Brookfield Infrastructure Partners LP (BIP) 2017 Q2 法說會逐字稿

Welcome to the Brookfield Infrastructure Partners Second Quarter 2017 Conference Call and Webcast. (Operator Instructions) 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 Rene Lubianski, Senior Vice President, Corporate Development. Please go ahead, Mr. Lubianski.

Thank you, operator, and good morning. Thank you all for joining us for Brookfield Infrastructure Partner's Second Quarter Earnings Conference Call for 2017. On the call today is Bahir Manios, Chief Financial Officer; and Sam Pollock, Chief Executive Officer. We also have Justin Beber, Managing Partner, Strategic Initiatives, joining us this quarter as a guest speaker. Following their remarks, we look forward to taking your questions and comments.

At this time, I'd 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'd 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 Bahir.

Thank you, Rene, and good morning, everyone. Brookfield Infrastructure had a very good second quarter, building on the strong momentum from the first 3 months of the year. During the quarter, we generated funds from operations, or FFO, of $295 million, or $0.80 on a per-unit basis. These results were a record for our business, representing year-over-year increases of 28% and 19%, respectively, driven by the initial contribution from the regulated gas and transmission investment we recently made in Brazil and the continued strength of our base business that organically grew its FFO by 10% on a same-store constant-currency basis.

I'll now give a quick overview of our results for the various segments and touch on a few business updates. Then Sam will cover off some of the organic initiatives we have going on. Starting out with our utilities business, we generated $168 million of FFO during the quarter, which was a step change relative to the prior year. 2 items accounted for most of this growth, the closing of the Brazilian regulated gas transmission investment on April 4 and the commissioning of capital to the rate base over the past 12 months. These positive effects were partially offset by a reduction in the allowed return at our Australian regulated terminal, due to a regulatory reset that was finalized in late 2016, as well as the impact of the sale of our Canadian electricity transmission asset last year.

A couple of updates on the operations front and more specifically in our Brazilian utilities businesses; first, the Brazilian regulated gas transmission business that we recently acquired has been performing well and in line with our expectations. Our initial focus has been on executing our integration plans and the buildout of a strong leadership group. A highly capable executive team is now in place, who have been charged with running the business and advancing a number of key priorities. Looking further ahead, this investment also positions Brookfield Infrastructure to play an important role in the expansion of Brazil's natural gas network in the future.

Secondly, development activity at the nearly 4,200 kilometers of electricity transmission lines that we're constructing in the country is progressing as planned. Construction has commenced on approximately 1,600 kilometers of lines, and out of this, roughly 800 kilometers is on track for completion by the end of the year, with the other half expected to be completed in 2018.

Our transport segment posted solid results for the quarter, generating $134 million of FFO, up 31% over the prior year. This increase was largely driven by contributions from our new investments in toll roads and ports over the past 12 months, in addition to organic growth of almost 12% on a constant-currency basis. These positive results more than offset a lower contribution from our rail assets.

EBITDA from our toll roads increased by 14% on a same-store basis, driven primarily by higher tariffs and growth in traffic levels. This quarter was the first period since mid-2014 where heavy traffic levels increased in Brazil, which is a positive indicator of an economic turnaround taking place in the country.

On our Chilean toll roads, regulatory approval was recently obtained to proceed with engineering design work for a congestion-relief project along 1 of our road segments. Although the project is still in its early stages, this is an important milestone in its development. The total cost is estimated to be $80 million, BIP's share of that being $40 million, with construction scheduled to be completed by end of 2019.

And finally with respect to our rail operations, and more specifically our asset in Australia, is experiencing some near-term headwinds, largely resulting from a weaker grain harvest. We expect this impact to be partially offset by incremental earnings from a recently completed expansion at our Brazilian logistics business expected to ramp up further in the fourth quarter.

The energy segment generated FFO of $43 million in the second quarter, which is in line with prior-year levels. This operating group experienced improved performance, particularly at our North American natural gas transmission business, which benefited from higher gas transport volumes, new contracts, and reduced leverage levels. Results for this segment also included incremental contribution from the recently acquired gas storage assets in North America. These positive results were offset by the impact of the sale of the Channel Islands distribution business in mid-2016.

Subsequent to period-end, our North American natural gas transmission business agreed to terms with customers regarding a rate review that was initiated earlier in the year. These terms include a slight tariff reduction to be phased in over 2 years, and a 5-year standstill period which customers are generally precluded from requesting further rate adjustments. A number of sizable expansion projects are being progressed, which are backed by long-term take-or-pay contracts and the business currently has $300 million backlog of potential projects that we're looking to commit to in the next 6 to 12 months.

