Brookfield Infrastructure Partners, L.P. (BIP) 4Q12 A Solid Report

BIP Port PhotoThe value created over the past few years continues to provide cumulative returns for the benefit of patient unit holders with a long term investing perspective. This is another solid report. I don’t think we could have asked for much more other than perhaps to wish more publicly traded companies were managed this well the owners.

Brookfield Infrastructure Partners, L.P. reported results [Source] for the year ended December 31, 2012 with funds from operations (FFO) totaling $462 million ($2.41 per unit) compared to FFO of $392 million ($2.41 per unit) in 2011 for a 18% increase in year-over-year FFO. The increase in FFO, a measure of cash flow, was primarily from expansion projects commissioned during the year. Year over year per unit FFO was flat year as there is generally a lag time until construction is completed in capital intensive projects.

“Our performance in 2012 highlights the value created in our business from capital investments made over the last several years. In 2012 we strategically expanded our operating platforms by acquiring high quality businesses at attractive valuations. In addition, we advanced our asset sales program, to allow us to recycle capital, which is a key part of our financing strategy,” said Sam Pollock, CEO of Brookfield Infrastructure. “Brookfield Infrastructure is entering 2013 well positioned for growth and with a strong balance sheet to continue taking advantage of attractive investment opportunities.”

Highlighting this point and showing confidence in future returns, the Board of Directors increased the quarterly distribution $0.43 per unit representing a 15% increase. This $1.72/unit distribution represents about a 4.4% yield at today’s unit price of $38.80 and a 5.5% yield on our cost basis. For income oriented investors, since their launch in 2008 BIP has increased the distribution from $1.06/year to $1.72/year or over 10% per year and remains well within their payout target. For 2012 the distribution payout ratio was about 62% of FFO well within the target range of 60%-70%.

Financial Highlights:

4Q12 Performance

Following is a summary of management’s comments [Source]:

Overview:

In 2012 BIP advanced a number of large-scale organic development projects and closed several opportunistic acquisitions. It is this formula of organic growth along with merger and acquisition (M&A) execution that will continue growth going forward.

  1. As a result of the growth and the stability of our cash flows, BIP obtained a BBB+ corporate credit rating from Standard and Poor’s;
  2. Strong operating results support the distributions paid out, providing unit holders with an attractive overall return of 33% for the year.
  3. Over the past five years outperformed both infrastructure peers and the S&P 500.

Note: Total Return includes unit price appreciation and distribution payments to unit holders.

In organic growth areas:

  1. Successfully commissioned $600 million Australian railroad expansion below budget and ahead of schedule;
  2. Advanced the construction of the $750 million Texas electricity transmission system; expected to be up and running by mid-2013.

In acquisition areas:

  1. Closed a number of transactions that were the result of an outreach program that we initiated in 2008;
  2. Developed relationships with European infrastructure companies with high quality assets in Latin America made available by the European sovereign debt crisis;
  3. Deployed $1 billion of capital in European businesses or in assets acquired from European owners as a direct result of this strategy.

Results of operations:

4Q12 Platforms

  1.  In 2012 generated FFO of $462 million compared with $392 million in 2011.
  2. The 18% increase in FFO was primarily from expansion projects during the year.
  3. FFO per unit of $2.41 was flat compared to the 2011 as the cash flows from investments made during the period tend to lag in capital intensive projects. The distribution payout ratio was 62%, within the target range of 60%-70%
  4. BIP earned a solid AFFO yield of 10%.

Utilities:

  1. Utilities platform generated FFO of $308 million in 2012 compared to $275 million in 2011.
  2. The increase in FFO was primarily from a completed merger that doubled the size of the UK distribution business; increased ownership of Chilean electricity transmission system; and acquisition of an interest in a Colombian distribution company.
  3. Cash flows of the existing business steadily increased with inflation indexation and contributions organic growth investments
  4. In 2012 utilities earned an AFFO yield of 15%, a very attractive return in light of the low risk profile of this segment.

Transport and Energy:

  1. The transport and energy segment generated FFO of $244 million in 2012 compared to $167 million in 2011.
  2. The increase in FFO was primarily driven by a 110% increase in our Australian railroad’s FFO as a result of expansion program and a favorable grain harvest.
  3. Results also benefited from the South American toll roads acquired in the fourth quarter.
  4. North American gas transmission business continues to be impacted by excess capacity and low natural gas prices however FFO remained flat vs. the prior year due to equity investment to deleverage the business
  5. Overall, the AFFO yield for our transport and energy platform was 9% for the year higher than the prior year, but below expectations over the long term.
  6. In 2013, the AFFO yield should increase with a further ramp-up of cash flows from the railroad expansion and a full year of results in the toll road business.

Timber:

  1. During 2012 Timber recorded FFO of $22 million compared to $33 million in 2011.
  2. Soft demand from Asia early in the year caused average realized prices to decrease by 7%.
  3. Operational restrictions due to a prolonged fire season impacted the harvest in the second half of the year.
  4. In 2012 exports represented 41% of total log sales versus 47% in 2011 as demand in domestic markets strengthened.
  5. U.S. housing market recovery gained momentum with seasonally adjusted, annualized U.S. housing starts reaching 954,000 in December 2012, which was 37% above prior year levels.
  6. New home permits increased 29% year over year.
  7. In 2012 AFFO yield for Timber was 4%, and expected to improve in 2013 due to strengthening export markets, and continuing recovery of the U.S. housing sector.

