Brookfield Infrastructure Partners (BIP) 2Q13 Best to Date

Brookfield Infrastructure reported strong results or as CFO John Stinebaugh described during the conference call; “The second quarter 2013, was the most profitable in our history as virtually all of our operations performed well.” It is important to pause and appreciate accomplishments and encouraging to hear a continued positive outlook for the future. The hard work and prudent investments over past years compound and produce increasingly attractive risk adjusted returns for the benefit of unit holders.

Management seems optimistic about continued opportunities to recycle the retained capital into 12-15% target return projects and is raising cash to do so. This is in addition to the capital being returned to us shareholders in the form of a strong dividend currently yielding 4.5%. The dividend is supported by a conservative payout ratio now at about 55% of Funds from Operations (FFO) when compared to the target range of 60-70%.

The company is building and operating a globally diversified portfolio of high quality infrastructure assets that will generate sustainable, growing distributions over the long term. For investors looking for a management team to deliver long term positive results instead of headlines; it appears like we can continue to expect more over the years to come.

Brookfield Infrastructure Partners, L.P. reported results [Source] for the quarter ended June 30, 2013 with funds from operations (FFO) totaling $180 million ($0.88 per unit) compared to FFO of $111 million ($0.60 per unit) in the second quarter of 2012 for a 62% increase in year-over-year FFO and 47% on a per unit basis. The increase in FFO was primarily from the recent Australian Railroad expansion performing well in the face of reduced commodity demand from Asia and value acquisitions that closed in late 2012.

BIP Collage

In the Letter to Unit holders [Source] CEO Sam Pollock described the quarter in part this way: “Most importantly, we are very encouraged that many of our operations are performing ahead of expectations, with outlooks that remain positive…”

“During the quarter, we made significant headway executing the plan to divest non-core assets that we announced last year. We signed definitive agreements to sell assets that will generate net proceeds of almost $1.1 billion, including our timber business and a minority stake in our regulated distribution business in New Zealand. As we look forward, our balance sheet is currently stronger than ever, with approximately $2.5 billion of liquidity at the corporate level, and we are actively evaluating a number of opportunities to re-invest this capital at attractive rates of return in order to enhance unit holder value.”

More important are his comments on what the future may hold later in the letter; “With the recent volatility in the capital markets, raising capital in the debt and equity markets now carries considerably greater uncertainty. Our ability to take a long-term view and to commit capital on a timely basis provides an attractive alternative for those companies looking to sell assets or raise capital. Furthermore, a number of these opportunities are very large scale. With our liquidity position and proven access to the capital markets, we believe that we are one of a short list of buyers that can readily execute these transactions.”

“We have a great amount of confidence in our ability to deploy significant amounts of capital at attractive returns as demonstrated by the approximately $4 billion that we have invested in acquisitions since 2009. We feel fortunate to have a significant war chest to invest at a time when equity return expectations are on the rise. The deployment of this capital will drive further distribution growth which should support our attractive valuation relative to other yield-oriented investments.”

Financial Summary:

2Q13 Financial Summary

BIP reported net income of $132 million ($0.60 per unit) for the period ended June 30, 2013, compared to a net loss of $26 million (loss of $0.16 per unit) in the prior quarter. The increase was the result of higher FFO, gains on certain asset sales and hedging items, partially offset by greater depreciation and amortization expense associated with an increased asset base.

Below are highlights and performance by segment from Brookfield Infrastructure’s Supplemental Information [Source] and you are encouraged to review the information provided in the source document as Brookfield continues to do an outstanding job keeping unit holders informed.

Operational Highlights:

  • Australian railroad operated at full take-or-pay volumes following completion of expansion program
  • Integration of UK regulated distribution business continues to progress
  • Toll road traffic increased 10% year-over-year
  • North American gas transmission operations continue to be impacted by weak market fundamentals
  • Completed expansion of North American district energy business, increasing cooling capacity by 10%
  • Commissioned first segment of Texas transmission system with completion of final two segments expected in third quarter
  • Awarded ~$85 million of new capital mandates in utilities business

Financing and Liquidity Highlights:

  • Executed a number of strategic initiatives that strengthened balance sheet, increasing corporate level liquidity to ~$2.5 billion
    • Signed definitive agreements for sale of non-core assets, including timber, for proceeds of ~$1.1 billion
    • Upsized credit facility by $500 million to $1.4 billion
    • Completed $340 million equity offering
  • Completed $1.2 billion of debt financings at attractive terms
    • Extended average maturity of debt portfolio to nine years
    • Improved maturity profile with less than 10% of total debt maturing over next three years
  • Our district energy business achieved A- rating from DBRS
  • Overall group-wide liquidity of ~$3 billion

Segment Performance:

2Q13 Segment Performance

Utilities Platform:

