Brookfield Infrastructure (BIP) Reports 4Q13 Results; 2013 was a Good Year

Brookfield Infrastructure reported results for full year 2013 with a total return of 16% compared to its target total return of 12-15%. This is lower than the past three and five years, where annualized returns were outstanding at 29% and 36% respectively. As much as those returns are enjoyable, they cannot be sustained at that level for a number of reasons including increased competition. The company made significant investments to build its infrastructure business during the year that can deliver increasing cash flows, dividends and better than average total returns for years to come. Funds from Operations (FFO), BIP’s measure of cash flow, for the full year 2013 compared favorably to full year 2012 showing a 37% increase.

BIP Annualized Total Return 4Q13

[Source] BIP’s 4Q13 Letter to Unitholders

It was a busy year allocating capital, the company’s core strength, with $1.5 billion of proceeds from asset recycling that yielded gains in excess of 25% and completion of $4.5 billion long term financing to capture historically low interest rates. Investments included completion of the now fully operational Australian rail expansion ($600 million); organic growth initiatives ($500 million); identified additional utility and transportation projects ($600 million); invested $600 million in Brazil toll roads and district energy systems in North America; Signed agreements to invest in a South America rail and port business and two container terminals in California.

Continued investments in infrastructure assets help assure the cash flows to support continued distribution growth. Following the 15% increase in the distribution per unit in 2013 the Board of Directors has approved a 12% increase in distribution per unit for 2014 increasing it to $.48 per quarter yielding 5.1% on today’s price. The payout ratio (total distributions divided by FFO) is 57% and below its long-term target range of 60%-70% supporting further potential distribution growth.

BIP Annual Distribution 4Q13

[Source] BIP’s 4Q13 Supplemental Information

Management also appears confident about the prospects of 2014 being another good year on the horizon: “This was a successful year for our business as we accomplished a number of financial and operating priorities and delivered our strongest year from an FFO perspective,” said Sam Pollock, Chief Executive Officer of Brookfield Infrastructure. “In 2013, we strengthened our balance sheet through execution of opportunistic refinancings, completion of our capital recycling program and reduction of our overall financial risk profile. We made significant organic growth investments in our existing business and secured $1.1 billion of new investments in North and South America. Going into 2014, we are excited about our prospects and believe we are well positioned to continue to deliver strong returns for our unitholders.”

Can this Continue?

Brookfield Infrastructure was launched in early 2008 and has had an outstanding performance with three and five year annualized returns of 29% and 36% respectively. As one of the early companies to identify and invest heavily in assets that became known as the infrastructure asset class they seized an early opportunity to establish a preeminent position.

Infrastructure assets are typically long life and require relatively minimal maintenance capital expenditures, enjoy varying degrees of barriers to entry and tend to appreciate in value over time. Modern society will always require infrastructure assets to deliver; finished and raw materials, energy and people and the investment benefits of this asset class are becoming more recognized by others so competion is increasing.

In the Letter to Unitholders, CEO Sam Pollock described cash flows into the sector this way: “Our experience in owning infrastructure assets has been extremely positive as demonstrated by our financial performance. However, we were not the only ones to discover this great market opportunity. Over the last five years, a significant amount of capital has entered the sector, with pension plans and other funds increasing allocations to infrastructure. Consequently, there has been speculation that inflows into the sector have been greater than investment opportunities and that this influx of capital is driving up values to potentially unsustainable levels. We don’t believe that to be the case overall, despite there having been a number of instances where highly competitive auctions have resulted in high valuations. In general, the market for infrastructure assets has become much more liquid as the sector has matured, resulting in lower return expectations than when the asset class was in its infancy. Our recent experience suggests that core infrastructure investors are underwriting investments at equity rates of return in the range of 9-11% after tax, although in some cases we’ve seen evidence of even lower thresholds.”

