Seeking Alpha
Deep value, value, contrarian, long only
Profile| Send Message|
( followers)  

Before jumping into the quarterly report let's take a moment to review why we're invested in this business.

Good Business:

Brookfield Infrastructure Partners (NYSE:BIP) is invested heavily in a class of assets that became known as infrastructure assets and established 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.

Good Management:

BIP and their parent Brookfield Asset Management (NYSE:BAM) established a worldwide position over the years that help 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 investment opportunities with the potential for above average returns due to a long term investment perspective.

Outstanding Long Term 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.

Financial Summary:

BIP reported [Source] funds from operations (FFO), Brookfield's measure of cash flow was $180 million ($0.86 per unit) and slightly lower on a per unit basis compared to FFO of $180 million ($0.88 per unit) in the 2Q13. The quarter results were flat compared to the prior year where 2Q13 benefited from assets that were subsequently sold as part of the ongoing capital recycling program. Net income was $13 million or $0.01 per unit for 2Q14 compared to $132 million or $0.60 per unit in 2Q13 where results in the prior year benefited from gains on certain asset sales and hedging items.

(click to enlarge)

[Source] BIP 2Q14 News Release

CEO Sam Pollock summarized the quarter this way:

"We are pleased to report that in the first half of the year, we have delivered 12% comparable or 'same store' annualized FFO per unit growth, surpassing the 6-9% organic growth target we set out last year. We are close to completing $450 million of previously announced acquisitions which will begin to contribute to results during the second half of the year and our business development teams are continuing to engage on a number of investment opportunities."

Was this a Disappointing Quarter?

Not for long term investors. In recent years, infrastructure assets are getting a lot more attention as an attractive asset class. So the competitive environment is getting tougher for BIP. Just as the stock market is into its fifth year of strength the use of leverage and valuation multiples to justify mergers and acquisitions are approaching pre-crises levels. The valuation levels of infrastructure assets are also likely being inflated by historically low interest rates, reduced infrastructure investment opportunities and lower return expectations of new market entrants.

Brookfield Infrastructure is a long term investment with a disciplined capital allocation history focused on risk adjusted returns. As the infrastructure market goes through cycles Brookfield's acquisitions kick into high gear during slower times; utilizing its high level of liquidity (now about $2.5 billion) to buy lower priced assets that produce outstanding returns for the future. During more competitive times, maybe like now, there is comfort knowing BIP has almost $1 billion of low risk organic investment opportunities that are often the lower risk and higher return.

I can't successfully time the market, but we can patiently wait through the cycles that surely come and while waiting, collect a strong 4.9% dividend secured by barriers to entry and a 60% payout ratio. Modern society will always require infrastructure assets to deliver; raw materials, energy and people in good times and bad times. Why wouldn't we keep this as a core investment with 90% of the company's cash flow regulated or contracted, 70% indexed to inflation, and 60% with no volume risk?

(click to enlarge)

Segment Performance [Source]; the following table presents net income and FFO by segment.

(click to enlarge)

Growth Initiatives:

In the quarterly letter to unit holders [Source] CEO Sam Pollock wrote:

"Last quarter we indicated that approximately $450 million of capital was committed to be deployed into four new investments. We have made considerable progress towards closing these transactions and expect them to start to contribute to our results during the second half of the year. With total liquidity of $2.5 billion, we have substantial financial capacity to fund these investments and future growth."

Acquisitions Update:

The company advanced the closing conditions of four previously announced transactions in the transport and energy businesses and summarized as follows:

  1. The expected close on the investment in VLI, a Brazilian rail and port business, is expected mid-August. All consents required for closing this transaction have been satisfied. This investment provides approximately $300 million of organic growth projects and the business has a substantial capital program to expand operations.
  2. All consents required for the closing of Macquarie District Energy in Chicago were received and is expected to close in early August.
  3. Waiting for regulatory and required consents to close the investment in the Elizabeth container terminal located in the port of New York/New Jersey and for the acquisition of Seattle Steam. Consents for both transactions are expected during the second half of 2014.
  4. Signed an agreement to acquire Lodi Gas Storage in California, along with our institutional partners, for $105 million. The equity investment will be 40% or approximately $40 million. This business complements the Canadian natural gas storage business and is expected to close by the end of the first quarter of 2015.

Operations Summary [Source]:

Utilities Platform:

The utilities business produced FFO of $92 million in 2Q14 compared to $83 million on a comparable basis and $96 million in total in 2Q13. Results were impacted due to sale of Australasian regulated distribution operation in 4Q13. Excluding the impact of the sale, FFO increased by $9 million as the business benefited from higher connections activity at the UK regulated distribution business, inflation indexation, a larger regulated asset base and lower costs resulting at a number of operations.

(click to enlarge)

Transport Platform:

Transportation generated FFO of $94 million in 2Q14, compared to $83 million in 2Q13. The increase in FFO was driven by the greater contribution from the Brazilian toll roads where ownership doubled in September 2013, and stronger results in the ports business from both the newly acquired North American west coast port operation and a stronger performance at the European port operations. This increase in FFO was partially offset by $6 million of non-recurring interest income from a favorable stamp duty ruling at our Australian railroad that was reflected in prior year results.

(click to enlarge)

Energy Platform:

The energy business generated FFO of $16 million in the 2Q014, compared to $18 million in the 2Q13. Results were negatively impacted by lower transportation volumes in the North American gas transmission business and a warmer winter that affected volumes in the UK energy distribution business.

(click to enlarge)

Corporate and Other:

(click to enlarge)

Corporate Liquidity:

Group-wide liquidity of ~$2.5 billion at June 30, 2014 comprised of the following:

(click to enlarge)

Distribution:

The Board of Directors declared a quarterly distribution in the amount of $0.48 per unit, payable on September 30, 2014 to unit holders of record as at the close of business on August 29, 2014.

Brookfield Infrastructure Partners is progressing with a good long term businesses plan in an attractive asset class prudently allocating capital for continued outstanding long term risk-adjusted returns.

Disclosure: Long BIP, BAM, BEP, BPY

Resources:

  • Brookfield Infrastructure Partners Website [Source]
  • Brookfield Infrastructure Partners 2Q14 Earnings Release [Source]
  • Brookfield Infrastructure Partners 2Q14 Letter to Unit Holders [Source]
  • Brookfield Infrastructure Partners 2Q14 Supplemental Information [Source]
Source: Brookfield Infrastructure Reports Q2 '14 Results; It Remains A Solid Long Term Investment