Brookfield Infrastructure Partners LP (BIP) 2017 Q3 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the Brookfield Infrastructure Partners Third 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 Mr. Rene Lubianski, Senior Vice President of Corporate Development. Please go ahead, Mr. Lubianski.

Thank you, operator, and good morning. Thank you all for joining us for Brookfield Infrastructure Partners Third Quarter Earnings Conference Call for 2017. On the call today is Bahir Manios, our Chief Financial Officer; and Sam Pollock, our Chief Executive Officer. 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 would encourage you to review our annual report on Form 20-F, which is available on our website.

With that, I'll turn the call over to Bahir.

Thank you, Rene, and good morning, everyone. Brookfield Infrastructure had a solid third quarter as we generated funds from operations or FFO of $301 million, which translates to $0.81 on a per unit basis and represents an increase of 19% compared to the prior year. These results were on the back of meaningful contribution from new investments that closed over the last 12 months and another solid quarter of organic growth.

Each one of our operating groups performed well during the quarter. On a holistic basis, results in our businesses grew by 10% on a constant currency basis and the outlook for each one of our operating groups remains positive for the balance of the year and heading into 2018.

I'll now give a quick overview of the results for each one of our operating segments, touch on some key operational matters and then I'll turn the call over to Sam, who'll take you through the various growth initiatives that are underway.

So first, I'll start off by discussing results for our Utilities operating group that generated FFO of $170 million in the period, representing a step change increase over the prior year. Our results benefited from a sizable contribution from the Brazilian regulated gas transmission business acquired in April this year, as well as additions to rate base, predominantly in our Chilean transmission and U.K. distribution businesses and upward inflation adjustments across the group. Results in this segment were modestly offset by the impact of the sale of our Canadian electricity business and to a lesser extent from foreign exchange.

On the operational front, and as previously noted in prior communications, we've been very focused on the execution of our integration plans related to our newly acquired gas transmission network in Brazil. To date, management has successfully internalized the Finance, Procurement, Human Resources and Information Technology functions, and our ultimate goal is to have this business running on a fully stand-alone basis by 2019.

Our U.K. regulated distribution operations delivered another strong quarter on the back of several large multi-utility contract wins. The business is on track to achieve its strongest annual results yet, both in terms of new sales that are up on a year-to-date basis by almost 30% compared to a record 2016 year and in terms of competed connections that are up 15% year-over-year.

Our Transport group had a very good quarter, recording FFO of $136 million, which was 21% higher than the prior year, driven by substantial earnings growth, particularly at our toll road business. This operating group continues to benefit immensely from the leverage it has to GDP growth. In that regard, both our Brazilian integrated logistics and toll road businesses are benefiting from the country's economic recovery following a severe and protracted recession.

Key economic indicators have improved over the past year, which include: core inflation, that is now below 3% and represents a drop of 50% over the past year; interest rates, which have fallen by over 6% and expected to fall further; and lastly, the country's GDP, which grew modestly in the range of 1% and is expected to continue to recover heading into 2018.

This economic turnaround supported a 4% increase in traffic volumes on our roads, which combined with strong tariff increases and lower interest cost, supported a 50% improvement in this business' quarterly results.

Volumes at our Brazilian logistics business also grew meaningfully from the prior year as a result of improvements in key industrial sectors and our ongoing ability to capture increasing volumes of agricultural products.

In our energy business, we posted FFO of $48 million for the quarter, which was 20% higher than the prior year. Results benefited from a growing contribution from our North American gas transmission business, which had higher gas transport volumes and due to reduced leverage levels in that business.

Our District Energy operations also performed well during the quarter, benefiting from the contribution of newly acquired systems and new contract wins, while our gas storage business posted weaker results due to lower gas spreads compared to the prior year.

Lastly, our Communication Infrastructure operations in France generated FFO of $19 million in the quarter, which is consistent with the prior year. Results in local currency terms were higher by 8%, primarily reflecting additional contribution from growth initiatives in addition to inflation and taxation.

I also wanted to make a few comments on our liquidity position. In September, we successfully completed an equity offering raising $1 billion of capital. We are very pleased to have raised this capital at a time when our pipeline of opportunities is extremely robust. With our recent addition to the S&P/TSX Index, our access to capital has never been better. We currently have corporate liquidity that is in excess of $2 billion, which positions us well to quickly execute on this pipeline of initiatives that will add value to our business.

