Brookfield Infrastructure (BIP) 3Q13 Strong Results & Good Outlook Continues

Brookfield Infrastructure Partners (BIP) reported another quarter of strong results and a continued positive outlook with many opportunities. Once again it is a pleasure to see hard work and prudent investments over past years continue to compound and produce increasing returns for the benefit of unit holders. Management continues on a sound and well executed strategy of contrarian investing in infrastructure opportunities around the world. It is refreshing to see the actual results continue to attest to their strategy.

Sam Pollock, CEO of Brookfield Infrastructure sums it up well; “Our results this quarter were strong as virtually all of our operations performed better than the prior year. Our focus has shifted from capital recycling to capital deployment. We have advanced a number of initiatives, including increasing our investments in our toll roads and expanding our district energy business. We continue to evaluate a number of opportunities and are enthusiastic about our growth prospects going forward.”

As an example of BIP’s flexible, robust and global strategy CEO Sam Pollock wrote in his letter to unit holders in part [Source] “We have been successful in the past by applying a contrarian approach when making new investments, often the result of focusing on sectors or regions that are capital constrained. In countries such as Brazil, where we have over 100 years of experience, economic growth has slowed and the currency has fallen against the U.S. dollar. Foreign investment has declined and capital available in the country has suddenly become scarce…As a result…we see opportunities to acquire high quality assets with strong fundamentals at attractive valuations. Overall, we remain confident in the country’s long-term prospects given its plentiful resource base, attractive demographics, established rule of law and expanding middle class”.

“…We recently increased our investment in our Brazilian toll roads, bought a district energy business and entered into exclusive negotiations for an investment into a large general cargo, infrastructure logistics business [Vale’s VLI unit: Source] in South America. In addition, we are in exclusive discussions relating to several other investment opportunities. We continue to feel very enthusiastic about our growth prospects going forward…We are seeing excellent opportunities to expand our global portfolio and we have significant financial resources available to pursue these initiatives”.

The company announced it is targeting long-term average distribution growth in the range of 5–9% on its current strong 4-5% distribution yield. This positive variance is an increase from the 3-5% prior target. For the long term investor looking for results it appears we can continue to expect more over the years as the company continues to build and operate a globally diversified portfolio of high quality infrastructure assets that will generate sustainable, growing distributions. The cash flow from regulatory frameworks or long-term contracts will increase to 85% and provide stability to the results. The prospects for continued income growth is promising.

 BIP Distribution Growth 3Q13

BIP’s 3Q13 Supplemental Information [Source]

Brookfield Infrastructure Partners, L.P. reported results [Source] for the quarter ended September 30, 2013: funds from operations (FFO) totaled $167 million $0.80/unit compared to $113 million or $0.58/unit in the 3Q12. This is a 48% increase and a 38% increase per unit. FFO was primarily driven by organic growth in most of its businesses and incremental earnings from capital deployed in the transport and utilities businesses. For the quarter BIP generated an Adjusted Funds from Operation (AFFO) yield of 12%. AFFO is Funds from operations less maintenance capital. Currently the dividend payout ratio is 59% below the long-term target range of 60%-70% and portends well for future dividend increases.

BIP Collage

In the 3Q13 Letter to Unit holders [Source] CEO Sam Pollock also described the quarter in part this way: “During the quarter, our focus firmly shifted from capital recycling to capital deployment. Our final asset sale, the divestiture of our Australasian distribution business, has been progressing through the regulatory consent process and it is currently anticipated that the sale will close before the end of the year. We are pleased that we were able to deploy approximately $550 million this quarter. This capital is being used to increase our ownership of our South American toll roads and further expand our district energy platform by acquiring two systems in Houston and New Orleans, which we expect to close before the end of the year. We also added to our utilities rate base by investing $70 million and replenished our backlog by signing almost $60 million of new mandates”.

Financial Summary:

BIP 3Q13 Financial Summary

BIP reported strong FFO growth for the quarter showing a 48% total increase and a 38% increase per unit. FFO is basically cash flow, a primary measure of performance for capital intensive businesses. FFO was primarily driven by organic growth in most of its businesses and incremental earnings from capital deployed in the transport and utilities businesses. Net income was $33 million or $0.12/unit compared to $68 million or $0.33/unit in 3Q12. The 3Q12 benefited from a deferred tax recovery and higher non cash depreciation and amortization expenses due to the expanded asset base and deferred tax charges relating to the sale of its Pacific Northwest timberlands more than offset the growth in FFO.

