Brookfield Infrastructure Partners, L.P. (BIP) 3Q12 Report

On November 7, 2012 Brookfield Infrastructure Partners, L.P. reported net income per unit of $0.35 and Funds from Operations (FFO) of $0.58 per unit slightly higher than Wall Street estimates of $0.55. The company is shifting gears from its
Australian organic growth focus, adjusting to the cooling of growth in Asia, to an acquisition focus to take advantage of bargains originating from the Euro-crises in both Europe and South America. A good example of how Brookfield’s worldwide reach creates opportunities not available to many.

BIP’s recent acquisition activity makes financial comparisons to prior periods
meaningless. The 3Q12 financial results were as expected and recent activities highlight the long term positive outlook for this value focused global infrastructure company. We can continue to collect the attractive 4.4% dividend yield while management takes advantage of cyclical conditions to grow the company and potential payout.

Financial Highlights:

3Q12 FFO totaled $113 million or $0.58/unit compared to FFO of $97 million or $0.62/unit in 3Q11 reflecting an increase in the transport and energy and utilities segments partially offset by a decline in the timber business. Per unit FFO was 6% lower
than the prior year due to the impact of a $500 million equity issuance during August
2012. Proceeds will be used to fund acquisitions that are scheduled to close 4Q12. BIP’s dividend payout for 3Q12 is 65% of FFO at the middle of the 60% to 70% target.

Following is a summary of management’s comments:

Overview:

In the 3Q12 BIP completed the $600 million upgrade and expansion of the Australian
railroad and executed five access agreements with mining customers. The railroad expansion is completed under budget and ahead of schedule. All five contracts are contributing to FFO. By the end of the 1Q12 all customers will be operating at or above take-or-pay volume levels.

BIP advanced a number of strategic initiatives to lay the foundation for the next phase of growth. It raised $900 million of debt and equity to finance transactions and will invest approximately $1.3 billion of equity in utilities and transport and energy segments.

Cash flow from regulatory frameworks or long-term contracts will increase to 85% of
cash flow providing greater stability for operating results and dividend payments.

Results of operations:

  1. BIP generated FFO of $113 million during the 3Q12 up $16 million over 3Q11 in weak global economic conditions.
  2. Results reflect strong performances from utilities, transport and energy, partially offset by a lower contribution from timber business.
  3. FFO per unit of $0.58 for 3Q12 was $0.04 lower than 3Q11 though due to the August equity offering where proceeds have yet to generate cash flow.
  4. The payout ratio was 65% of FFO which is the midpoint of the target range of 60%-70%, and showed an Adjusted Funds from Operations (AFFO) yield of 8% in 3Q12.

Utilities:

  1. Utilities generated FFO of $80 million in 3Q12 compared with $77 million in 3Q11. The increase was from greater connections revenue and higher average rates due to the acquisition of the Colombian distribution utility earlier in the year.
  2. These were somewhat offset by a reduction in FFO from the coal terminal, which earned non-recurring revenue last year.
  3. Utilities segment posted an AFFO yield of 16% in the current period.

Transport and Energy:

  1. Transport and energy segment earned $54 million of FFO in 3Q12 compared to $39 million in 3Q11.
  2. The railroad’s FFO increased over 140% in 3Q12 compared to 3Q11 due to contribution from four expansion projects and a favorable grain harvest.
  3. The strong performance was partially offset by a decline in FFO from the ports business that benefitted from a start-up payment in 3Q11 and was impacted by reduced economic activity in Europe.
  4. Overall transport and energy generated an AFFO yield of 6% in the quarter.

Timber:

  1. During 3Q12 timber earned FFO of $3 million compared to $5 million 3Q11.
  2. Results show soft demand from Asia and a price decline of 7%.
  3. Operating restrictions due to an extended fire season forced a reduced harvest by 7%.
  4. Timber exports fell to 36% of total log sales, but at a level likely to continue as demand in the domestic market improves with recovery in the U.S. housing market.
  5. The AFFO yield for timber operations was 2%.

