I recently had a conversation with a colleague about Brookfield Asset Management's (NYSE:BAM) infrastructure asset management affiliate Brookfield Infrastructure Partners (NYSE:BIP). He had the same skeptical reaction about BIP that I did when I first encountered the company. Although I typically prefer companies financing "growth" from free cash flows rather than secondary offerings, I recognize that BIP is a relatively unique company with unique, high-quality, hard-to-duplicate infrastructure assets, especially in the transportation segment. I told him to view BIP as a non-correlated diversification away from traditional stocks and bonds and accessing a high-quality asset manager specializing in 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. Investors should see that BIP's transportation, utilities and energy businesses offer strong, stable and growing cash flow funds from operation, which enable BIP to provide investors with strong dividend yields and dividend growth.
Source: BIP's Investor Relations
Summary of Business Units:
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 28 terminals in the United Kingdom and across Europe
- Toll Roads: BIP Transport operates ~3,200 kilometers of motorways in Brazil and Chile
BIP Utilities three business units are as follows:
- Regulated distribution: BIP Utilities has almost 2.5M electricity and natural gas connections primarily in the United Kingdom and Australasia. FY 2013 FFOs increased by 33.8% due to the November 2012 acquisition of Inexus
- Electricity transmission: BIP Utilities owns approximately 9,900 km of transmission lines in North and South America. FY 2013 FFOs increased by 40.25% due to increased ownership interest in its Chilean transmission operation
- Regulated Coal Export Terminal: BIP Utilities owns one of the world's largest coal exports terminals in Australia, with 85M TPA of capacity. FY 2013 FFOs declined by 7% due to negative headwinds from foreign exchange
BIP Energy's operations comprise 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 82,300 ton deep lake water cooling system
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Source: BIP's Q4 2013 Report
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 2011. BIP's Q1 2013 FFOs/unit was $.80, which met consensus analyst expectations and increased from $.58 in Q1 2012. BIP's Q2 2013 FFOs/unit was $.88, which beat consensus analyst expectations by $.07 and increased from $.60 in Q2 2012. BIP's Q3 2013 FFOs/unit was $.80, which beat consensus analyst expectations by $.04 and increased from $.58 in Q3 2012. BIP's Q4 2013 FFOs/unit were $.83, missing analyst expectations for only the second time in the last four years but increasing by 27.7% versus Q4 2012. The prime drivers of this growth were due to acquisitions in its Utilities business (a regulated UK utility distribution business and its Chilean electricity transmission system) and acquisitions of Brazilian and Chilean toll roads in its Transport business.
Business Unit Highlights:
BIP Transport saw a 74% increase in its FFO's for Q4 versus the prior year's period due to the commissioning of its Australian railroad's expansion program and contribution from South American toll roads acquired in Q4 2012. BIP's Transport operations generated 33% revenue growth and the division saw positive operating leverage as its operating costs increased by 16.15%. Non-Cash expenses for BIP Transport were $48M for Depreciation and Amortization (up 29.7% versus last year) while deferred taxes and charges were $34M and were attributable to the result of recognition of deferred tax assets.
BIP Utilities saw an 8.25% increase in its Q4 2013 FFOs versus prior year levels. The increase in FFO was primarily attributable to the November 15, 2012 acquisition of Inexus. BIP Utilities merged Inexus into its UK regulated distribution business. Partially offsetting growth from the Inexus acquisition was the sale of its Australasian operations on November 30, 2013. Excluding these acquisitions and investments, the division's FFOs increased due to inflation indexation and additions to rate base of existing operations. BIP's maintenance capital expenditures in FY 2013 were $27M and were $2M more than FY 2012. BIP Utilities' AFFO yield was 15% on average invested capital, which slightly below Q3 2012 levels. BIP Utilities' revenue declined by 5.8% year-over-year in Q4 2013 but operating costs decreased by 17.44%.
Source: BIP's 2009-2013 Financial Supplements
BIP Energy's FFOs declined by $5M year-over-year as a challenging natural gas market that continues to negatively impact results at its North American gas transmission business. This investor 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 Adjusted EBITDA was $33M in Q4 2013 and $37M in Q4 2012 due to the aforementioned natural gas market headwinds. BIP Energy's maintenance capital expenditures increased from $37M in FY 2012 to $49M in FY 2013 due to the timing of maintenance projects. This investor was not surprised that BIP Energy incurred a $275M asset impairment charge due to the weak natural gas market environment.
BIP's Corporate and Administrative segment's net pre-tax expenses decreased by $3M (10%) in the quarter as increased management fees paid to Brookfield Asset Management offset reduced financing costs. Investors should note the following key accomplishments by BIP:
- BIP generated a total of $1.5B of proceeds from its asset-recycling program, earning returns on equity that exceeded 25% and recording gains of $500M. BIP increased its corporate credit facility by $500M to $1.4B, which together with the proceeds from asset sales provides BIP with total year-end corporate liquidity of close to $2B.
- BIP completed $4.5B of long-term financing early in the year, taking advantage of historically low interest rates. In doing so, BIP extended the average term of its debt to 10 years and addressed all significant near-term maturities.
- BIP invested approximately $500M in organic growth initiatives, commissioned $350M of projects to grow its utilities rate base and bring its $600M Australian rail expansion project fully on line. BIP also added approximately $600M of utilities and transport projects to its capital backlog, which it plans to execute on over the next 24-36 months
- BIP secured over $1.1B of new investments in its transport and energy platforms.
In conclusion, investors should like what they see from BIP. BIP's unit price has pulled back 11.3% since its November highs and 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. Although BIP's unit price is within ~11% of its fair intrinsic value and investors should not expect the relative returns to be as breathtaking over the next 5 years as the previous 6 years, investors should realize that BIP will be a great alternative to the S&P 500 and traditional utilities as represented by the XLU.
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