Below are highlights and performance by segment from Brookfield Infrastructure’s Supplemental Information [Source], You are encouraged to review the information provided in the source document.

Operational Highlights:

  • Commissioned the second segment of Texas transmission system in October expect fully  commissioned into the rate base by end of the year
  • Connected a commercial office property in downtown Toronto to the district energy system and progressed plans to connect an additional two buildings by the end of next year
  • Achieved ~70% of anticipated savings following integration of Inexus at the UK regulated distribution operation
  • Introduced fiber to home product lines to customers at UK regulated distribution business
  • North American gas transmission operations continue to be affected by weak market fundamentals
  • Invested $70 million in utilities rate base; replenished backlog with $60 million new capital mandates

Financing and Liquidity Highlights:

  • Completed $0.8 billion of financings bringing year-to-date financings to $4 billion
    • Extended average maturity of debt portfolio to almost 10 years
    • No significant maturities in the next five years
  • ~$2.4 billion1 of corporate level liquidity
  • Overall group-wide liquidity of $2.7 billion

Segment Performance:

BIP 3Q13 Segment Peformance

Utilities Platform:

BIP 3Q13 Utlities Platform

  • FFO of $97 million in Q3’13 compared to $80 million in Q3’12. Results benefited from:
    • New investments in Q4’12 that doubled the size of UK regulated distribution business and increased ownership interest of Chilean electricity transmission system
    • ‘Same store’ organic growth from inflation indexation, additions to rate base and lower financing costs
  • Return on rate base and AFFO yield of 11% and 15%, respectively, is relatively consistent with prior year levels

Transport Platform:

BIP 3Q13 Transporation Platform

  • FFO of $82 million in Q3’13 compared to $40 million in Q3’12
    • Primarily driven by commissioning of Australian railroad’s expansion program, as well as contribution from toll roads acquired in Q4’12
    • Also benefited from a partial period contribution from increase in ownership of Brazilian toll roads business completed in September
  • AFFO yield increased to 16% in the current quarter versus 9% in prior year due primarily to the above noted increase in FFO

Energy Platform:

BIP 3Q13 Energy Platform

  • FFO of $14 million in Q3’13 was unchanged from Q3’12
    • The benefit of district energy acquisition that closed in 2012 and investments in our Australian energy distribution operation were offset by the impact of a challenging North American natural gas market
  • AFFO yield of 1% in Q3’13 is consistent with prior year
    • Maintenance capital expenditures were $11 million, which is higher than average quarterly sustainable level of $3 million to $5 million
    • Primarily attributable to certain larger scale projects at North American gas transmission business that are non-recurring

Corporate and Other:

BIP 3Q13 Corporate and Other

  • Closed the sale of U.S. timberlands in the quarter for proceeds of $470 million
    • Eliminated reporting on timber segment in the prior quarter; included results in corporate & other segment
    • FFO declined from prior year due to the sale of U.S. timberlands at the end of July
  • General and administrative costs were consistent with prior year
    • Anticipate corporate and administrative costs of $9 million to $11 million per year, excluding base management fee
  • BIP pays Brookfield Asset Management an annual base management fee equal to 1.25% of the market value, plus recourse debt net of cash
    • Base management fee was higher than prior year due to increase in market capitalization following May 2013 equity issuance and higher unit trading price
  • Corporate financing costs include interest expense and standby fees on committed credit facility, less interest earned on cash balances
    • 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
  • Other income includes interest and distribution income earned on corporate cash and financial assets

Corporate Liquidity:

Group-wide liquidity was ~$2.3 billion at September 30, 2013, up from approximately $760 million at December 31, 2012, and was comprised of the following:

BIP 3Q13 Corporate Liquidity

  • Pro-forma corporate cash (inclusive of financial assets) is approximately $800 million following completion of the sale of Australasian distribution business, expected to occur by the end of November
  • BIP maintains liquidity 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
  • May invest in financial assets comprised mainly of liquid equity and debt infrastructure securities in order to earn attractive short-term returns and for strategic purposes

Debt Maturity Profile:

BIP finances assets principally at the operating company level with debt that generally has long-term maturities, few restrictive covenants and no recourse to either Brookfield Infrastructure or our other operations. On a proportionate basis as of September 30, 2013, scheduled principal repayments over the next five years are as follows:

BIP 3Q13 Debt Maturity

BIP’s continues the hard work, prudent investments and performance that are generating strong risk adjusted returns for the owners of the company. The good work continues!

Disclosure: Long BIP, BAM, BEP, 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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