during the year, and total capex for the period, excluding AMI was A$68.6m, of which A$20.1m was customer-initiated.

(4) Select solutions business
During the period, Select Solutions contributed $55.6m in service revenue and $2.0m in other revenue, an increase of $7.4m over the previous year. Select Solutions contribution to EBITDA for the year was $6.3m.

Select Solutions provides services to SP AusNet and also provides niche asset services, in particular metering and vegetation management, asset inspection and technical services to external parties including Jemena Asset Management Pty Ltd (referred to as “Jemena”). The agreements with Jemena commenced 1 April 2009 and are for an initial five year term. The agreements will continue for further five year terms unless terminated by either party by giving notice to terminate at the end of the current term. These agreements have resulted in SP AusNet extending its footprint to introduce these niche services into New South Wales.

My Comments:
Overall half year revenue of SP Austnet is looking good. However, with the current high gearing, it is necessary to watch closely how SP Austnet will refinance its huge debts.
The near term debt which matures on Mar 2011 is A$685M and another A$435M is due in Nov 2011. Total undrawn bank debt facilities is only A$725M. SP Austnet will need to secure further debt facilities soon.
Although having such a high borrowing, SP Austnet is still issuing A$0.04 per share which is consistent with previous distributions. This imply that future distributions may not sustain.
In any case, im vested and prepared to bear risks on this company based on its high yield.