Brookfield Infrastructure (BIP) Reports 1Q14 Results; Remains a Solid Investment

Before jumping into the quarterly report (which was good by the way) let’s take a moment to reflect on why we’re invested in this business.

Good Business:

Brookfield Infrastructure Partners (BIP) is invested heavily in the class of assets that became known as infrastructure assets where they seized an early opportunity to establish a preeminent position. Infrastructure assets are long life and require relatively minimal maintenance capital expenditures; they tend to appreciate in value over time and enjoy varying degrees of barriers to entry. Modern society will always require infrastructure assets to deliver; raw materials, energy and people and the investment benefits of this asset class are becoming more recognized by others.

Good Management:

BIP and their parent Brookfield Asset Management (BAM) as front runners established a worldwide position that helps create opportunities for the well-funded, contrarian and value oriented Brookfield family of companies. BIP continues to be active expanding the infrastructure platform as opportunities surface. Brazil is a current example; cash has been fleeing emerging markets causing asset prices and competition for those assets to drop. BIP’s contrarian and value perspective causes them to see these conditions as an investment opportunity with the potential for above average returns due to a long term investment perspective.

Outstanding Results:

Brookfield Infrastructure targets a total return of 12-15% per year. The annualized returns for the one, three and five year periods ending in December, 2013 were 16%, 29% and 35% respectively. These are simply outstanding results for the benefit of the longer term and patient investor.

What about Market Valuation?

Concern over the valuation of the stock market is getting a lot of attention and although we have no idea when or how much the market will correct, someday it surely will correct. When the market does correct and the unit price drops, there is comfort knowing that is the time when Brookfield is kicking it into high gear; buying low to create the outstanding returns that we’ll enjoy in the future. We can’t successfully time the market, but we can patiently wait for the recovery that will also surely come and while waiting, collect a strong 4.9% dividend secured by barriers to entry and a 60% payout ratio. Why wouldn’t we keep this a core investment with 90% of the company’s cash flow regulated or contracted, 70% indexed to inflation, and 60% with no volume risk?

Financial Summary:

BIP 1Q14 Financial Summary

[Source] BIP 1Q14 News Release

The 1Q14 report shows the year 2014 is off to another strong start. BIP reported [Source] continued strong results with funds from operations (FFO), Brookfield’s primary metric of cash flow, of $186 million ($0.89 per unit) compared to FFO of $160 million ($0.80 per unit) in the 1Q13 for a 16% total increase in year-over-year FFO) and a 11% per unit increase. The lower per unit increase reflects equity distributions for investment projects.

The company’s return on capital during the quarter was 14% as measured by adjusted funds from operations (AFFO), funds from operations less maintenance capital expenditures divided by capital deployed. Net income was $32 million or $0.10 per unit compared to a net loss of $28 million or a negative $0.17 per unit in 1Q13 where results were negatively impacted by refinancing debt breakage costs incurred in the quarter for longer term lower rates.

BIP Collage

Segment Performance [Source]:

The utilities business produced FFO of $89 million in the 1Q14 compared to $92 million in the 1Q13. Results were impacted by the sale of the Australasian distribution operations in the 4Q13. Excluding the impact of this sale, underlying FFO increased by $6 million or 7% due to inflation indexation and the commissioning of capital projects into the rate base.

The strongest year over year FFO improvements was in transportation up almost 42%. The Australian rail road expansion came fully on stream in March, 2013 contributing to the favorable comparison along with the help of a bumper Australian grain crop requiring rail transportation to the market. Higher contribution from Brazilian toll roads also contributed in transportation where BIP doubled ownership.

Energy operation produced FFO of $26 million in the 1Q14 compared to $22 million in the 1Q13 for an 18% increase. Improvements in the North American natural gas transmission business resulted from increased natural gas volumes into Chicago and higher revenues from profit sharing tied to higher spreads from natural gas price volatility caused by the winter weather. The UK energy distribution operations reported higher FFO as a result of higher tariffs and lower costs through a margin improvement program implemented over the past year.

