Brookfield Infrastructure Partners LP (BIP) 2010 Q3 法說會逐字稿

Hello, this is the Chorus Call conference operator. Welcome to the Brookfield Infrastructure Partners conference call and webcast to present the Company's 2010 third quarter results to unitholders.

As a reminder, all participants are in listen-only mode and the conference is being recorded. (Operator Instructions).

At this time, I'd like to turn the conference over to Michael Botha, Senior Vice President, Finance. Please go ahead, Mr. Botha.

Thank you, operator, and good morning. Thank you all for joining us for Brookfield Infrastructure Partners third quarter 2010. On the call today is Chief Executive Officer Sam Pollock, who will discuss highlights for the quarter, provide comments on our strategy and the outlook for our business. Also joining us is John Stinebaugh, our Chief Financial Officer, who will review our financial results. Following their remarks, we look forward to taking your questions and comments.

At this time, I would like to remind you that in responding to questions and in talking about our growth initiatives and our financial and operating performance, we may make forward-looking statements. These statements are subject to known and unknown risks and future results may differ materially. For further information on known risk factors, I would encourage you to review our annual report on Form 20-F, which is available on our website.

With that, I would like to turn the call over to Sam Pollock. Sam?

Thank you, Mike, and good morning, everyone.

The third quarter was an exciting period for Brookfield Infrastructure. We made significant strides toward achieving our goal of building a leading global infrastructure company with the announcement of our merger with Prime Infrastructure.

Following the merger, we will directly own a much larger portfolio of premier, long-lived infrastructure assets with exciting growth prospects. We launched the merger with Prime against the backdrop of sluggish economic performance in the major developed economies. To combat this, the United States Federal Reserve recently announced plans to purchase government securities in a second round of quantitative easing in hopes of stimulating the economy.

As a result, long-term rates have materially declined from levels that were already low by historic standards. The US dollar has depreciated against most major currencies and there is increasing risk of inflation over the longer term.

In contrast, however, South American and Asian nations, including Australia, continue to experience relatively strong growth. With the global economic outlook remaining uncertain, Brookfield Infrastructure will be an increasingly international company that is less susceptible to economic conditions in any one region.

With that brief introduction, let me now turn it over to John to discuss our financial results for the quarter.

Thanks, Sam. Now I'd like to spend a few minutes walking through our results of operations. In my remarks, I will focus on proportionate FFO, which is equal to net income plus depreciation and amortization, deferred taxes and other items. We highlight this metric because we believe it is a good proxy for the cash flow from our operations.

I will also focus on AFFO yield, which is equal to FFO less maintenance capital expenditures, divided by partnership capital, which is a measure of how effectively we deploy our capital.

Our third quarter results reflected a solid performance, with FFO of $55 million, compared with $52 million in the second quarter of 2010. Adjusting for non-recurring revenue, our FFO was $46 million, compared with $48 million in the second quarter of 2010.

On a recurring basis, our AFFO yield was 8% and our payout ratio was 63%, which is within our targeted range of 60% to 70%.

During the third quarter, our utilities segment generated FFO of $43 million, an increase of $11 million over the prior quarter. This quarter-over-quarter increase is largely attributable to a retroactive payment received by our Australian coal terminal as part of the final authorization of expansion capital costs by our regulator.

Our transmission business posted results that were slightly ahead of the prior quarter as a result of revenue indexation in our Chilean operation and higher system demand in our North American operation. Overall, the rate base of our utility segment grew by 1% in the quarter, primarily due to gross capital expenditures, inflation indexation and foreign exchange.

Our return on rate base was a solid 14% and the AFFO yield from our utility segment, adjusting for non-recurring revenue, was 19%.

In September of 2010, our regulator approved a new access agreement for our Australian coal terminal. In accordance with this agreement, our regulated weighted average cost of capital will be 9.9% for a five-and-a-half-year period commencing January 2011, which will result in incremental revenue of $45 million over this time period.

Additionally, expansion capital costs approved by the regulator that I mentioned were AUD30 million, which is expected to generate a recurring FFO stream of approximately AUD3 million per year.

Our transport and energy business contributed FFO of $20 million in the quarter, down from $26 million in the second quarter. This reduction is primarily attributable to the implementation of the rate settlement in our North American gas transmission business, which took effect in September.

Additionally, in the second quarter, we benefited from a rebate which reduced cash taxes in our North American gas transmission business by $4 million.

After deducting maintenance capital spending, the AFFO yield for our transport and energy segment was 9%, compared with 15% in the prior quarter, primarily as a result of lower FFO and lower maintenance capital spending at our Australian railroad and our UK port.