Corporate:

  1. In 3Q12 progress was made in the funding plan for strategic initiatives.
  2. In October 15.7 million L.P. units were issued at a gross price of $33.25 per unit raising $500 million.
  3. Prior to quarter end a corporate bond issuance with investment grade credit rating raised C$400 million of five-year bonds in the Canadian market with a 3.5% interest rate and swapped into U.S. dollars for an effective interest rate of 2.7%.
  4. Going forward BIP will predominantly issue non-recourse debt at the asset level targeting less than 10% of debt portfolio comprised of corporate debt.

Growth and initiatives:

Transport and Energy

  1. In October closed the acquisition of an additional interest in the Chilean toll road, increasing ownership to approximately 50%.
  2. Continue the acquisition of a 60% interest in the largest toll road operator in Brazil, in partnership with Abertis Infraestructuras and institutional investors.
  3. Closing is expected in December, BIP will own interests in 11 toll roads in Brazil and Chile.
  4. The 3,200 km network is diversified with a balance of light and heavy vehicles and urban and interurban traffic.
  5. All concessions will benefit from projected increases in traffic and tolls that escalate with inflation.
  6. BIP is now one the largest owner/operators of toll roads in the region and well positioned to invest in additional expansions and upgrades; and add-on acquisitions.
  7. Further development opportunities exist in Brazil and Chile, two of the highest growth countries in the region.
  8. Approximately $475 million will be invested in the South American toll roads in the 4Q12.
  9. BIP acquired a district energy system along with institutional investors serving commercial customers in Toronto.
  10. The business generates very stable cash flow, with 93% of its revenue under long term contracts. Growth opportunities exist with a large pipeline of new customers that can be connected to the deep lake cooling system.
  11. Invested approximately $75 million for a 25% interest in this business.

Utilities:

  1. Closed the acquisition of a UK regulated distribution business and working on the
    recapitalization of the company.
  2. Challenger Infrastructure Fund’s unit holders and minority shareholders sold 100% of the business to BIP.
  3. Received clearance from the UK Office of Fair Trading; finalizing financing arrangements; expect to complete the recapitalization before end of 11/12
  4. Will merger with existing business; invest $510 million and more than double installed base of gas and electricity connections to over 1 million.
  5. Will extend multi-utility capability into high margin fiber-to-home and district heating offerings.
  6. Initiated the acquisition of Brookfield Asset Management’s (BAM) 10% interest in the Chilean transmission system for $235 million. Will increase BIP’s stake to 28%.
  7. The electricity transmission system in Chile, serves 98% of the population.
  8. Economic growth in Chile positions the business for upgrades and expansions to satisfy demand. Expect to close the transaction 1Q13 subject to third party consents.

Outlook:

  1. In 2013 global economic uncertainties, as a result of the European sovereign debt crisis and lower growth from China, will limit organic growth near term.
  2. Investments in utilities, transport and energy businesses over the past two years will make a significant contribution to results in 2013.
  3. Commodity prices have declined and mining companies have deferred expansion projects.
  4. The Dudgeon Point coal terminal will be delayed but continuing planning for the site and feasibility study.

For further information:

3Q12 Press Release, Letter to Unit Holders, Supplemental, Conference call here.

Brookfield Infrastructure Investor Presentation here.

Disclosures: I am long BIP, BAM, and BREP.

The information contained herein is provided for informational purposes only, is not comprehensive, does not contain important disclosures and risk factors associated with investments, and is subject to change without notice. The author is not responsible for the accuracy, completeness or lack thereof of information, nor has the author verified information from third parties which may be relied upon. The information does not take into account the particular investment objectives or financial circumstances of any specific person or organization which may view it. Nothing contained within may be considered an offer or a solicitation to purchase or sell any particular financial instrument. Any investment can be very risky and is not suitable for everyone. You should never enter into an investment unless you can afford to lose your entire investment. Always complete your own due diligence. Before making any investment, investors are advised to review such investment thoroughly and carefully with their
financial, legal and tax advisors to determine whether it is suitable for them.

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