Brookfield Infrastructure Partners LP (BIP) 2012 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 2012 third quarter results to unitholders. As a reminder all participants are in a listen only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. (Operator Instructions). At this time, I would like to turn the conference over to Tracey Wise, Vice President, Investor Relations. Please go ahead, Ms. Wise.

Thank you, operator, and good morning. Thank you all for joining us for Brookfield Infrastructure Partners' third quarter 2012 earnings conference call. 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 remind you that in responding to questions and in talking about our growth initiatives and 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 future 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, Tracey. And good morning, everyone.

In the third quarter, Brookfield Infrastructure achieved a significant milestone in its growth. Two years ago, we commenced a $600 million upgrade and expansion of our Australian railroad, executing five commercial track access agreements with mining customers who support capital investments. We are pleased to report that the railroad expansion has been completed under budget and ahead of schedule. In early October, our largest customer commissioned its first train on the Midwest segment of our system, and all five contracts are now contributing to our funds from operation. By the end of the first quarter of 2013, we anticipate that all of our customers will be operating at or above their take or pay volume levels.

During the quarter, we also progressed a number of strategic initiatives that will lay the foundation for the next phase of growth of our business, and we raised $900 million of debt equity that will finance these transactions. Once these transactions have closed, we will have invested approximately $1.3 billion of equity in our utilities and transport and energy platforms, which will increase the scale and scope. Respectively, our cash flow from regulatory frameworks or long term contracts will increase to 85%, which will provide even greater stability to our results.

Now I'll turn it over to John to review our results.

Thank you, Sam.

I'd like to spend a few minutes walking through our results. In my remarks I will focus on FFO, which is a proxy for cash flow from our operations. I will also focus on AFFO yield, which is a measure of how effectively we deploy our capital.

Despite relatively weak global economic conditions, Brookfield Infrastructure posted solid operating results during the quarter. We generated FFO of $113 million, an increase of $16 million over the third quarter of 2011. Our results reflected strong performances from our utilities and transport and energy platforms, partially offset by a lower contribution from our timber business.

Our FFO per unit of $0.58 was $0.04 lower than the prior year due to our August equity offering whose proceeds have not yet begun to generate cash flow. Our payout ratio was 65%, which is the midpoint of our target range of 60% to 70%, and we earned an AFFO yield of 8% in the period.

Our utilities platform generated FFO of $80 million in the quarter, compared with $77 million dollars in the prior year. The increase in FFO was driven by our regulated distribution operations due to greater connections revenue and a higher average rate base following the acquisition of our Colombian distribution utility earlier in the year. These factors were somewhat offset by a reduction in FFO from our regulated coal terminal, which earned non-recurring revenues last year associated with approval of investments into our rate base. Overall, our utilities segment posted an AFFO yield of 16%, in the current period.

Our transport and energy platform earned $54 million of FFO, compared to $39 million in the third quarter of 2011. During the quarter, our railroads FFO increased by over 140%, compared to the prior year, due to contribution from four expansion tasks and a favorable grain harvest. This strong performance was partially offset by a decline in FFO from our ports business which benefited from a startup payment from an energy company in the prior year, and was impacted by reduced economic activity in Europe. Overall, our transport and energy segment generated an FFO yield of 6% in the quarter.

During the quarter, our timber segment posted FFO of $3 million, compared to $5 million in the third quarter of 2011. Our results reflect soft demand from Asia, which caused average realized prices to decline by 7%, combined with operating restrictions resulting from an abnormally extended fire season that forced us to reduce harvest by 7%. For the quarter, exports fell to 36% of total log sales, which is a level that we expect to maintain as demand in the domestic market continues to strengthen with the early stages of recovery in the housing market. For the quarter, the AFFO yield for our timber operations was 2%.

On the financing front, we made significant progress executing the funding plan for our strategic initiatives during the past three months. In October, we issued 15.7 million LP units at a gross price of $33.25 per unit, raising net proceeds of approximately $500 million. Subsequent to quarter end, we completed our inaugural corporate bond issuance, capitalizing on our investment-grade credit rating. We issued $400 million of five-year bonds in the Canadian market, with a 3.5% interest rate, which we swapped into US dollars at an effective interest rate of 2.7%. Despite the successful execution in the corporate bond market, our financing strategy has not changed. Going forward, we will continue to predominately issue non-recourse debt at the asset level, with a target of less than 10% of our debt portfolio comprised of corporate debt.