Our communication infrastructure segment also performed in line with last year with $19 million of FFO. This business continues to deliver consistent and predictable cash flows and has many growth initiatives that it continues to advance, a few of which Sam will comment on shortly.

And finally before I hand the call over to Sam, I wanted to make a few remarks on our balance sheet. We concluded the quarter with $2.6 billion of total available liquidity, which is expected to increase in the next 6 to 9 months from proceeds from successful capital recycling initiatives.

And on the financing front, one of the most important priorities we had to undergo was to reduce leverage at our North American gas transmission business, and to refinance its near-term maturities. During the quarter, the company's shareholders injected $400 million of capital -- BIP's share of that was $200 million -- to repay its 9.625% 2019 corporate notes. As a result of its strength in balance sheet and solid growth trajectory, the company's credit ratings improved substantially.

And the final element of the refinancing plan was the recent launch of a bond offering in the capital markets to refinance the company's upcoming maturity later this year. The outcome of this issuance was very positive, resulting in debt with an average term of 7.5 years at an average rate of 4.625%. With this refinancing completed, Brookfield Infrastructure has no major debt maturities within the next 5 years, and less than 30% of our total debt amortizes or matures during this period.

And so with that, thank you for your time this morning. And I'll turn the call over to Sam.

Great. Thanks, Bahir, and good morning, everyone. We have a number of exciting initiatives underway in our various operations, which will generate organic growth. And so I thought I'd take a few moments to go through some of the highlights.

Overall, we have a growing backlog of capital projects which currently stands at $2.4 billion and has doubled over the past 2 years. Our operating segments are also pursuing initiatives that have the potential to add a further $1.5 billion to $2 billion to this backlog in the next 6 to 12 months. These organic growth opportunities generally offer the best risk-adjusted returns and provide us with considerable visibility on our near-term growth outlook.

Now turning to some examples, our U.K. regulated distribution business continues to succeed on its growth initiatives, producing positive results. The U.K. housing market is growing quickly, with new housing registrations up 17% in the first quarter compared with the prior year. Not only are sales of new connections up 16% year-over-year, but we are also adding to the rollout of smart meters. In that regard, our business was recently selected as the preferred bidder to acquire up to a further 2 million additional smart meters from a leading energy retailer. We estimate this to represent approximately $500 million in additional investment for BIP, doubling our number of meters to 3.5 million and making this a nearly $1 billion investment for us and a major growth driver for the utilities segment.

In the energy segment, our district energy business continues to grow through tuck-in acquisitions. In June, we closed previously announced acquisitions of 5 separate facilities in the U.S. and Canada. In addition, we have been selected by the city of Toronto as its preferred strategic partner to develop new large-scale, low-carbon thermal energy networks throughout the city.

Within our French telecom infrastructure business, we have 2 exciting growth initiatives to mention. First, the business was selected to deploy a fibre-to-the-home network in a region of France, which neighbors our first network win. The deployment will now involve providing access to ultra-fast broadband to a total of 195,000 households for an estimated investment of over $50 million by BIP.

We are also focusing on securing more of these concessions currently up for tender by the French government. If successful, this could result in an additional investment by BIP of approximately $200 million. These long-term concessions serve prime low-density areas and are expected to generate strong risk-adjusted returns.

Second, the business was awarded the exclusive the right to deploy and host wireless equipment in approximately 3,000 railroad stations across France for 25 years, representing an attractive opportunity to expand our footprint in urban areas, while also expanding our product offering.

With that, I'll now hand the call over to Justin Beber, who will talk about our investment strategy in the water sector. And he'll describe some of the organic growth initiatives that are taking place within the existing business.

Thank you, Sam, and good morning, everyone. 3 years ago, a decision was made to expand our infrastructure business to include the water sector. Water infrastructure supports arguably the most essential of services, the provision of clean, fresh water for consumption and irrigation, and is a critical input for many industrial processes. Water assets tend to be scarce and have high barriers to entry in the form of capital costs and regulation. In addition, cash flows tend to be stable, often underpinned by either regulatory frameworks or long-term supply relationships with strong counterparties, such as municipal governments and industrial customers. In short, much of the water infrastructure sector exhibits all of the hallmarks of high-quality infrastructure assets that we target.

With the world's growing population and development and urbanization continuing apace, demand for water follows, highlighting the need for investment in water-related infrastructure. While developing countries require the buildout of new projects, developed countries face issues with aging infrastructure and the declining quality of water resources. According to the OECD, there is a $6.7 trillion funding gap for capital to be invested globally in water supply and sanitation by 2050.

