With the existing volatility and low yields, many investors are flocking to MLPs for security. However, most MLPs are concentrated in one field such as gas pipelines that can be crushed when oil prices plummet. There are other MLPs that offer more diversification. For example, Brookfield Infrastructure Partners L.P. (BIP) is a diversified MLP with operations relating to utility, transport and energy, as also freehold timberland in North and South America, Australasia and Europe. Brookfield Infrastructure targets a total return of 12%-15% per year on infrastructure assets over the long term. The distribution (dividend) growth is projected to grow 3%-7% annually so as to keep enough cash to grow the business. Each business has high barriers to entry and strong competitive positions, such as being a sole provider. Brookfield Infrastructure is held partially by a holding company, Brookfield Asset Management. The holding company provides Brookfield Infrastructure with funds indirectly to pay dividends and also assists with administrative duties.
The utilities operations make up about half of the revenue of Brookfield Infrastructure and its returns are based on regulations and long-term contracts. The utilities are well diversified to mitigate any exposure to a single regulatory system. BIP has an efficient regulatory structure as well as large economies of scale to enable attractive returns on capital. Brookfield Infrastructure has one of the world's largest export terminals for coal, over 8,800 km of transmission lines in the Americas and 1.5 million electricity and gas connections - all of which provide a steady stream of income.
Brookfield Infrastructure maintains take-or-pay contracts on the coal export terminal - which is one of the only cost-efficient ways to access the coal in the Bowen Basin. The capacity of 85 million tons per annum is currently 100% contracted through 2018 and no customer has ever allowed their contract to expire in the terminal's 28-year history.
The electrical transmission lines are located in Canada, the U.S. and Chile - all of which are relatively stable on a consumer and regulatory basis. In fact, they operate much of Chile's existing transmission lines. The lines are located in key intersections for that region to ensure their continued use and future expansion. Both the Canadian and Chilean markets require expansion of the existing transmission lines due to local demands. The Texas section of lines in the United States is expected to commission three new lines in 2013.
The gas and electricity distribution operations are also critical to the markets in which they are located. The main distribution centers are located in the United Kingdom, Australasia, and South America. In the UK and South America, the revenues do not fluctuate with volume as they do for Australasia. Instead, they are steady streams of revenue set by long-term contracts that adjust for inflation. Growth will occur as the need for additional connections and volume consumed, depending on the location of the operation.
Transport and Energy Position
Brookfield Infrastructure provides transportation, storage, and handling services for energy, freight, and passengers. The profitability is based on volume and the price for transportation subject to price ceilings from regulators. The businesses have high barriers to entry, as well as few substitutes for their locations. The revenues tend to be relatively stable due to long-term contracts and customer loyalty.
The businesses include 30 ports in the UK and Europe, Chilean toll roads that connect the country to Santiago (its capitol), 15,500 km of natural gas transmission lines in the U.S., and BIP is the sole provider of rail operations in Southwestern Australia with over 5,000 km of tracks. The rail is supported by the need for low-cost transportation for commodities in the region. Some companies have long-term contracts with Brookfield Infrastructure to use the rail system, while BIP leases it from the government and it has another 38 years left on the lease for a secure position in the region.
The rail network will benefit from new mining operations that will increase the volume transported by 50%. The ports in the UK and Europe (7 different countries) are some of the largest by volume and generate revenue by port handling services, conservancy tariffs (which are like tolls for the use of waterways), and long-term land leases for property near the ports. The logistic services offered are a competitive advantage and revenue is stable under long-term contracts. Growth will come with increased demand for commodities and thus more shipping. The port operations are located in lightly or non-regulated environments.
The energy transmission and distribution network is one of the largest in the United States, Australia, and UK and is often a majority or sole provider for the location. The revenue is not heavily regulated, but is instead subject to market competition. The revenue is based on mixed contracts of a fixed demand charge and a variable charge. Revenue will grow out of an increase in natural gas prices and new connections in emerging markets such as Tasmania.
The toll roads near Santiago, Chile, were just built in 2006 and operate under long-term contracts lasting until at least 2033. As the economy continues to grow, more vehicles will pass along the toll roads, providing an increase in stable revenue. The roads were built with an extra capacity in mind for future growth so that no capital expenses should occur for lane expansion. A majority of the users are commuters who exhibit inelasticity. The revenue is based off a regulation that allows the annual tariff increases to be 3.5% higher than inflation and even higher for high congestion periods.
Brookfield Infrastructure has about 419,000 acres of timber with a long-run sustainable yield of 1.6 million m3 per year. There is a variety of species and flexibility in harvesting to achieve the highest value of the trees. Growth will come from new home construction in the U.S. and other markets.
Utilities account for about half of Brookfield Infrastructure's net income and timber accounts for a third. BIP's net income has decreased over the past few years due to high levels of depreciation. The revenue has increased along with the operating cash flow and free cash flow. The balance sheet looks equally healthy with growing reserves of cash and an increasing amount of assets. The debt to equity is at 1.08, but I would like to see a higher quick ratio than the 0.36. The growth numbers look poor due to the large number of acquisitions and depreciation, but the earnings should bounce back as the cash flow and business as a whole is healthy; it has not had time to show the benefits of its assets yet. The ROE and ROI are both higher than the industry average. Being a MLP, it offers a good dividend of about 4%.
Brookfield Infrastructure has a unique system in place that offers diversity of industries in a variety of stable, yet growing locations. Its focus on assets that have low maintenance costs and high barriers to entry will help it stay competitive. It should be a good buy for the long term.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.