Now I will turn the call back to Sam to provide an update on our growth initiatives and outlook.

Thank you, John. I'll start by reviewing the initiatives in our transport and energy platform.

In October, we closed the acquisition of an additional interest in our Chilean toll road, increasing our ownership to approximately 50%. Furthermore, we continue to advance the acquisition of a 60% interest in the largest toll road operator in Brazil, which we are doing in partnership with Abertis and institutional investors. Upon closing, which we expect will be in December, we will own interest in 11 toll roads in Brazil and Chile. Our 3200km network will be diversified, with a balance of light and heavy vehicles and urban and interurban traffic. All concessions will benefit from projected increases in traffic and tolls that escalate with inflation. As one of the largest owner/operators of toll roads in the region, we will be well-positioned to invest in additional expansions and upgrades on our system, as well as add-on acquisitions and development opportunities in two of the highest-growth countries in the region. We will be investing approximately $475 million into our South American toll road platform in the fourth quarter.

Also in October, we acquired a district energy system that serves commercial customers in downtown Toronto, in partnership with institutional investors. This business generates very stable cash flows, with 93% of its revenue under long-term contracts with high-quality counterparties. We are particularly excited about the growth opportunities of this business, in light of the large pipeline of prospective new customers that can be connected to our deep lake cooling system. We invested approximately $75 million for a 25% interest in this business.

Now turning to our utilities platform, during the quarter, we closed the acquisition of a UK-regulated distribution business, and have made significant progress towards completing the recapitalization of the company. In September, Challenger Infrastructure Fund's unitholders approved the sale of its 85% interest to us, and subsequently, the minority shareholders exercised their right to sell their shares on the same terms, enabling us to acquire 100% of the business. In October, we received clearance for the transaction from the UK Office of Fair Trading, and we are in the process of finalizing the documentation for financing arrangements with our bank group. We expect to complete the recapitalization before the end of this month. Upon close of the transaction, and the merger with our existing business, we will invest approximately $510 million, and more than double our installed base of gas and electricity connections to over 1 million. Furthermore, we will extend our multi-utility capability into high margin fiber to home, and district heating offerings.

During the quarter, we initiated a process to acquire Brookfield Asset Management's interest in our Chilean transmission system. We recently received approval from the independent members of our board of directors to acquire this 10% interest for $235 million. With this transaction, we will increase our stake in one of our premier assets to 28%. Our system is the backbone electricity transmission system in Chile, serving 98% of the population of the country. With the economic growth in Chile, this business is well positioned to invest in upgrades and expansions to satisfy increased electricity demand. We expect to close this transaction during the first quarter of 2013, subject to obtaining required third party consents.

Now looking forward with our outlook, our primary focus for the balance of the year is to close our strategic initiatives, also to integrate these businesses into our operating platforms, and complete the processes to sell noncore assets and timber that have commenced. We are aware that there have been several rumors in the market regarding specific transactions. Our policy is not to comment on speculation, and there is no update that we can provide at this time.

Looking ahead to 2013, we expect that global economic uncertainties as a result of the European sovereign debt crisis combined with the lower growth in China, will limit our growth on the same store base in the near term. However, the investments that we have made in our utilities and transport energy businesses over the past two years will make a significant contribution to our results in 2013.

Going forward, one of our main objectives is also to replenish our capital backlog. As commodity prices have declined sharply from their highs, mining companies have deferred many of their expansion projects. As a result, we expect that the timetable for our Dudgeon Point Coal Terminal will be delayed. However, we are continuing to progress the master planning process for the site, and we are preparing to initiate a pre-feasibility study. We are still cautiously optimistic that we will be able to sign sufficient long-term contracts to support a smaller version of the project that we can expand over time to satisfy demand. In addition, with the increased scale of our electricity transmission, regulated distribution, and toll-road platforms, we have significantly enhanced our competitive positions, and we believe that these platforms will be key drivers of our organic growth in the coming years.