At the same time, according to the American Society of Civil Engineers, local governments in the U.S. have decreased their funding for water and wastewater infrastructure by 22% between 2009 and 2014. Given this growing investment need and amid ongoing concerns about droughts, floods and water quality failures around the world, we are observing increased interest in privately funded solutions.

We believe that this increased trend towards private financing brings significant opportunity for us. In the United States alone, the private sector accounts for just 9% of water and sewage infrastructure spending, whereas this figure has grown to 92% in the power sector, as reported by McKinsey and Co. From an investment perspective, we view water infrastructure opportunities falling within 1 of 3 markets: first, regulated water utilities; second, private water infrastructure such as long-term contracted assets servicing communities or supplementing larger water systems; and third, industrial water infrastructure, supporting manufacturing and other processing activities.

In developing a strategy for investing in water, we have taken into account the unique characteristics of each of these markets. Consistent with our approach in other parts of our business, our strategy in the water sector is to remain patient and focus on opportunities to leverage our competitive advantages in acquiring high-quality assets for value, and building scale and operating expertise over time. In deploying this strategy, our focus is on 3 areas, and I'll cover each of these now.

First, we seek to utilize our extensive network of relationships globally to generate proprietary deal flow. For example, we were recently invited to partner with SUEZ, a well-known and longstanding participant in the global water industry, to invest in a water irrigation project in Peru. The project consists of 2 irrigation systems, operating under favorable concessions, with take-or-pay agreements with fixed tariffs linked to local and in other cases U.S. inflation. We believe that we can leverage our global relationships further in pursuing other water opportunities like these by partnering with industrial and mining companies to develop and operate critical water infrastructure solutions for their production processes.

The second component of our strategy relies on the well-established proactive outreach programs that Brookfield, as a global investor, is able to deploy through our local team in order to enhance our deal sourcing capabilities. In each target market, our local people are able to build relationships with owners of desirable infrastructure assets and identify specific opportunities with the potential to become actionable transactions.

We recently did this in California and secured a modest, but highly strategic, investment in a water infrastructure developer that in 2015 commissioned the largest water desalination facility in the United States, located in Carlsbad, California. Combining our infrastructure credentials with our significant presence in California across infrastructure, power and real estate, we established ourselves as a partner of choice, having the requisite experience, expertise and resources to support the company in undertaking its next large desalination project located in Huntington Beach, California. Even beyond California, we believe this business is equally well-position to successfully pursue additional opportunities in similarly situated markets.

The third focus of our strategy is our ongoing efforts to unearth opportunities within our existing operations to expand our presence in the water sector. Our U.K. regulated distribution business is a good example of this, where in addition to gas, electricity and fiber, we are capable of providing new water connections, as well as water and wastewater services to end consumers. Today the business has over 7,600 in-place water connections, and nearly 6,900 wastewater connections, with sizable order books of more than 25,000 connections in each category.

In addition, our Australian district energy business delivers an integrated multi-utility offering, including energy, gas, electricity, water and recycled water services to over 16,000 customers. These services include drinking water, recycled water, wastewater services and hot water systems at greenfield and urban infill communities. The business also serves as the appointed local water utility for 11 communities, including more than 30,000 dwellings, over 8.6 million square feet of commercial retail space and various new urban industrial development. The incorporation of these water assets in current operations both enhances the value of our existing businesses, and builds additional expertise that we can then leverage in pursuing larger-scale water infrastructure opportunities globally.

Growing our water infrastructure presence in a meaningful way is a priority. While this will take some time, our experience and success in growing our district energy operations from an initial acquisition less than 5 year ago to a total enterprise value of close to $2 billion today, we think exemplifies the strategy and scale we will target in water over the next few years.

I'll now pass it back over to Sam for some final remarks.

Thank you, Justin. That was great. I'll wrap up the planned remarks now with some comments on our outlook, before opening things up for questions. From both a macroeconomic and political perspective, it was an eventful quarter with notable events in the form of elections and political scandals occurring in Europe, North America and South America. However, none of these events have had a meaningful direct impact on any of our businesses. And I'd say generally speaking, business conditions remain solid in all our key markets.

In the current economic environment, investors have been focused on 3 particular areas: weakness in the U.S. dollar, which is a change from the past little while, rising interest rates and asset valuations. Interest rates and asset valuations are obviously inextricably linked, and over the years the conversation on this topic has ebbed and flowed. We believe our strategy provides us with confidence in the face of unpredictable variations in these indicators, as well as in any market conditions. In particular, Brookfield Infrastructure implements both a prudent financing and hedging policy, which combined with our globally diversified business, serves to insulate our cash flows from changes in the U.S. dollar and other currencies.

