Brookfield Infrastructure (BIP) 3Q14 Update: Strong Quarter to Underpin Future Returns

Brookfield Infrastructure (BIP) reported a strong 3Q14 [Source] and continues to execute well. Importantly management provides examples of what BIP is doing each quarter to continue their performance in the future through: (i) the quality of our assets (ii) our track record of internally generated growth (iii) our global business development platform with local presence and (iv) our full cycle investment strategy.

At their spinoff in 2008 BIP set a total return (dividend and share price appreciation) target of 12-15% per year over the long term. They surpassed the target with annualized returns for the one, three and five year periods ending in June, 2014 of 19%, 23% and 34% respectively. The track record is certainly commendable and with management’s open and honest communications; focus on infrastructure assets with organic growth potential; and long term view through the business cycles; this performance just might continue for many more years.

BIP Collage

Financial Summary:

BIP reported funds from operations (FFO), Brookfield’s measure of cash flow was $178 million ($0.85 per unit) an increase of 6% on a per unit basis compared to FFO of $167 million ($0.80 per unit) in the 3Q13. Organic growth across most of the business and earnings on incremental capital deployed over the past year more than offset assets sales as part of the ongoing capital recycling program. Net income was $72 million or $0.29 per unit for 3Q14 compared to $33 million or $0.12 per unit in 3Q13 benefiting higher operating earnings, gains on hedging and partially offset by income tax expenses.

BIP 3Q14 Financial Summary

[Source] BIP 3Q14 News Release

CEO Sam Pollock summarized the quarter in his letter to unit holders [Source]: “Financial results in the third quarter for Brookfield Infrastructure continued to be solid reflecting the regulated and contractual cash flows that underpin our operations. Our business, for the most part, has been insulated from the effects of a slowdown in some of the global markets where we operate, demonstrating the strength of our franchises, the secure nature of our cash flows and the overall diversification of the business. We closed on approximately $400 million of transactions that will meaningfully expand our transport and energy businesses, and advanced a number of other initiatives in both our organic growth backlog and acquisitions pipeline.”

 

Segment Performance [Source]:

Brookfield Infrastructure operates three primary segments; Utilities, Transport, and Energy. The following table presents net income and FFO by segment and is followed by more detail in the operations summary.

BIP 3Q14 Segment Performance

Business Development:

In the conference call Sam Pollock provided examples of organic growth initiatives added to the existing backlog of opportunities.

During the third quarter BIP closed a US$350 million investment in VLI a large scale Brazilian rail operation. VLI provides logistic services primarily to agriculture and industrial customers. Expectations are the business will deploy over R$6 billion on 100% basis to upgrade and expand operations over the next seven years. This will allow it to capture volume growth from increased economic activity in a resource rich country with a rapidly growing middle class. Components of the VLI upgrade and expansion include:

  • Expansion of a terminal in Santos, to provide agriculture customers with an integrated, rail and port solution for the export of increasing grain and sugar products and the import of fertilizers.
  • The integration of a highly modernized and efficient rail link at the port to handle over five times more volume from 2.5 million tons per annum to over 15.4 million tons per annum.
  • Development of inland terminals directly connected to the rail network to consolidate the number of loading points to a single depot reducing loading times and the number of idle wagons.
  • Adding and replacing new rolling stock for additional volumes; materially improving the age of the fleet.
  • New locomotives with higher fuel efficiency and lower maintenance costs; improving the operational reliability and availability of VLI’s integrated logistics system.

During the quarter BIP closed on the acquisition of a district energy system in Chicago and in next few weeks will close on the acquisition of one in Seattle. With these acquisitions BIP is adding three systems that will provide environmentally efficient heating and cooling to large buildings in Seattle, Chicago and Las Vegas. BIP will own six district energy systems in North America and has increased the overall heating and cooling capabilities by approximately 50% over the past year.

In the U.S. ports business, BIP had signed agreements to acquire a container terminal located in New York but will not proceed with this transaction due to regulatory issues.

Sam Pollock added: “Looking ahead to 2015, Brookfield Infrastructure is positioned to generate sustainable growing cash flows, given our secure income streams and the solid pipeline of growth projects that are currently committed in our project backlog. We remain confident in our ability to deliver annual same-store growth of 6% to 9%, consistent with our long-term stated target.”

“Our primary focus for the balance of the year is to execute on advanced transactions in our pipeline, continue to integrate our Brazilian rail business into our operating platform and execute on our organic capital project backlog bringing them to completion on time, scope and budget. The contributions from our Brazilian rail operation, new investments once completed, and with the embedded growth we expect to achieve from our existing business, will meaningfully add to our cash flows in 2015.”

Other Highlights Reported:

  • Added approximately $65 million to the capital backlog in Utilities and Transport platforms during the quarter, resulting in a current total backlog of about $1.2 billion
  • Commenced construction of a $750 million project at a Brazilian toll road, which will include a 51km greenfield four-lane highway.
  • Experienced record connection sales at the UK regulated distribution business with YTD sales of 200,000 new connections, bringing total backlog to 600,000 connections.
  • Began integration efforts at the newly acquired Brazilian rail operations and the U.S. district energy systems.

Operations Summary [Source]

Utilities Platform:

BIP Utilities Description

The utilities business generated FFO of $93 million in 3Q14 compared to $97 million in the 3Q13, slightly lower, reflecting the impact of the sale of Australasian regulated distribution operations in the 4Q13. On a same store basis, results grew nearly 17% compared to the prior quarter. Results benefited from higher connection activity in the UK regulated distribution business, the commissioning of projects at both the Australian terminal and electricity transmission businesses, and margin improvement programs that have been implemented across operations. On the organic growth front; successfully added new projects to bolster the capital backlog in utilities to approximately $450 million.

BIP 3Q14 Utilities Summary

Transport Platform:

BIP Transport Description

The transport business generated FFO of $102 million in the 3Q14, compared to $82 million in the prior year period. The 24% increase in FFO was driven largely by a greater contribution from the Brazilian toll roads, where ownership doubled in September 2013, partial contribution from the new Brazilian rail business that closed in mid-August, and higher overall volumes in the Australian railroad operations.

BIP 3Q14 Transport Summary

Energy Platform:

BIP Energy Description

The energy business generated FFO of $10 million in the 3Q14, compared to $14 million in the prior year period. Results were lower as North American gas transmission business was impacted by lower spreads and summer demand which was partially offset by a higher contribution from the district energy business where four systems were added in a number of U.S. cities over the past 12 months.

BIP 3Q14 Energy Summary

Corporate and Other:

BIP 3Q14 Corporate Summary

Corporate Liquidity:

Group-wide liquidity of $2.1 billion at September 30, 2014 comprised of the following:

BIP 3Q14 Liquidity

Distribution:

The Board of Directors has declared a quarterly distribution in the amount of $0.48 per unit, payable on December 31, 2014 to unit holders of record as at the close of business on November 28, 2014.

Summary:

Brookfield Infrastructure is progressing well on their businesses plan, developing businesses with solid risk adjusted returns, delivering total returns in excess of their 12-15% target. While we watch this performance unfold they pay us a 4.8% distribution, targeted to grow 5-9% per year and currently at a 63% payout ratio, near the bottom of their target range of 60-70%. What’s not to like?

Disclosures: Long BIP, BAM, BEP, BPY

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