Operator, that concludes our remarks, and so I'd like to turn the call over to you to open the call for questions.

(Operator Instructions). First question is from Brendan Maiorana from Wells Fargo. Please go ahead, sir.

Thanks, good morning. Sam, I was just listening to your comments about the same store outlook, a little bit of caution. Is it your view that outside of the capital projects that are coming online, do you actually think your same store, same basis assets have positive growth, NOI growth, EBITDA growth going into 2013? Do you think it's going to be flat? Do you think it could be negative?

Brendan, I think we will, in certain areas, continue to have growth. As you are aware, we have a number of our utility businesses that benefit from inflation indexation. And so we will see growth in those businesses. We will also see some growth in businesses such as our toll road platform, where we have inflation indexation, and as well as a ramp up in volumes just because of growth in those markets.

I think where we will probably see either flat growth, or maybe -- possibly small reductions is in areas where there's a contractual framework that doesn't have inflation indexation, or are very GDP sensitive. The areas I'm referring to would be the ports business in Europe, where we could possibly see some softness. We have always been surprised with the resilience of our UK business, but the mainland European business has always been a bit softer, and then with the natural gas environment in North America, we expect you will probably take some time to see a recovery in our midstream and storage business.

So I guess I forget if it was in the letter or the supplemental, but I think you made reference that 85% of your cash flows and businesses are now set up with either long-term contracts or are under regulatory frameworks. So is that -- is it a fair characterization that 85% of your business ought to see the sort of typical inflationary type of improvements as you go into next year? Hearing your comments it sounded like there was maybe a little more caution than I would have expected.

You know, the -- a large part of that 85% do have inflation indexation. But there is some that doesn't. So there are some of our utility businesses that don't benefit from inflation. So I don't have offhand the percentage of what that is. It's probably about 35%. But I guess where we were being -- trying to be cautious in our view of the world, which just in relation to our more merchant activities, where there is just economic uncertainty.

Sure. The announcements, the new investments that you guys are doing, can you give us a sense of where those shake out from a multiple basis or a -- either on EV to EBITDA, or on an FFO yield basis, as we are looking at the $1.3 billion that you are going to invest in the fourth quarter or by early next year?

Hey, Brendan, it is John. So if you take a look at the businesses that we're in the process of closing or have closed recently, the OHL Brazil business, based on where that is trading right now, which reflects the purchase price effectively that we pay. It's around a seven times enterprise value to EBITDA multiple. The Inexus transaction is probably in the range to 13 to 14 times EBITDA, but that's a business that has got essentially no maintenance CapEx. It's got cash flow that is going to escalate at inflation minus a factor. So it is going to provide very good growth, based on the existing connections that are in place.

And then in addition to that obviously the growth from new connections similar to what we have seen from the connection businesses that we have historically owned, we should be able to generate from that merged business. And then finally the Enwave transaction is -- it's a relatively small investment, it is only $75 million. It does have largely demand charges, so effectively very little volume risk, and those demand charges do escalate with inflation. And that's probably a multiple of close to 13 times based on the in-place cash flow. In that business we think there's going to be quite a bit of growth by virtue of new buildings that we can connect to the system.

And what about Transelec?

Transelec, the multiple that that would reflect is probably around -- I think around 12 times EBITDA.

Okay. Is that actually a lower multiple on FFO, just because of the way the -- you guys have the indexation on the bonds there? Like is that actually going to be a better multiple on FFO?

The multiple on FFO probably will be a little bit lower on that. The way that I think about the returns for Transelec is that -- based on the FFO, it doesn't really have much significant maintenance CapEx at all, but we should be able to generate a current yield of around close to 10%, plus we get inflation on top of that, so that would be an FFO yield multiple of around ten times.

And then last one, John, the corporate bond issuance -- unitholders pay 125 basis points on the increase in corporate level capitalization, which I think includes corporate bonds. If I look at the 2.7% on that, and I add 125 basis points so let's just call it 4%, is that better than project-level financing that you guys could get now?