As a result of one of the lowest recorded periods of rainfall on record in Western Australia, the outlook for the 2010 grain harvest has been significantly downgraded. Transporting grain is a major source of revenue for our Australian railroad, representing around 20% of annual revenue during an average grain harvest year.

With the revised forecast for the 2010 grain harvest, we are projecting a 40% drop in grain revenues, which implies a reduction of our share of revenues of approximately AUD8 million through the middle of 2011. As this business has a predominantly fixed cost structure, this decline in revenues will largely fall to the bottom line. We are aggressively reviewing operational cost saving initiatives to mitigate this negative impact.

During the quarter, log prices returned to first quarter levels following a run-up in the domestic market, which was largely attributable to inventory restocking by sawmills. In response to the current market price environment, we reduced harvest levels of both higher-margin Douglas fir and white wood logs to levels consistent with the prior year in order to preserve inventory value. At these lower harvest levels, our timber business generated zero FFO, which was in line with our expectations at the beginning of the year.

Export sales remain a bright spot for our timber business, accounting for 46% of total shipments during the quarter. The rapid development of the Chinese market has been particularly encouraging. Historically, the Chinese have bought low-grade logs, used primarily for packaging. Due to changes in building codes, the Chinese market is increasingly purchasing higher-grade Douglas fir logs to produce structural lumber.

Year-to-date shipments of logs to China have continued to increase, representing 15% of shipments in the third quarter, up from 13% in the second quarter and nearly 4 times the level in the prior year.

That concludes my remarks. Now I'll turn it back over to Sam to walk through corporate, as well as our strategy and outlook.

Thank you, John. Brookfield Infrastructure has substantial liquidity, which will enable us to participate in attractive opportunities as they arise and manage our working capital needs, including our goal of maintaining a consistent and growing distribution to unitholders.

At quarter end, we had corporate liquidity of approximately $485 million, comprised primarily of undrawn amounts under our corporate credit facility. In addition, our share of cash within our operations was approximately $232 million, which we used primarily to fund organic growth and selectively pay down asset-level debt as it matures.

In conjunction with the proposed merger, Prime Infrastructure canceled its AUD300 million credit facility and replaced it with a $280 million credit facility from Brookfield Infrastructure. To support this, we increased our credit facility to $500 million with our existing bank group.

We are also in the process of upsizing the facility to $700 million. We anticipate this will close in the fourth quarter.

Brookfield Infrastructure currently has a well-laddered debt maturity profile. Over the next two years, we have approximately $700 million of debt maturing and we are well advanced on many of these refinancing initiatives where we'd be seeking to lock in long-term debt capital at what we believe are historically low interest rates.

Now let me turn to our main initiative in the quarter. While we've been progressing a number of exciting investment opportunities, much of our attention has been focused on completing the merger of Prime. Since investing in the recapitalization of Prime in late 2009, as a cornerstone investor, we've been working very closely with Prime's management and have developed a deep understanding of its assets.

We believe that our respective businesses are highly complementary and that the proposed merger will have a number of important long-term benefits. We believe these benefits include significant FFO accretion, which supports our targeted 13% increase in distributions in 2011, enhanced growth prospects as a result of the combined company's robust portfolio of expansion projects, increased access to capital markets to fund our growth, and, finally, a simplified ownership and operating structure for the business.

We are confident today that we will receive the necessary support of Prime security holders and expect to close the merger on December 8th, as previously announced. Upon completion of the merger, we will increase our asset base by approximately $1.1 billion and grown our market capitalization to comfortably over $3 billion.

In summary, while the economic recovery remains fragile and uncertain, we are confident that our unique portfolio of infrastructure assets will continue to deliver consistent returns. We plan to expand operations within a number of our businesses and continue to work on a number of new investment opportunities, including potential acquisitions in Latin America. We believe this region will provide attractive risk-adjusted returns as infrastructure is essential to these growing, commodity-based economies.

Faced with the prospect of historically low interest rates, investors are turning to companies that pay stable distributions as a substitute for fixed-income investment. Following the merger, we believe that Brookfield Infrastructure offers investors a very attractive value proposition.

We anticipate that the merger will be immediately accretive to our FFO and, as a result, we are planning to increase our quarterly distribution by 13% to $0.31 per unit in 2011. With this distribution level-- while this distribution level will be subject to Board approval and business conditions at that time, we anticipate that our payout ratio will be at or below the low end of our targeted range. Prospective, we continue to target 3% to 7% distribution growth per annum on distributions.

