Brookfield Infrastructure (BIP) Reports 2014 Results; Another Good Year

Brookfield Infrastructure Partners (BIP) reported results [Source] for full year 2014 with a total return of 12% compared to its target total return of 12-15%. In the past three and five years annualized returns were 20% and 26% respectively.

Funds from Operations (FFO), BIP’s measure of cash flow, for the full year 2014 was $724 million or $3.46/unit compared favorably to full year 2013 of $682 million or $3.30/unit, a per unit increase of 5%. Organic growth and returns on new capital investments were somewhat offset by asset sales as part of the ongoing capital recycling program. Netting out the capital recycling effects, comparable (“same store”) growth of 11% was realized primarily from growth in the utility rate base, higher transportation volumes and inflation indexation throughout the business.

BIP 4Q14 Annualized Returns

[Source] BIP’s 4Q14 Letter to Unitholders

Distribution:

The company continues to methodically grow its infrastructure business with attractive risk adjusted returns helping to assure increasing cash flows, distributions and better than average total returns for years to come. For 2015 the distribution was increased 10% from $1.92/unit to $2.12/unit annually and currently yields 5% per year. This is the 5th consecutive year of double digit distribution increases attesting to a promising future.

BIP 4Q14 Distributions

[Source] BIP’s 4Q14 Supplemental Information

Management continues to perform well and shows no signs of resting on their laurels: “We had another successful year, delivering strong results and establishing new platforms that will enable us to grow and diversify our company in the future. We redeployed proceeds from our capital recycling program into a number of attractive businesses and committed to an investment in a French communication tower infrastructure company,” said Sam Pollock, Chief Executive Officer of Brookfield Infrastructure. “2015 is shaping up to be potentially one of the most active periods for infrastructure investors. The trends we are seeing in the global economy could provide opportunities for step change growth for our business.”

BIP Collage

Is the optimism warranted? We believe so, as owners of BIP since its spinoff from Brookfield Asset Management (BAM) we have watch them deliver time and again. Our original investment thesis reached the lower end of our target range last year for a total return of 43% or about 16%/year. We updated the thesis in November [Source] concluding: “While investors may consider selling to lock in these returns, the company continues to perform well and in the updated thesis below we think there is more to come.”

In the 4Q14 Letter to Unit Holders [Source] management characterized 2015 as shaping up to be potentially one of the most active periods for infrastructure investors with opportunities for step changes in growth including:

Government privatizations – Using Australia as an example where BIP has an existing large base of operations, a number of state and federal government privatizations are proposed over the next two to three years totaling approximately $50 billion. Over the next two quarters BIP expects the sale of two large scale transmission and port assets. The timing and scale of these privatizations is uncertain BIP’s large presence in ports and expertise in the transmission sector will be beneficial accessing these opportunities when they come about.

Brazilian construction companies – Additional large purchases of South American infrastructure assets from Brazilian construction companies are increasingly feasible as many of these companies experience financial challenges. BIP acquired quality assets from European construction companies several years ago and will leverage their unique history and expertise of operating in Brazil to surface investment opportunities.

Corporate deleveraging and carve-outs – For several years BIP has worked to acquire assets from European utilities and global mining companies with constrained balance sheets. The European utilities have been active sellers over the past few years and mining companies have had to reduce capital programs in response to significantly lower commodity prices. They are evaluating whether to own their infrastructure or liquidate these assets to focus on core operations. The large drop in energy prices will likely create opportunities in the midstream sector as exploration and construction companies face the same challenges as the mining sector.

Maturing Infrastructure Funds – As infrastructure asset class matures some of the earlier investment funds raised in 2005-2008 are approaching the expiry of their funds and may need to divest from this ownership group.

BIP concluded with: Since the formation of Brookfield Infrastructure, we have not seen this level of market activity. Despite the supply of opportunities, we do expect to see competition for many of these assets as the quantum of private capital seeking investments in the infrastructure sector is substantial. Nonetheless, we believe that the combination of our well capitalized balance sheet, significant access to the capital markets and strong operating presence in key markets around the world, will provide us with a competitive advantage to grow in this environment. We will remain disciplined throughout this period and target acquisitions that will provide Brookfield Infrastructure with the best risk-adjusted returns…While our outlook for the global economy is cautious, we remain optimistic about Brookfield Infrastructure’s prospects for success.