If you look at the use of proceeds that we stated for that issue a couple of quarters ago, we basically are refinancing bonds that are coming due in New Zealand that were corporate bonds yielding roughly 9%, and then we also are refinancing an investment to retire holding company debt at Myria which would have been well north of 9% because it would have been a premium to where the bonds were issued. So it is significantly cheaper than had we raised capital at the operating company level that those -- where we are retiring the debt.

Okay, great, thanks.

Thanks, Brendan.

The next question is from Andrew Kuske of Credit Suisse. Please go ahead.

Thank you. Good morning.

If we can talk a little bit more on Enwave, and how you think about this asset, not just in the aspect of Toronto, and the growth opportunities within Toronto, but do you see other opportunities really around the world to expand into district heating particularly in the downtown cores?

Yes, hi, Andrew, maybe I'll start and John maybe will add some additional comments.

This is a business that we do like. It's got a number of attributes that are particularly attractive. First of all, it is basically a non-regulated utility. It isn't subject to any rate-setting regulations. And these are long-term contracted and inflation-protected cash flows -- that basically you collect the capacity and consumption charge from your customers. And it is clearly an essential service, as your customers are hospitals, universities, governments and large commercial properties. And it is a business that plays to many of our strengths as an organization, because it ties in -- obviously the infrastructure element, but it has a power generation component to it, and it has a real estate component to it. So we are able to leverage lots of knowledge in and around Brookfield.

And to your question, I guess, we believe that there is an opportunity now that we have this business and we've got the intellectual capability to think about opportunities of how we can build similar systems, we can then leverage our real estate knowledge that we have in other parts of North America in particular, to grow that business. So it is something that we're going to be looking to do. It's obviously at the early stages. I would caution you that some of the attributes that Toronto has is different than what you see in other cities. So some of the applications of this deep lake cooling only exist in a very few markets around North America, so we may not be able to duplicate that side of it. But clearly the whole trend towards sharing energy and cooling is something that is very prevalent particularly in Europe, and we see greater applications of that probably on a smaller scale than what we have in Toronto, but nonetheless in other parts of North America.

And what this does, Andrew, is it established a platform for us with the management team that we can build upon. And there are a lot of projects that would be quite a bit smaller in North America, and other countries that we never really go after on a standalone basis but now that we have got a platform in place, it is somewhere in Brookfield's hydro strategy where you could buy single assets for like a university, or things of that nature, and build out the business.

So just on that last point, and that color is greatly appreciated. Do you think of this now -- you have got one more key asset, along the lines of just building up this business from that platform asset by asset, and then really having this under one umbrella of district heating systems?

Absolutely. We look at this as -- we've got a business that has some scale, and we are going to look to build it by acquisitions. Selectively we might look at some developments but because of the fragmentation of the industry, acquisitions are probably the biggest opportunity for us.

Okay, that's extremely helpful.

If I can just turn my attention to Transelec briefly -- if memory serves me correctly, BAM bought that asset in about 2005, thereabouts, with -- and then had a fund construct around it. When does that fund terminate, from an LP perspective?

Maybe I'll touch on that. The way I think you should think of that is it was a co-investment with several pension funds in North America, and there is no real termination to the fund. I would really see it as a joint venture. What would terminate probably in about just under ten years is an advisory contract that Brookfield has in managing the business. But other than that there is no finite life to that business.

And all the investors are long term investors that like the asset, and view it as a long term holding.

And then just one final on that, but I assume given the nature of the structure of the ownership, there's rights of first refusal between the partners within or the joint venture partners within the asset?

Yes. There are typical preemption rights that you expect for an arrangement of this kind.

Okay. That's extremely thankful, thank you.

The next question is from Robert Kwan of RBC. Please go ahead.

This is actually Danny filling in for Robert. I just have a question regarding the $475 million that you guys put in the press release regarding the South American toll roads. So is this just the purchase price, or does this include other expansion investment?

Hi, Danny. That is just the equity we are investing in those two transactions.

Okay, and then sort of similar question -- for the $510 million, that UK distribution business. So is that the purchase price and (inaudible) costs for 100% of Inexus or the other stuff bundled in as well?