We remain committed to owning and operating long-life infrastructure assets with sustainable cash flow. Using our operational expertise, we will seek to achieve the best-possible performance from these assets. We are optimistic that we can continue to acquire high-quality assets and deliver distribution growth to unitholders.

With that, I thank you for your support and look forward to updating you on our progress in the quarters ahead.

Operator, that concludes our remarks. I would like to turn the call back to you for questions.

Thank you, sir. (Operator Instructions). Your first question is from Brendan Maiorana of Wells Fargo Securities. Please go ahead, sir.

Thanks. Good morning.

Good morning, Brendan.

Hi. So, on WestNet Rail, you guys mentioned-- I think, John, you mentioned that it's going to be down, I think, around AUD8 million if you look at the reduction in the grain harvest, but it was down in Q3, as well. So is the impact-- has that been felt, thus far, in the results, if we kind of annualize Q3? Or is there more to come?

Hey, Brendan. It's John. There was a modest impact in Q3, but we think the impact of the drought is going to be felt beginning in Q4, as well as the beginning of 2011.

Is there anything that drove the sequential decline from Q2 to Q3 of that business, other than the grain reduction?

There was also some increased maintenance expense, which impacted the business, but those would be the two main factors.

Okay. And then on PD Ports, there was the understanding that it's at capacity now, but then there was also some commentary in the supplemental that you may be able to increase because of the impact from Corus and someone coming in and taking over their operations. But how will that actually drive an increase in EBITDA in that business if you're at capacity today?

We're at capacity in the containerized portion of our business, Brendan, and the expansion that we're working on will increase that capacity and alleviate that constraint.

Corus is the bulk side of our business where we don't have the capacity constraint, so to the extent that that mill is-- or that operation is taken out of mothball, we think that we can-- the business would have some pretty good upside, from a revenue perspective.

In addition to that, we receive conservancy fees from Corus that will come from them, using some of their own port facilities, as well. So it's a combination of conservancy fees, which are toll-like revenues, as well as the revenues from the bulk terminal that we operate.

Okay. Okay, that's helpful. And then, in-- just with respect to the balance sheet, I guess probably for John, but as you look at the overall leverage of Brookfield Infrastructure Partners, it seems that it's higher than sort of, I guess, the typical Brookfield type of vehicles at close to 60% debt to total assets.

And then, with the Prime merger coming on, those assets are also more highly levered than BIP's average, so that might push the number up a little bit, even more. And then you've got, as you guys have elaborated, a lot of growth projects that are potentially going to come down the pike over the next year or two years, three years.

So how do you kind of think about your leverage? Do you feel comfortable with where it is? And might those growth projects-- is there an outlook that you may need to reduce leverage, in which case maybe some of the growth gets funded primarily with equity or cash?

Well, I'll take the initial question regarding the leverage position of the Company and then go on to growth after that, Brendan.

But what you've seen with the business is the leverage level from a debt-to-cap standpoint has increased, but that's largely because it's the mix of businesses with the initial investment in Prime. We've got greater regulated businesses, which can support higher levels of debt. So that's the main driver behind that.

And with the merger, the level of regulated business will increase additionally or incrementally. So we think that the business can support a higher level of leverage than it historically has been.

On a going-forward basis, we think that in a couple of areas we are looking to reduce the leverage. The big one is probably NGPL, where with the rate settlement we need to right-size the capital structure to the cash-flow-generating capability of the business. But beyond that, we're pretty happy with where the business is.

On a going-forward basis, how we'll fund the CapEx, it's going to be, really, a function of the types of businesses we're investing in. For regulated businesses that have got very stable cash flow, the target leverage structure from our standpoint is probably in the 60% range, maybe a little bit higher. For other businesses like port businesses, it's probably closer to 50%.

So it's really going to be driven by the businesses that we're investing in.

Okay, that's helpful. And then, just lastly, I mean, you mentioned that you'd like to take advantage of the attractive rates that are available today, but you don't have-- you've got a reasonable amount of roll in 2011, but there's not a whole lot of roll in 2012. I mean, are you able to retire some of the debt that rolls in some of the later years? Is there that ability? Or might you just kind of issue more debt today and carry a little bit higher leverage and wait for some of that stuff to mature?

In terms of-- we've been looking at our debt portfolio on an issue-by-issue basis and we have been evaluating, first of all, is there any debt that we can call? We don't have a whole lot of callable debt in the portfolio. We've also been looking at forward swaps and things of that nature.

