We have held a long position in Brookfield Infrastructure Partners (NYSE:BIP) since the beginning of 2011 and we have been pleased with the results of the company during this time. We normally frown on companies issuing secondary offerings in order to finance "growth." However we view our investment in the partnership units of Brookfield Infrastructure as a diversification away from traditional stocks and bonds and being able to utilize a high-quality asset manager for investing in unique, hard-to-duplicate infrastructure assets. BIP grows through prudently acquiring high-quality infrastructure assets much as a private equity firm grows through the acquisition of desirable investment targets. BIP's Utilities segment accounts for 42.8% of its assets, its Transport segment has 34.7%, its Energy segment checks in with 14.6% of its assets and its soon to be former Timber operations represents 7.9% of its assets.
While we aren't happy that BIP's per unit Fund Flows from Operations have declined on a year-over-year basis during the first three quarters of FY 2012, we were happy that it exceeded the consensus estimates of Wall Street in each quarter. BIP's Q4 2012 FFOs were $.65/unit and this solidly exceeded the $.58/unit that the average analyst expected as well as the $.54/unit achieved in Q4 2012. The bad news about Q1 2013's FFOs was that it only met the consensus analyst estimates of $.80/unit. The good news was that its FFO/unit increased from $.58 in Q1 2012 to $.80 in Q1 2013. The bad news was that the bulk of this growth was due to acquisitions in its Utilities business (a regulated UK utility distribution business) and acquisitions of Brazilian and Chilean toll roads in its Transport business.
Source: FactSet Marquee
At first glance, we were excited to see FFOs jump by 38% year-over-year. However, our excitement faded when we remembered the acquisitions that BIP executed in Q4 2012. We were expecting FFOs to decline on a per unit basis due to increased unit issuance as well as soft performance in its Timber operations. For the 12th time in the last 13 quarters, BIP's Fund Flows from Operations exceeded consensus estimates published by sell-side analysts. BIP's total FFOs increased by 48% in Q1 2013 versus Q1 2012 and reached $160M due primarily to the additional capital employed by BIP pursuant to its acquisitions.
BIP Utilities saw a 41.5% increase in its Q1 2013 FFOs versus prior year levels. The increase in FFO was primarily attributable to the Q4 2012 acquisition of Inexus. BIP Utilities merged Inexus into its UK regulated distribution business. A secondary cause of BIP Utilities' FFO growth was due to an increased ownership stake in its Chilean electricity transmission system. Excluding these acquisitions and investments, the division's FFOs increased due to inflation indexation and additions to rate base of existing operations. For the period, BIP's maintenance capital expenditures were $6 million, which is consistent with its estimated quarterly sustainable level and its maintenance capital expenditures were in line with the levels achieved in Q1 2012. BIP Utilities' AFFO yield was 14% on average invested capital, which was comparable to Q1 2012 levels. BIP Utilities grew its revenue by 23% year-over-year in Q1 2013 and operating costs only increased by 16%. BIP Utilities is made up of the following operations:
- Regulated Coal Export Terminal: BIP Utilities owns one of the world's largest coal exports terminals in Australia, with 85 Mtpa of capacity
- Electricity transmission: BIP Utilities owns approximately 9,900 km of transmission lines in North and South America
- Regulated distribution: BIP Utilities has almost 2.5M electricity and natural gas connections primarily in the United Kingdom and Australasia
Source: BIP's Investor Relations
BIP Transport and Energy was reorganized into BIP Transport and BIP Energy. BIP Transport saw a 76% increase in its FFOs for Q1 versus the prior year's period and this was driven by commissioning of Australian railroad's expansion program and contribution from South American toll roads acquired in Q4 2012. BIP's Transport operations generated a 45% revenue increase and the division saw positive operating leverage as its operating costs increased by 28%. Non-Cash expenses for BIP Transport were $51M for Depreciation and Amortization (up 104% versus last year) and deferred taxes and charges of $17M attributable to the result of recognition of deferred tax assets. BIP Transport is comprised of these three operations:
- Railroad: BIP Transport is the sole provider of rail service in Southwestern Western Australia with approximately 5,100 kilometers of track
- Ports: BIP Transport has 30 terminals in the United Kingdom and across Europe
- Toll Roads: BIP Transport operates ~3,200 kilometers of motorways in Brazil and Chile
BIP Energy's FFOs declined by 8% ($22M in Q1 2013 versus $24M in Q1 2012) due to a challenging natural gas market that continues to negatively impact results at its North American gas transmission business. We can see that BIP Energy is one of the few companies that is not benefiting from hydraulic fracturing serving as the supply and demand game changer in the natural gas industry. BIP Energy's EBITDA declined by $4M due to the aforementioned natural gas market headwinds. However, reduced financing costs associated with the deleveraging of its North American energy transmission that was executed in Q2 2012 helped offset $2M of the $4M EBITDA decline. BIP Energy's maintenance capital expenditures doubled from $3M in Q1 2012 to $6M in Q1 2013 due to the timing of maintenance projects. We weren't surprised that BIP Energy's AFFO Yield of 7% trailed BIP's other divisions. BIP Energy's operations are made up of the following units:
- Energy Transmission, Distribution: BIP Energy has 15,500 kilometers of transmission pipelines, over 50,000 gas distribution customers and 300 billion cubic feet of natural gas storage capacity in the U.S. and Canada.
- District Energy: BIP Energy operates a 522 Megawatt thermal district heating system and 72,000 ton deep lake water cooling system.
BIP Timber finally saw the light at the end of the dark tunnel in Q4 2012 as it was able to increase its harvest volumes and sales volumes versus Q4 2011. That helped its revenue increase by 11.4% and it benefited from operating and financial leverage which pushed its FFOs up by $2M (40%) in Q4 2012. BIP Timber also sold a 12.5% interest in its Canadian timberlands to an institutional investor for $85M. Based on BIP Timber's struggles during FY 2012, at least it was able to sell it at book value.
In Q1 2013, BIP Timber continued its recovering trends with an 8.6% increase in revenue and 13% decline in operating costs. BIP benefited from a 15% increase in average realized price due to continued recovery in U.S. housing, more than offset 6% decrease in sales volumes as a result of the reduced interest in the Canadian timberlands. Adjusting for the change in ownership, harvest and sales volumes were 10% and 12% higher, respectively than the prior year. Brookfield has decided to take advantage of the recovering timber marketplace to sell the remainder of its Canadian BC Coastal timberland operations for net proceeds of approximately $170 million and it sold its interest in Longview Timber LLC for $470M plus assumed debt to Weyerhaeuser (NYSE:WY).
BIP's Corporate and Administrative segment's net pre-tax expenses increased by $3M (9%) in the quarter as increased management fees paid to Brookfield Asset Management were offset by lower deferred taxes and a $1M boost in other income.
In conclusion, we still like what we see from Brookfield. We're glad that BIP's unit price has pulled back 11% since its March highs and we believe that investors looking for high yields and non-equity correlation should consider BIP's portfolio of unique, hard-to-replicate assets. BIP has provided unit-holders with strong returns from capital appreciation and partnership unit distributions since it went public in 2008. While we don't expect the relative returns to be as breathtaking over the next 5 years as the previous ~5.5 years, we expect that this will be a great alternative to the S&P 500 and traditional utilities as represented by the XLU.
Source: FactSet Marquee
Disclosure: I am long BIP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article was written by an analyst at Saibus Research. Saibus Research has not received compensation directly or indirectly for expressing the recommendation in this article. We have no business relationship with any company whose stock is mentioned in this article. Under no circumstances must this report be considered an offer to buy, sell, subscribe for or trade securities or other instruments.