Management outlined how they intend to invest in this more competitive environment and deliver on the return objectives while avoiding what they call “cost of capital shootouts” that can lead to diminishing returns when competition increases:

  • Invest capital in their existing businesses to facilitate customer growth. In franchise areas where they generally do not have to compete with others due to barriers of entry. There they can negotiate directly with customers on a win-win basis. The $600 million expansion of the Australian railroad completed in 2013 is cited as an example of this capability.
  • Leverage operating platforms with tack-on acquisitions. They have been successful in auction processes when competing against others with lower return expectations by capturing revenue and/or cost synergies with existing businesses or identifying growth opportunities that others cannot because they lack the same depth and geographical presence of Brookfield Infrastructure. The recent acquisition of the district energy business in Houston and New Orleans in 2013 is given as an example where this has been the case.
  • Brookfield’s ability to move quickly; taking a contrarian view and applying expertise in structuring and closing transactions leading to exclusive negotiations with sellers. This was used to develop relationships with European construction companies in 2010 to 2012 that led to the successful build-out of the toll road business in South America. Recently they were rewarded for efforts in developing relationships with mining and shipping companies with an agreements in the rail and port sectors (along with partners) to acquire interests in VLI, a Brazilian transportation company, and Trapac, a U.S. based port operator. These resulted in partnership arrangements and transactions underwritten to achieve return thresholds.

Sam Pollock continued:The influx of new competitors into the sector will present its challenges, however the growing interest in the asset class validates the value of our marquee assets and provides an opportunity for us to exit mature investments at attractive prices, as we have done over the past few years. Furthermore we believe there are few investors who have the ability to replicate our investment strategy and thus our unit price should reflect a premium for our ability to invest capital at higher risk-adjusted return levels.”

A Robust Strategy for Market Cycles:

If you think of the company’s value and contrarian investments made during declining or depressed markets as the buy-side strategy. There is a complementing sell-side strategy; where they opportunistically sell assets for attractive returns when the markets are overheating or opportunities are found. Brookfield refers to this as capital recycling.

For example we enjoyed outstanding returns over these past few years because Brookfield invested in various value and distressed propositions during times when many choose (or were forced) to flee the markets. As the investment merits of infrastructure assets are recognized, competition enters the infrastructure business, and the markets overheat and became more liquid. The sell-side strategy of capital recycling enhances returns as Brookfield’s opportunistically sells assets when attractive gains can be locked in. Capital can then be reallocated to more value and contrarian investments opportunities around the world or the proceeds are set aside for the next downturn of the cycle.

As an example BIP’s liquidity is about $2.6 billion on December 31, 2013, up from $763 million on December 31, 2012. The two sides of Brookfield’s strategy; is summed up by another likeminded value investor, Warren Buffett who says; “Be fearful when others are greedy and greedy when others are fearful”.

 

 

BIP Collage

Financial Summary:

Brookfield Infrastructure Partners, L.P. posted strong results [Source]: for the year ended December 31, 2013 with funds from operations (“FFO”) totalling $682 million ($3.30 per unit) compared to FFO of $462 million ($2.41 per unit) in 2012. This 48% increase (37% on a per unit basis) in FFO was primarily the result of virtually all our operations performing better than the prior year, benefitting from organic growth and incremental earnings from capital deployed to grow its transport and utilities businesses. For the year, Brookfield Infrastructure generated an AFFO yield of 13%, and currently has a payout ratio5 of 57% that is conservative versus its long-term target range of 60%-70%.

BIP FFO 4Q13

Segment Performance:

Brookfield Infrastructure’s utilities platform produced FFO of $377 million compared to $308 million in 2012. This 22% increase was primarily due to the acquisition of a UK regulated distribution business, and the increased ownership in its Chilean electricity transmission system. Excluding the impact of new investments, results increased by 7%, benefitting from inflation indexation, additions to the rate base, as well as lower financing costs.

The transport platform generated FFO of $326 million in 2013, compared to $168 million in the prior year. The significant increase in FFO was driven by the full commissioning of the Australian railroad’s expansion that was completed in the first quarter of 2013, and the contribution from the toll road business, following investments made over the past 12 months.

Brookfield Infrastructure’s energy platform earned FFO of $70 million in 2013, compared to $76 million in 2012. Contributions from its district energy business and improved performance at its energy distribution businesses were more than offset by weaker results at its North American gas transmission business, which continues to face difficult market pressures from the rapidly changing energy landscape in the U.S.

The following table presents net income and FFO by segment:

BIP FFO by Segment 4Q13

Brookfield Infrastructure reported a net loss of $58 million ($0.43 per unit) for the year ended December 31, 2013, compared to net income of $106 million ($0.47 per unit) in 2012. Valuations of the Partnership’s property, plant and equipment increased by $250 million across many of its businesses, net of a $275 million charge recorded on its investment in the North American natural gas transmission business. These valuation gains were recorded in Other Comprehensive income, whereas the impairment charge was recorded in income, which was the main contributor to the decline in earnings compared to the prior year.