Corporate:

  1. In 2012 BIP further solidified the balance sheet, raised approximately $900 million of capital, comprised of $500 million of equity and C$400 million from a corporate bond issuance.
  2. The two offerings were several times over-subscribed, demonstrating investors’ interest in BIP and the access to the capital markets.
  3. Increased liquidity by increasing the credit facility to $900 million subsequent to year end; and reduce the borrowing cost as a result of a BBB+ credit rating from Standard and Poor’s.
  4. Completed several refinancing and capitalizing on the opportunity to issue long-term debt in this historically low interest rate environment.
  5. In total, refinanced $3.3 billion of debt at an average rate of 4.6%.
  6. In the first half of 2013, will focus on executing long-term, take-out financings at the UK regulated distribution business and the Australian railroad.
  7. Secured investment grade credit ratings at both of these entities.
  8. On completion of refinancing the average maturity of the debt portfolio will be about eight years and will repatriate nearly $400 million of capital.

Growth Initiatives:

  1. During the fourth quarter of 2012 deployed $1.1 billion of capital into investments in the utility, transport and energy platforms funded with $500 million equity offering and draws on revolving credit facility.
  2. In utilities completed the acquisition of a UK distribution business investing $525 million and merged with the existing UK distribution company increasing installed connections to over one million.
  3. The invested capital in the combined business totaled approximately $650 million; the value of this franchise is significantly greater due to its prospects for growth and its market position as indicated by sale of 20% interest in the combined entity to an institutional investor for proceeds of approximately $235 million [implying a value of about $1175].
  4. During 4Q12signed an agreement to acquire an additional 10% interest in the Chilean transmission system from Brookfield Asset Management for $235 million.
  5. In the transport and energy segment BIP completed the acquisition of additional interest in the Chilean toll road for $170 million in October, increasing ownership to approximately 50%.
  6. BIP acquired an interest in an entity with a 60% controlling stake in the largest toll road operator in Brazil for $310 million, in partnership with Abertis Infraestructuras and institutional investors.
  7. These roads benefit from long-term concession agreements in proven regulatory regimes, with tariffs that are indexed to inflation.
  8. There remain significant opportunities to deploy capital to expand networks to accommodate increased traffic due to GDP growth.
  9. BIP also invested approximately $75 million for a 25% interest in a district energy system serving commercial customers in downtown Toronto, in partnership with institutional investors.

Financing Plan:

  1. Progress made in executing our financing plan for these investments include:
  2. Proceeds of $500 million received from the August equity offering.
  3. Over $300 million raised from asset sales in addition to the sale of the 20% interest in our UK regulated distribution business.
  4. Sold 12.5% interest in Canadian timberlands for $85 million.
  5. These initiatives the take-out financings that expected to close 1Q13 will raise $1.2 billion. In early 2013 approximately $700 million of liquidity is available to invest and considering further timber and non-core asset sales to recycle capital into new investment opportunities.

Outlook:

Sam Pollock, Chief Executive Officer summarized the 2012 performance and outlook for 2013 and beyond in his letter to unit holders [Source] this way;

Last year our performance demonstrated that our business can deliver strong results even during periods of tepid growth in the global economy. We believe this resiliency can be attributed to the fact that 85% of our cash flows are generated under regulatory frameworks or long-term contracts, a significant amount of which are of a take-or-pay nature. Entering 2013, we believe that the global economic recovery is beginning to accelerate. Prospects for the U.S. economy have improved as the housing market has finally turned the corner. After a relatively weak year, the Chinese economy is showing signs of strengthening. With the contractual nature of our business, Brookfield Infrastructure has demonstrated it can deliver solid results in a variety of economic environments, however, we believe the full potential of the business will be realized in periods of stronger economic growth and higher inflation.

Going forward, our growth strategy will continue to be multi-dimensional. Within our existing portfolio of businesses, we should generate meaningful growth that does not require capital investment. Over 65% of our revenues are indexed to inflation, and we have considerable excess capacity in our toll roads, ports and natural gas transmission system. Furthermore, certain of our businesses such as our electricity transmission operations, distribution business and railroad are well positioned to invest in high return organic growth projects driven by customer demand. Lastly, we will seek to originate acquisitions of new businesses that we can buy for value that strategically fit with our operations, utilizing Brookfield’s extensive global asset management platform. For the past year, our M&A activities have been the more prominent activity. While we expect this trend to continue over the balance of 2013, the level of organic growth within our business should accelerate with the global economic recovery that is underway.

In summary, we are very excited about the prospects for Brookfield Infrastructure in light of the current position of our business and our growth opportunities…

Supplemental Information:

BIP 4Q12 Letter to Unit Holders [Source]

BIP 4Q12 Earnings Release [Source]

BIP 4Q12 Supplemental Informatoin [Source]

BIP Website [Source]

Disclosure: Long BIP, BAM, BREP

 

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