2Q13 Utilities

  • FFO of $96 million in Q2’13 compared to $78 million in Q2’12
    • Primarily attributable to recently completed acquisition of UK regulated distribution business, which doubled its size, and increase in ownership of our Chilean electricity transmission system
    • Excluding these investments, FFO increased due to inflation indexation and additions to rate base of existing operations
  • Return on rate base and AFFO yield of 11% and 15%, respectively, is relatively consistent with prior year levels
    • Attractive returns given risk profile of the business

Transport Platform:

2Q13 Transport

  • FFO of $83 million in Q2’13 compared to $36 million in Q2’12
    • Primarily driven by commissioning of Australian railroad’s expansion program and contribution from toll roads acquired in Q4’12
    • AFFO yield of 18% in Q2’13 versus 9% in prior year, primarily due to increase in FFO and lower than average quarterly maintenance capital expenditures
    • Maintenance capital expenditures were $12 million, less than average quarterly sustainable level of $18-$20 million largely due to timing of projects at our railroad that typically occur in second half of the year

Energy Platform:

2Q13 Energy

  • FFO of $18 million in Q2’13 compared to $17 million in Q2’12
    • Benefit of investments that closed in 2012 and favorable weather conditions were partially offset by the impact of challenging North American natural gas market
  • AFFO yield of 3% in Q2’13 is lower than prior year due to:
    • Declining FFO at North American gas transmission operations
    • Higher than average maintenance capital expenditures
    • Maintenance capital expenditures were $11 million, which is higher than average quarterly sustainable level of $3 million to $5 million largely due to timing of projects in North American gas transmission operations

Corporate and Other:

2Q13 Corporate

  • General and administrative costs for the quarter were consistent with prior year
    • Anticipate corporate and administrative costs of $9 million to $11 million per year
  • We pay Brookfield an annual base management fee equal to 1.25% of our market value, plus recourse debt net of cash
    • Base management fee was higher than prior year due to increase in market capitalization following August 2012 and May 2013 equity issuances and higher unit trading price
  • Financing costs include interest expense and standby fees on committed credit facility, less interest earned on cash balances
    • Financing costs decreased primarily due to lower interest costs on corporate credit facility following receipt of investment grade credit rating, in addition to refinancing of higher cost legacy corporate debt with corporate bonds issued in October 2012

Capital Recycling:

During the conference call Sam Pollock explained the rationale behind the timber business sale: “We define non-core assets as ones in which Brookfield does not have sufficient control in order to deploy our operations oriented approach to enhance value as well as assets that are mature or has limited incremental upside. In relations to our timber assets, while they were a core component of our business, we had an opportunity to dispose-off these assets to strategic buyers who are prepared to offer prices that fully reflected our view of future log prices.”

“In the current market environment, buyers are generally valuing both mature regulated assets and timberlands, [at] rates of returns that are meaningfully lower than our target range of 12% to 15% per annum. As a result, we felt that a sale of these assets would provide a very low cost source of financing for our business.”

“When we embarked upon our plan, we appreciate that we would not necessarily be able to time asset sales in order to match fund new investments. However, we’re confident that we will be able to recycle this capital into new investments that offer superior returns for our unit holders in a relatively short period of time.”

2Q13 Capital Recycling

Corporate Liquidity:

Liquidity was ~$2.1 billion at June 30, 2013, up from approximately $760 million at December 31, 2012 positioning the company well to recycle capital to projects meeting total return objectives of 12-15%; and is comprised of the following:

2Q13 Corporate Liquidity

  • Pro-forma corporate cash is ~$1.1 billion following close of the sale of U.S. timberlands, which occurred subsequent to period end, and the sale of the New Zealand distribution business, which is expected to close by the end of 2013
  • The nature of our asset base and the quality of our cash flows enable us to maintain a stable and low cost capital structure
  • We attempt to maintain sufficient liquidity at all times so that we are able to participate in attractive opportunities as they arise, withstand sudden adverse changes in economic circumstances and maintain a relatively high payout of our FFO to unit holders
  • Principal sources of liquidity are cash flows from our operations, undrawn credit facilities and access to public and private capital markets
    • During the period we increased our corporate credit facility by $500 million to $1.4 billion to reflect the growing scale of our operations
  • We may, from time to time, invest short term in marketable equity and debt securities in order to earn attractive short-term returns and reduce the cost of our liquidity

BIP’s has demonstrated years of hard work, prudent investments and performance that are generating increasingly strong and diversified risk adjusted returns for the owners of the company. Out investment thesis remains on track; let’s continue to enjoy the results!

Disclosure: Long BIP, BAM, BREP, BPY

Resources:

  • Brookfield Infrastructure Partners Website [Source]
  • Brookfield Infrastructure Partners 2Q13 Earnings Release [Source]
  • Brookfield Infrastructure Partners 2Q13 Letter to Unit Holders [Source]
  • Brookfield Infrastructure Partners 2Q13 Supplemental Information [Source]

 

 

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