Additionally, our well-laddered debt maturity profile, which utilizes fixed-rate long-term debt, helps mitigate any short-to-medium-term impacts from rising interest rates. Finally, our large capital backlog and $1.5 billion plus (inaudible) pipeline of potential projects provides ample opportunity to deploy capital in an accretive way, even if a heated M&A market were to cause valuations to be temporarily high.

Overall, the outlook for our business is strong due to our solid financial position and operating businesses with high barriers to entry that are underpinned with regulated and contracted revenues. Our backlog of capital investment opportunities is the largest it's ever been, and our M&A pipeline is robust, particularly in the transport and telecommunication infrastructure sectors. While many of these situations are still in the early stages, we look forward to being able to report on our progress in the coming quarters.

With that, I'll turn the call back over to the operator to open the line for questions.

(Operator Instructions) The first question is from Cherilyn Radbourne of TD Securities.

I wanted to start with one for you, Sam. One of your peers recently announced a large permanent capital infrastructure fund. And to be clear, I don't want to ask you to comment on the strategy of others. But do you think that a long duration or permanent fund might be a fit for Brookfield's business now or in the future?

Look, the question of establishing a permanent fund is something we've talked about quite a bit. Really, it's always dependent on the appetite from institutional investors on whether or not they want a closed-end versus an open-ended fund. And there's positives and constraints to both. I would say that many of the larger investors seem to favor and understand closed-end funds, and so that's why we've tended to focus on those. Although I have to admit that I think there is an increasing appetite for permanent open-ended vehicles. And so I think that there could be a shift, and as a result it's probably a structure that we will look at in the future and may in fact tap into that market.

There was certainly a lot to go through in the letter. I did want to ask for a bit more detail on the partnership with the city of Toronto to develop what you describe as large-scale low-carbon thermal energy networks throughout the city. Can you elaborate a little more on what that will involve and how and when the buildout might unfold?

I'll tackle that, Cherilyn, as well. I'd say that the first thing is it's still very preliminary. And there's a lot of discussions that we need to have with the city to determine where the initial focus will be and exactly what we're trying to achieve. But the way to think of it is there is opportunities to establish various micro nodes across the city where we can take advantage of a cluster of buildings. And sometimes they'll be centered around hospitals, universities or just a new precinct of commercial buildings being established. And the point is to utilize the district energy technology in a way that you don't duplicate all the various infrastructure around cooling and heating that currently exists in most parts outside of the downtown precinct here. And so by doing that, you can significantly lower the carbon footprint of the city overall.

So in theory, that's what it involves. It's just a number of mini systems. And the city is growing in such a large fashion that there's obviously opportunities to do that. But you need to plan well ahead in order to do that. And given our long history and in fact our leading presence in the sector, we were the natural partners for the city to accomplish that.

And that sounds like it should be relatively replicable to other urban centers once you get a template.

Absolutely. So you've read our mind. This is something that we think we can come up with a template and show it to the other cities that we're in, and maybe some cities that today we don?t even operate in. And I think the other opportunity for us here is most municipalities are focused on creating cities of the future. And so it isn't just about low-carbon. But there's also questions around how you would fiber up a municipality in a manner that positions us well for 5G rollouts and the Internet of Things, which is clearly taking hold around the world.

And so we think that we have a great opportunity to combine those new technologies with our footprint that we have in Toronto and other cities. So we're quite excited by the whole opportunity set here.

(Operator Instructions) The next question is from Steven Hong of National Bank Financial.

Got a question in regards to smart meter. With the possibility of more than doubling the size, what kind of return can we expect in this investment? Would it be kind of in line with particularly the connection business or so?

Again, it's Sam. Yes, I'd say these are attractive return opportunities for us. I would say they are comparable with the returns in our other utility connections. Each connection has a little bit of a different profile. So I'd say you have to look at it more on an aggregate basis. But the levered returns in this business are comfortably in our 12% to 15% return threshold, and in fact in some cases higher.

And just particularly on the infrastructure sector in general, with the increasing competition for new assets, do you have any comments on how the market is changing in terms of structuring deals to extract a similar or maybe a good return at this standpoint, and maybe which jurisdictions you think are attractive at this point because of that?

What I would say is the market hasn't changed materially in the last couple years. I'd say for the last few years there has been new capital coming in, lots of interest from institutional investors and low interest rates. So we've had to deal with this environment for a while. I thought Justin's description of what we're doing in the water sector is probably a useful guide for how we're thinking about all our different businesses. We just try to leverage our regional footprint and our local relationships, find tuck-in opportunities related to our existing businesses and then once in a while if an attractive large opportunity comes up where for whatever reason, due to complexity around structure or the size of the investments or just maybe the location, we can acquire that on an off-market basis. Then we'll move very quickly and aggressively to do that.