But clearly we're addressing the near-term maturities that we've got and trying to get some duration there and we're opportunistically looking to see if we can do something with the debt that matures farther out. But it would be, largely, probably through forward swaps or prepaying debt in accordance with the terms of the debt.

Sure. Okay, thank you.

Your next question is from Robert Kwan of RBC Capital Markets. Please go ahead, sir.

Hi. It's actually [Danny] filling in for Robert. And we were wondering-- so for DBCT, it looks like the WAC is down modestly to 9.86% from 10.2%, which was previously applied for and the guidance in the cash outlook looks like it's down to around 45 over the five years from the-- versus 70. So I was wondering if you can give us a little bit more background on that?

It's John.

Hi.

Yes, it's really a function of the WAC is set based on market conditions. And when we gave the estimate, the market conditions implied a WAC of a little bit over 10%, but based on the market conditions when it was set for the next five-and-a-half-year period, that implies the 9.86%. So it's basically just a reduction, primarily, in the benchmark interest rate.

But, John, you should probably add that while we are-- while we received a lower WAC for-- to earn on our regulated asset base, we were able to lock in lower interest rates, which, on a net/net basis, after factoring the lowest interest rate less the EBITDA, we're actually still ahead of the game.

Okay.

So the two are a natural hedge against one another.

Okay, got it, natural hedge. All right. And for Euroports, you mentioned that you expect the partnership to decrease to around 40% range. Now do you expect to let the equalization run itself out, or do you expect to negotiate the ownership interest in the next little bit, or--?

What I would say in that regard is that we are having discussions with our partners. There is no certainty that we will come to an arrangement with them. We have the arrangement that is in place today.

I think there is an understanding amongst us that for purposes of future funding of CapEx and investments that it probably makes sense to accelerate that equalization, but there are a number of factors at play and I think we'll see how things play over the next couple of quarters.

Okay. And lastly, for Transelec, we noticed that the FFO was flat year-over-year, but I think the Q3 2009 included around $1.2 million of non-recurring revenue related to prior periods. So, given your guidance on earthquake impact, could you give more color on the year-over-year increase?

Yes, the year-over-year increase is largely a result of growth CapEx.

Okay.

And, to a lesser extent, the indexation.

So all-- mostly growth CapEx, then, basically?

Yes, growth CapEx would be the biggest factor of the two.

Okay. And that's all I had. Thanks.

Thanks.

Okay, thanks, Danny.

(Operator Instructions). There seems to be-- oh, and we have a follow-up question from Brendan Maiorana of Wells Fargo Securities. Please go ahead.

Hey, guys. I had a couple of quick ones. So, for Dalrymple Bay, if you get the Dungeon Point buildout expansion, would that be at the now 9.86 WAC?

Yes. Obviously, the only caveat to that is that by the time this project comes into service, we're probably right around the time of a new regulatory reset. But the way that the WAC would be calculated would be the way it currently is set for DBCT.

And, Sam, can you just refresh my memory on how that-- is that just based on-- was the increase based on where interest rates are today, relative to where they were prior and that's what drew the step up from the prior rate structure?

There are a number of factors that go into the calculation, but the one that-- I guess the two factors that generally drive it are prevailing interest rates and spread for debt, for BBB debt.

There's also an equity beta factor that also can drive the WAC up or down. That equity beta's been relatively constant over the last number of resets, but to the extent that changed, that could affect the WAC, as well.

And to the extent that you guys were, somehow, able to get more advantageous financing because you've got, call it global interests and maybe that drives your financing down a little bit, that does not impact the WAC, right? It's just based on where the local financing market is?

That is correct.

Okay. That's helpful. Thank you. And then, do you have a sense of how much the FX impact helped or-- helped your bottom line in Q3? Maybe either relative to Q2, if there was a pickup there, or year over year, either one would be helpful?

It didn't really impact numbers that much in the third quarter, Brendan. The Aussie dollar, the pound and euro began appreciating more toward the end of the quarter, so I think you're probably going to see that more in the fourth quarter results than you would see it in the third quarter results.

It had balance sheet impact, I guess, at the end of the quarter.

That's right. It impacted the balance sheet through the CTA.

Sure. But not on the income statement. Okay.

That's right.

Okay, great. Thank you.

Thanks, Brendan.

There are no more questions at this time. I'll turn the call back over to Mr. Pollock.

Great. Thank you, operator, and thank you, everyone, for participating on today's call. We are looking forward to speaking with you again next quarter and hopefully at that time we can talk about the combined company's prospects and the benefit of the merger. Thank you very much. 'Bye.

Ladies and gentlemen, this concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.