Growth Initiatives:

In 2013, Brookfield Infrastructure secured over $1.1 billion of new investments in its transport and energy platforms. It invested $600 million to increase its ownership in its toll road business in Brazil and to expand its district energy platform in North America. Additionally, in December, Brookfield Infrastructure agreed to invest approximately $500 million into two container terminal facilities in California and a South American infrastructure logistics business.

North American Port Investments

Brookfield established a joint venture with Mitsui OSK Lines’ (MOL) container terminals to add value to its container terminals in the U.S. and to participate in future expansions in growing regions. As part of the formation of this joint venture, Brookfield Infrastructure signed agreements to invest alongside institutional investors in an approximately 50% equity stake in MOL’s container terminals in Los Angeles and Oakland. These gateway terminals handled approximately 900,000 TEUs in 2013 and have surplus capacity to facilitate volume growth in the future. The Los Angeles terminal is undergoing a $185 million modernization project that will double its capacity, increase efficiency and enhance its low-cost operation. Once complete in 2016, this will be one of the most automated terminals in North America. Completion of this transaction is expected in the first quarter of 2014, subject to obtaining all required consents and regulatory approvals.

South American Port and Rail Investments

Brookfield Infrastructure signed agreements to invest alongside institutional investors to acquire an approximate 27% interest in VLI, one of Brazil’s largest rail and port logistics businesses. This investment provides Brookfield Infrastructure with the opportunity to participate in the evolution and growth of the logistics and transportation industries in Brazil. VLI’s rail consists of approximately 4,000 km under concession, with approximately 17,100 wagons and approximately 680 locomotives, and is integrated with five inland terminals and three ports. VLI expects to deploy over R$6.0 billion to upgrade and expand operations over the next seven years, allowing it to capture volume growth from increased activity in the agriculture, steel and other industrial sectors in Brazil. The terms of Brookfield’s investment include a mechanism, guaranteed by the seller, to ensure that a minimum return is achieved over a period of up to six years from closing, which is expected to occur in the first half of 2014, subject to obtaining all required consents and regulatory approvals.

Utilities Platform:

BIP Utilities Platform 4Q13

  • FFO of $377 million in 2013 compared to $308 million in 2012. Results benefited from:
    • New investments in 4Q12 that doubled the size of the UK regulated distribution business and increased ownership interest of the Chilean electricity transmission system
    • ‘Same store’ organic growth from inflation indexation and additions to rate base

Transport Platform:

BIP Transport Platform 4Q13

  • FFO of $326 million in 2013 compared to $168 million in 2012
    • Primarily driven by commissioning of Australian railroad’s expansion program, as well as contribution from South American 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

Energy Platform:

BIP Energy Platform 4Q13

  • FFO of $70 million in 2013 compared to $76 million in 2012
  • The benefit of district energy acquisition that closed in 2012 and improved performance at our energy distribution businesses was offset by the impact of a challenging North American natural gas market

Corporate and Other:

BIP Corporate 4Q13

  • Closed the sale of our timberlands in 2013 for proceeds of $640 million
    • Eliminated reporting on timber segment in the prior quarter; included results in corporate & other segment
  • General and administrative costs were in-line with prior year
    • Anticipate corporate and administrative costs of $8 million to $10 million per year, excluding base management fee
  • BIP pays 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 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 Q4’12
  • Other income includes interest and distribution income earned on corporate cash and financial assets

Corporate Liquidity:

Group-wide liquidity was approximately $2.6 billion at December 31, 2013, up from $763 million at December 31, 2012, and was comprised of the following:

BIP Liquidity 4Q13

  • Maintains sufficient liquidity at all times 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 unitholders
  • Principal sources of liquidity are cash flows from operations, undrawn credit facilities and access to public and private capital markets
  • May, from time to time, 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 December 31, 2013, scheduled principal repayments over the next five years are as follows:

BIP Debt Maturity 4Q13

Brookfield Infrastructure continues the good work of finding attractive investments that generate strong risk adjusted returns for the owners of the company.

Disclosure: Long BIP, BAM, BEP, BPY

Resources:

  • Brookfield Infrastructure Partners Website [Source]
  • Brookfield Infrastructure Partners 4Q13 Earnings Release [Source]
  • Brookfield Infrastructure Partners 4Q13 Letter to Unit Holders [Source]
  • Brookfield Infrastructure Partners 4Q13 Supplemental Information [Source]

 

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