I believe in that number there is some additional debt pay down in relation to the existing GTC business.

That's all I have, thanks.

Thank you.

The next question is from Bert Powell, please go ahead -- with BMO Capital Markets. Please go ahead.

Good morning, this is Luigi on behalf of Bert. You talked about the merchant opportunities, and there is some risk to the outlook. Can you just kind of give us more detail there?

So -- it is John. So the merchant opportunities in the risk to the outlook, I think what Sam was referring to is that some of the businesses that we've got that don't have necessarily long-term contracts or inflation indexation, like the ports business, and also the gas pipeline in the United States, as well as storage business -- we see that those businesses are going to be impacted a bit more by the economic condition right now. So to reiterate what Sam said regarding the ports, we think that with the uncertainty in the European economy that they are probably going to be in a period of time where they might be able to hold their own volumes where there might be slight declines in volumes if economic activity continues to slow down in Europe. In the United States, it's going to be driven by the natural gas industry, and we think we have probably hit a trough level in that industry. But we think it is going to be a period of time before we start to see recovery for our North American gas transmission business.

Okay, thank you, with respect to the acquisition of Inexus and Transelec, how should we think about the developer contributions and the return on rate base in 2013 utilities segment?

With respect to Inexus, the business had largely -- they had taken themselves out of the market for competing for electricity and gas connections. And the reason why they did that is they overlevered and didn't really have the capital to try to invest in the growth of their business. So on a going forward basis, we think that the connections that we had been generating for electricity and gas are going to be basically the same level that our business has been experiencing, so a run rate in the GBP5 million level per quarter, $8 million per quarter. Activity has been pretty strong the last couple of quarters so it's been above that, but we think that the $8 million is a pretty good run rate level. But what we are excited about is the Inexus business has focused on particularly fiber offerings so that's going to expand our capability. And we think that's a high growth opportunity that we'll be able to begin capitalizing on after we integrate Inexus into our existing business.

And then the returns on the rate base next year, potentially?

For Inexus?

Just for the segment overall.

I think it is going to largely be consistent with what we have realized to this point, so in the 12% ballpark.

Okay, thank you.

The next question is from Cherilyn Radbourne with T.D. Securities. Please go ahead.

Thanks very much, good morning. I wanted to actually ask a couple of questions also on the topic of IEG connections and Inexus. I guess first off, the growth in the contribution from IEG connections has been I think surprising, just given the European situations. I wondered if you can speak about the recent strength of that business.

Okay. Hi, Cherilyn. One of the main reasons for the strength in that business really has to do with our competitive position in that marketplace. So while housing has been relatively flat, I guess, in the UK market over the last couple of years -- it has improved somewhat, but obviously not to the levels it was previously, our market share has probably more than doubled from the late 2000s to where it is today. And so that's really been a big driver of the strong performance.

The other benefit of that lower amount of competition has been that we have been able to price our services at levels higher than what we have been able to achieve in the past as well. So we really benefit from both of those situations.

And the other thing, Cherilyn, that is reflecting is that over the last couple of years there's been a ramp up in the percentage of electricity connections that we have been winning. They have put in place a pricing regime for electricity connections to open up the market to independents such as ourselves, and those have been an increasingly greater percentage of our mix, which has driven our connections revenue.

In terms of some of the revenue and expense synergies that you would expect as you combine the Inexus business, how quickly do you think you can get at some of those synergies?

We think we can get at most of them very quickly. We are targeting to achieve our synergies probably within the first six months. And really it's about combining a number of back office-related activities and moving them from one office where Inexus is at today to GTC's office. And given the very strong similarities in the business, and the compatibility of our information systems, we're very comfortable we can achieve it in short order.

And just the last one on that topic, I think the $510 million that you indicate you are going to invest in Inexus is up somewhat from what was contemplated in August -- does that indicate that you are just delevering that asset a little bit more than you expected initially?

Yes. That's what we are doing. In our earlier numbers we were just speaking about Inexus on a standalone basis, and today the number we just provided is basically looking at it on a combined GTC and Inexus basis.

Okay, thanks, that's all my questions.

