Brookfield Infrastructure: Unique Assets, Strong Growth, High Dividend Yields

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 believe that because of the complex nature of BIP's infrastructure assets, investors may not necessarily have the ability to understand this company. We believe that this partly explains why only five brokerage analysts cover the stock.

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On the other hand, Brookfield's unique, hard-to-duplicate infrastructure assets provide them the ability to generate cash flows from operations and to pay out a sizable proportion of its income to partnership unit holders (BIP is a publicly traded limited partnership and one buys "partnership units" of BIP rather than common shares). We also believe that continued political uncertainty, such as the recent electoral victory of the Socialist party in the French Presidential Race, the continued instability in Greece and the challenges in the European banking sector, may provide BIP with unique acquisition opportunities.

For the eighth time in the last nine quarters, BIP's Fund Flows from Operations exceeded consensus estimates published by sell-side analysts. BIP generated Q1 FFOs of $.58 per unit. While it was a 6.5% decline versus Q1 2011 FFOs, it still beat analyst estimates by $.02/unit. BIP's per unit FFO declined due to an increase of outstanding units. Total FFOs increased by 10.2% year over year and were $108M for the quarter. Weighted average units outstanding for BIP in the quarter increased by 28.1M (17.8%) year over year. The increase in average units outstanding was from the October 2011 unit issuance that was used to fund BIP's Australian railroad expansion program. We are expecting that cash flow from this investment will ramp up over the next four quarters.

Source: FactSet Marquee

BIP increased the per unit distribution by 7%. This represents the fourth consecutive increase in distributions to unit holders since it was spun-off from Brookfield Asset Management (BAM) in 2008. We previously had a position in BAM as well, however we sold it off to add to our BIP position, as well felt that BIP offered a greater total return potential, especially on a risk-adjusted basis.


Source: From Brookfield's Investor Relations Section

During the quarter, BIP engaged Standard & Poor's to provide credit ratings advisory services with regards to the issuance of $300M in partnership debt. S&P initiated coverage of BIP with an investment grade rating of BBB+ and BIP anticipates completing the corporate debt issue in the next two quarters. The proceeds will be used to fund an upcoming $120M bond maturity and the equity investment into BIP's North American gas transmission business.

With the exception of the Timber and Corporate Overhead segments, we were pleased with the performance of BIP's business units. The Utilities segment generated $65M in FFOs, which was a 6.55% increase versus Q1 2011. This increase was driven by greater contributions from BIP's regulated terminal and electricity transmission operations as a result of additions to BIP's rate base and favorable foreign exchange movements. This was partially offset by a reduction in the contribution from BIP's UK regulated distribution business where BIP had lower connection revenues compared with an exceptionally strong prior year period.

Transport and Energy segment posted a sharp increase in cash flow, generating $62 million of FFO compared to $45 million in the prior year. The improvement reflects a doubling of FFO from the Australian railroad, supported by consistent results from BIP's energy transmission and distribution and ports businesses. This was the first quarter of BIP's ownership of the Chilean toll road. Although it's early days, this investment is off to a strong start with traffic 14% above prior year levels.

The Timber segment posts FFO of $6M versus $10M in Q1 2011. Performance was negatively impacted by reduced demand from China due to high inventories and decelerating growth in that market. Timber FFOs were also hurt by the average prices for Douglas-fir timber (BIP's highest margin product) declining by 6% and an 11% decline for whitewood timber versus last year's levels. Management expects that excess inventory will be absorbed into the Chinese market and will increase production once improved pricing materializes.


Source: BIP Q1 Earnings Release

We agree with management's assessment of the natural gas market. As hydraulic fracturing (fracking) has dramatically changed the environment for natural gas, there is potential for companies like BIP to opportunistically acquire high quality assets at a discount to replacement cost. Not only have natural gas prices declined, but spreads for storage have declined. Basis spreads which drive transportation value have compressed and the rig count for natural gas wells has declined pretty sharply. We believe BIP has opportunities to potentially acquire natural gas storage assets, transportation assets, gathering assets and processing assets.

We also believe that BIP can use the Spanish crisis to potentially acquire attractive Spanish infrastructure assets. The company has anecdotal evidence that traffic levels are back to 2000 levels and that there are a number of potential high quality assets from distressed companies in Spain.

Other notable recent developments include progress towards the construction of BIP's Texas electricity transmission system. The system is comprised of three lines and six substations in West Texas. At quarter end, BIP secured 100% of the right of way easements for the first line, 98% for the second line and about two-thirds for the third line. The company broke ground on the first two lines, and will start construction of the third line in the latter part of the year. The project remains on schedule with an online date in the first half of 2013.

In January, BIP invested $55 million in a Brookfield-led consortium that acquired a regulated distribution business in Colombia. Although the initial equity investment was modest, BIP was investing alongside several notable Colombian pension funds. This utility is located approximately 150 kilometers north of Bogotá, serving a region with a population of 1.3 million people that is home to emerging coal, steel and cement industries.

Colombia's regulatory framework is similar to Chile's, whereby utilities earn a real return on replacement cost. Furthermore, the electricity distribution industry in Colombia is fragmented, and we hope that BIP can use this as a platform to build a broad-based electric utility business within the country.

Finally, BIP is advancing feasibility and planning work for the Dudgeon Point coal terminal project. Over the past several months, BIP held substantive discussions with several large mining companies that are interested in sizable capacity commitments.

In conclusion we are pleased with the performance from Brookfield Infrastructure Partners, L.P. We see our investment in the partnership units as not only a diversification away from traditional stocks and bonds, but also being able to utilize a high-quality asset manager for this specific segment. For those who are interested in infrastructure and natural resource assets, we find it to be a better alternative than a typical infrastructure, basic materials utilities or natural resource mutual fund or ETF because BIP owns these infrastructure assets outright, versus owning shares of those companies. Using gold versus gold miners as an example, we have found that owning gold mining companies can be a poor proxy with regards to speculating on gold prices. We also like BIP specifically because of its unique, hard-to-replicate assets, which have provided shareholders with strong returns from capital appreciation and partnership unit distributions since it went public in 2008. We can see why Brookfield Asset Management still owns 51.7M units of BIP, which is worth $1.55B and represents 28.1% of BIP's outstanding limited partnership units. BAM still owns 100% of BIP's general partnership interest.

Disclosure: I am long BIP.

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