The following table presents net income and FFO by segment:

BIP 1Q14 FFO by Segment

Growth Initiatives:

In the quarterly letter to unit holders [Source] BIP discussed the excellent start on the 2014 goal of between $500 million to $1 billion investment goal. The company committed to make five new investments in transportation and energy that total about $600 million to be invested alongside institutional partners for a 40% interest in the investments. They include:

  1. Agreements were signed to acquire an approximate 50% equity stake in APM Terminals’ (APMT) Elizabeth container terminal located in the port of New York & New Jersey. The transaction is a great opportunity for BIP to enter the second busiest port market in North America. This long life asset has surplus capacity to benefit from economic growth in the U.S. The close is expected in 2Q14. The terminal handled approximately 700,000 TEUs (standard size container units) in 2013.
  2. The previously announced acquisition of a 50% interest in Mitsui OSK Lines’ (MOL) container terminals in Los Angeles and Oakland was completed in March. These terminals also have surplus capacity for future volume growth and a significant modernization project is underway that will increase capacity and efficiency further. When complete it will be one of the most automated terminals in North America.
  3. Definitive agreements were signed in April to acquire 100% of Macquarie District Energy (MDE) and Seattle Steam LP (SSC). MDE owns district cooling systems in Chicago and Las Vegas. The Chicago system considered one of the highest quality facilities in the U.S. The SSC provides heat to over 160 buildings in Seattle through 18 miles of distribution pipelines and operates two steam plants with a total generating capacity of 750,000 lbs./hour of steam. These acquisitions are expected to close by the third quarter of 2014. The systems complement BIP’s existing operations in Toronto, Houston and New Orleans and continues the overall strategy of acquiring systems in urban locations where BIP can enhance the operations.
  4. Progress continues on the completion of the previously discussed acquisition of 27% of Vale’s Brazilian rail and port business (VLI). The business consists of about 4,000 km of rail integrated with five inland terminals and three ports. VLI expects to invest over 6.0 billion Real (U.S. $2.7 billion) in the business for growth from agriculture, steel and other sectors in Brazil. The close on this investment is expected 3Q14.

Operations Summary [Source]:

Utilities Platform:

BIP 1Q14 Utilities Platform

  • FFO of $89 million in 1Q14 compared to $92 million in 1Q13
    • Decrease primarily due to sale of Australasian regulated distribution operation in 4Q13
    • Excluding the impact of the sale, FFO increased by $6 million as the business benefited from inflation indexation and commissioning of capital projects into rate base

Transport Platform:

BIP 1Q14 Transportation Platform

  • FFO of $95 million in 1Q14 compared to $67 million in 1Q13
    • Primarily driven by contribution from the additional investment in our Brazilian toll road operation in 3Q13
    • Also benefited from improved results from our Australian railroad due to the full contribution from the expansion program and higher volumes from a bumper grain harvest

Energy Platform:

BIP 1Q14 Energy Platform

  • FFO of $26 million in 2014 compared to $22 million in 2013
    • Primarily driven by improved performance at our North American gas transmission business as a result of increased natural gas volume demand into the Chicago market due to record cold weather
    • Also benefited from improved results at our UK energy distribution operation from higher tariffs and lower costs from margin improvement program

Corporate and Other:

BIP 1Q14 Corporate

  • 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
  • Pay Brookfield an annual base management fee equal to 1.25% of our market value, plus recourse debt net of cash
    • Base management fee decreased versus the prior year due to higher recourse debt in the prior year as the corporate credit facility was drawn to fund new investments made in the fourth quarter of 2012
    • This was partially offset by the increase in market capitalization following the 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 due to lower interest costs on corporate credit facility as we were drawn in the prior year to fund new investments that closed in the fourth quarter of 2012
  • Other income includes interest and distribution income earned on corporate cash and financial assets

Corporate Liquidity:

Group-wide liquidity of ~$2.6 billion at March 31, 2014 was in line with December 31, 2013 and was comprised of the following:

BIP 1Q14 Liquidity

  • Maintain 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
  • From time to time, 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

Brookfield Infrastructure Partners is starting off with another strong start year; and with a good businesses and good management compounding to produce outstanding performance what’s not to like?

Disclosures: Long BIP, BAM, BEP, BPY

Resources:

  • Brookfield Infrastructure Partners Website [Source];
  • Brookfield Infrastructure Partners 1Q14 Earnings Release [Source];
  • Brookfield Infrastructure Partners 1Q14 Letter to Unit Holders [Source];
  • Brookfield Infrastructure Partners 1Q14 Supplemental Information [Source]

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