The next question is from Brendan Maiorana from Wells Fargo. Please go ahead.

Thanks. So, John I had a question, if I look at all the investments it sounds like the $1.3 billion -- that's the equity contribution that you guys are making. You raised $500 million of equity back in August, but it's $1.3 billion of equity investments. It seems like there's -- there would have to be a lot of asset sales, probably more than what we think is likely, not to see an increase in leverage after these deals are all completed. How should we think about look through leverage at the BIP level?

First of all, to address your point, the financing plan is largely the same as what we had talked about last quarter. So we raised $500 million of equity, the corporate bond is a little bit greater than the refinancing that we've got to do, so there's some incremental proceeds there. And then in terms of the balance of it, it will be from asset sales. I think largely Brendan to address your question, the pro forma leverage we think is not going to change much from where the business is today following the new investments that we will close on as well as the mix of asset sales that we are considering.

What's the -- can you give us a sense of $1.3 billion equity, what's the enterprise value investment?

It is probably -- the financing is a little bit more than 50% debt to equity. So the $1.3 billion would be a little bit more than $2.6 billion of enterprise value.

Maybe I'm just missing something, but how is that not going to increase leverage significantly if there's $2.6 billion of assets that are coming on line, and you raise $500 million of equity?

Because we're selling assets that also is going to take debt off the books as well. And based on the mix of assets, we think that on a pro forma basis, the combination of raising equity, and then selling assets and then with the new assets that come on, we think it is roughly going to be the same.

The asset sales that you do, do you think the returns that you are talking about earlier, when I asked, the returns that you are getting on those investments, do you think that assets that you sell will have lower returns or be sold at a higher cash flow multiple than what you are investing in? Just on a current basis.

The assets that we are targeting Brendan, based on what we had mentioned last quarter, is assets we would consider noncore, so those are going to be ones that are pretty mature and/or we own minority stakes in. For those we think in this environment, people are going to bid those at a pretty low return, so pay pretty high multiples for. And then also we are looking at selling some timber, and from a multiple standpoint, because in this market, people are willing to pay for upside in timber prices that effectively would go for pretty high multiples as well.

Right, okay. Another question this probably more for -- well, it could be for John or Sam. You know, you guys have, at least on our estimates, traded at a premium to the sum of the parts of your existing in place cash flowing assets. And I think that's largely because you have had this great backlog of projects that we have been able to see that we know is going to generate a lot of solid cash flow growth as we look out over 2013, and maybe a little bit beyond that. But with the slow down -- with Dudgeon Point that is being delayed I think probably the western rail projects that we had talked about a few quarters ago, those are probably likely delayed with commodity prices down, you guys didn't put a backlog in your transport and energy segment disclosure this quarter. So what -- is there a backlog of projects that is in line with what it's been in the past that maybe it's a shadow pipeline or something that will come up? Or is there -- at least in the near term, the backlog of projects that you guys have traditionally gotten high returns on a lot lower now than it had been over the past 18 to 24 months?

I'd make a couple of comments on it. I think as far as the growth outlook for the business, for the next year or two, at least, we are seeing -- we are going to see tremendous growth because of the rail expansion coming on line, as well as these new investments we made this year. So I think some of our trading probably reflects the fact that growth will come on.

With respect to the organic pipeline, I actually think that our ability to generate organic projects is better now than it ever has been because of the new businesses that we have entered and the prospects for growing those businesses. I think that given the slowdown in business overall in the world, the economic conditions, we just haven't met the strict definition of backlog that we have applied for those projects.

So for us, backlog, to go into our tables needs to be contracted or be in a regulatory framework within two years of today. We have numerous projects that we are working on. Dudgeon Point is just one. And we are hopeful over the coming year that we will be able to move a number of those projects into our backlog. But there's no doubt that it hasn't been as quick as we would like, and that just is a reflection of the economic uncertainty in the world today.

Okay, well that's helpful, thank you, guys.

Thanks.

This concludes the time we have for questions, I will turn the conference back to Mr. Pollock.

Great, thank you operator, and thank you everyone for participating on our call today, we look forward to speaking to you again next quarter.

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