So I think the playbook hasn't changed. And despite the fact that it's still a very competitive market, the number of opportunities we're seeing is still quite high. So I?m pretty optimistic.

And just finally quickly on the capital recycling initiatives, I understand that there might be a potential for more capital recycling over the next 6 to 9 months. Is there a particular sector that you guys are really looking at, or is it more if there's attractive opportunity to sell, you guys are just going to go at it, in that sense?

So as we've probably mentioned on a couple calls, I'll just reiterate sort of how we think about asset recycling. So there's sort of a profile for our businesses of what they go through, through their life of our ownership, if you want to call it that. Usually when we buy a business, we have a particular business plan of how we're going to extract growth and grow the business. Often that involves a change in the management, putting in place a new capital structure and investing within the franchise or business to grow EBITDA.

After a number of years, that business plan gets executed and typically it becomes a much more stable lower-growth business. Some businesses have a growth profile that can go on for a long period of time, like our regulated business in the U.K. Others have a shorter profile, shorter-term profile on growth. And so to get to the punchline, once we've reached the point where we feel we've extracted most of the value and we've created the higher growth trajectory of the business, then we tend to recycle the business and sell it off to an investor who prefers a much more seasoned, established cash-flowing business, and will often pay a very low cost to capital for that business. And that way we can generate higher returns, investing it where we can earn a higher return, and then selling them when people will ascribe a much lower cost of capital.

So today we think we have a few businesses in our portfolio that meet that criteria where they're in a lower-growth profile. And it will be those businesses that we target to sell over the next little while.

The next question is from Frederic Bastien of Raymond James.

Sorry, I was late to join the call, so I apologize if you've touched on this subject already. But I was wondering if you could provide an update on the Australian ports business.

On the Australian ports business, I would say things are going reasonably well. The market conditions have held up, and I'd say on the positive side we've been able to put through some price increases that have favorably impacted our results. And operationally, our businesses are running well and we don't have any labor issues which is always a nice thing to be able to report. I would say it has been, on the competitive side, a little bit more challenging. We've had a few of our customers targeted over the last 6 to 12 months. And given the recent changeover or acquisition of the business, we've had to button down a few of our large customers, which we've now done. As part of extending those contracts, we have seen some price concessions though.

So I'd say on a long-term basis, it's going very well. But we've had to manage some near-term challenges, which I think the team has done a great job.

Maybe a month or 2 ago, there was an article in the papers suggesting that there a proposal that had been put forth to potentially add Brookfield Infrastructure to the TSX Index composite. Do you have any view on that or any update that you can share with us since this announcement was made?

Well, I'll start with that. Maybe Bahir or Rene might want to jump in as well. But I guess for others on the call who may not be as familiar for the issue, Brookfield Infrastructure, because of its dual listing both in the U.S. and Canada and the fact that we've probably historically have traded more in the U.S. than on the TSX, we've not been meeting the float [ph] turnover test in order to get inclusion into the TSX composite index, which has been a bit frustrating given the fact that we're one of the largest businesses in Canada. I think today, just based on market float, not even our market cap, we would be around somewhere between 35 and the 40th largest company in Canada on the index.

I think as a result of that and the fact that we are the largest business that isn't included, a number of people have campaigned for some rule changes. And we understand that the S&P Advisory Committee did meet a while back, a few months ago, and discussed this. And we believe there was very strong support among all the participants in the meeting for a change to reflect both the Canadian and U.S. trading in that float turnover test.

So we're optimistic that something will happen. Obviously we don't anything more than that. And I think the impact -- look, I think the impact will be more of an initial one, where there might be some buying in order to rebalance some of the index portfolios. On a longer-term basis, it's unclear whether or not it will have any impact on the stock price. But long story short, we're hopeful. We think it's the right thing to do. And I think it will be net-net positive for the company.

Okay, that's helpful. But they haven't given any time lines as to when they expect to make a decision, or this is a prolonged process that may take some time?

To be honest, we know nothing about the process that's involved, and we've not really been involved ourselves. So to the extent that we've had opportunities to comment, we have done that. But really, this is not in our hands, and we sort of let S&P do their work and make their own decisions.

(Operator Instructions) There appear to be no further questions. I'll now hand the call back over to Mr. Pollock for closing comments.

Well, thank you, operator, and obviously given the number of questions is a reflection that we're in the middle of summer. And so I'd just like to take the time to thank everyone who joined the call today. I know most of you prefer to be at the beach. But at any event, I hope everyone has a great summer and we look forward to speaking to you again next quarter. Thank you, operator.

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