Financial Summary:

Brookfield Infrastructure Partners, L.P. posted solid results [Source]: for the year ended December 31, 2014 with funds from operations (FFO) totaling $724 million ($3.45 per unit) compared to FFO of $682 million ($3.30 per unit) in 2013. Net income was $184 million ($0.67 per unit) for the year ended 4Q14, compared to a net loss of $58 million ($0.43 per unit) in the prior year. The increase in net income is attributable to higher earnings from operations, partially offset by higher depreciation and income tax expense in the current period, in addition to a one-time charge recorded in the prior year.

BIP 4Q14 Finanical Summary

Highlights:

Acquisition: The previously announced acquisition of 50% of TDF, the largest independent communication tower infrastructure business in France is progressing with regulatory approvals and is expected to close by the end of March, 2015. The total enterprise value is €3.55 billion and Brookfield Infrastructure’s equity commitment will be approximately $500 million invested alongside institutional partners. This is a sector where BIP believes there are a number of growth prospects.

Organic Growth: BIP invested more than $600 million in organic capital projects to grow the utilities rate base and expand the transport and energy segments. The capital backlog was expanded with $900 million of new projects planned to be commissioned over the next 24-36 months.

North America: Approximately $250 million of new investments consisting of tuck-in acquisitions, expanding the port, gas storage and district energy platforms.

Brazil: Invested $350 million into a general cargo rail operation in Brazil and provides significant opportunities to deploy further capital to service the growing agriculture and industrial sectors in Brazil.

Refinancing: Refinanced $4 billion of debt in 2014 at historically low interest rates. The average maturity is over 10 years, financed on a weighted average basis at approximately 5.9%.

Liquidity: Finished the year with $2+ billion of total liquidity and identified over $1 billion of non-core assets that are targeted for sale to raise more funds for redeployment. Progressed plans to issue $300 – $500 million of corporate debentures to be marketed during the first half of the year.

Segment Performance:

The following table presents net income and FFO by segment:

BIP 4Q14 Segment Results

Utilities Platform:

BIP 4Q14 Utilities Composition

The Utility Platform FFO was $367 million in 2014 compared to $377 million in 2013. The decrease primarily due to sale of Australasian regulated distribution operation in 4Q13. Excluding the impact of sale, FFO increased by $39 million, representing a 12% increase. The business benefited from higher connections activity at the UK regulated distribution business, inflation indexation, a larger regulated asset base and margin improvement programs at a number of operations.

BIP 4Q14 Utilities Summary

Transport Platform:

BIP 4Q14 Transportation Composition

The Transport Platform FFO of $392 million in 2014 compared to $326 million in 2013. Primarily driven by new investments in Brazil where increased ownership in the toll road business 3Q13 and invested in a rail operation in 3Q14. Also benefited from inflationary tariff increases and volume growth at the Brazilian toll roads and UK port, as well as a favorable grain harvest at the Australian rail operation.

BIP 4Q14 Transport Summary

Energy Platform:

BIP 4Q14 Energy Composition

The Energy Platform FFO was $68 million in 2014 compared to $70 million in 2013. Contribution from investments made in the U.S. district energy business in 4Q13 and 3Q14 improved performance at the energy distribution businesses but this was offset by lower transportation volumes at the North American energy transmission business.

BIP 4Q14 Energy Summary

Corporate and Other:

BIP 4Q14 Corporate Summary

Corporate Liquidity:

Total liquidity was $2.1 billion at December 31, 2014, and comprised of the following:

BIP 4Q14 Liquidity

Summary:

Brookfield Infrastructure Partners accomplished another solid quarter and year of results and the outlook remains positive. Late last year we updated the BIP investment thesis as the company reached our targets, we expect more good to come. The company also announced a 10% distribution increase, the fifth consecutive year of double digit increases reflecting optimism for continued growth in Funds from Operations. Brookfield Infrastructure continues to 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 4Q14 Earnings Release [Source]
  • Brookfield Infrastructure Partners 4Q14 Letter to Unit Holders [Source]
  • Brookfield Infrastructure Partners 4Q14 Supplemental Information [Source]

You are encouraged to do your own independent research (due diligence) on any idea discussed here because it could be wrong. This is not an invitation to buy or sell any particular security and at best it is an educated guess as to what a security or the markets may do. This is not intended as investment advice, it is just an opinion. Consult a reputable professional to get personal advice that meets your specialized needs of which that the author has no knowledge. This communication does not provide complete information regarding its subject matter, and no investor should take any investment action based on this information.

 

 

 

 

 

 

 

 

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