And so with that, thanks for your time this morning and I'll hand it off to Sam.

Thank you, Bahir, and good morning, everyone. As Bahir alluded to at the beginning of his comments, we've been focused on setting the stage for the next phase of our growth in business. To elaborate on this, I'll start by providing updates on some of the key organic growth initiatives underway and some of those that are already contributing positively to our results.

Firstly, at our U.K. regulated distribution business, our growth outlook for the next year is robust. This is supported by a strong healthy market in the U.K., with planning permits at record highs and housing registrations reaching the highest mark in a decade. As part of our continued strategy to capture this growth, we are close to finalizing agreement with a leading energy retailer to secure up to 2 million smart meters, which more than doubles the size of our smart meter offering, a significant accomplishment for this business.

With this contract, we will secure up to 3.5 million meters, which we will look to commission over the next few years and are on track to deploy nearly $1 billion into this business at excellent risk-adjusted returns on our capital.

Our natural gas transmission business in North America continues to capitalize on changing flow dynamics in the U.S., with Phase 1 of our Gulf Coast expansion progressing as planned and continued interest in support of Phase 2. During the quarter, the business also secured a significant agreement to transport gas in the Permian basin, with incremental revenues beginning in 2018. The business is pursuing approximately $300 million of potential expansion projects. If these materialize, they could generate approximately $45 million in incremental EBITDA to BIP. We expect to provide further updates on these opportunities early next year.

At our Telecom business, our management team is beginning to position the business as a strategic partner of choice to leading internet service providers. This is on the back of early success in the Fiber to the Home market with our 2 network wins in the first half of the year. We also progressed several new Fiber to the Home opportunities during the quarter. These included new network service areas tethered by municipal authorities and potential partnerships of large service providers to build out and operate segments of their networks.

If successful, these initiatives could provide meaningful growth to this business.

Speaking more broadly on telecom, as we discussed last quarter, we have been focused on several opportunities in India on the M&A side. Our agreement to make a $200 million investment into a portfolio of over 40,000 towers from Reliance Telecom, which was conditional on a merger between Reliance with Aircel. The merger will not proceed and therefore, this transaction won't proceed as initially intended. However, we continue to monitor the evolving situation to determine if revised terms can be agreed upon with them. Meanwhile, we remain patient in pursuing this and several other potential opportunities in the India's telecom sector as we believe this space has tremendous growth potential.

On the transport side of the business, in August, we agreed to acquire a portfolio of 370 kilometers of toll roads in Southern India for an approximately $100 million investment by BIP, bringing our overall toll road portfolio in the country to over 600 kilometers. The business is comprised of 2 high-quality well-located roads, which are in advance stages of construction.

Right now, they are partially tolling with full commission expected early next year. This is a great investment for the business and that it should capture the benefits of favorable demographic and economic trends in India.

In September, we held our Annual Investor Day in New York where we discussed the investment landscape for infrastructure for the next 10 years, focusing on trends that should generate meaningful investment opportunities for our business.

Last quarter, my colleague, Justin Beber, reviewed the many opportunities in the water sector and I'll briefly discuss a few others with you that we are excited about.

First, we are focused on data infrastructure space. Data is the fastest-growing commodity in the world with global usage growing exponentially, which requires massive investment in networks to store and transmit it, like fiber and telecom, where we've already made investments and remain focused on growing our portfolios.

Second, we see significant opportunity in municipal infrastructure. Trillions of dollars have been committed globally to making cities smarter and more connected, efficient and environmentally friendly to accommodate an increasing rate of urbanization.

We see the largest opportunities for us in district energy, where we already have opportunities -- operations in 11 North American cities and energy-efficient system such as smart meters, where we continue to deploy substantial capital. Additionally, we are ideally suited to capture scale in this sector, given Brookfield's vast urban property presence.

Lastly, we are focused on making Asia a larger part of our capital allocation. Asia is the world's largest and fastest-growing market with current GDP growth of nearly 6%. It is also estimated that by 2030, the middle class in Asia is expected to be over 150% of what it is today at almost 3.5 billion people. With this growth and Brookfield's established presence in Asia, we will look to allocate capital to fund the build-out and maintenance of critical infrastructure across all sectors where we reinvest.

To conclude, our investment pipeline is strong, both with respect to M&A and organic growth initiatives. We are operating in a global economy, where there is an exceptional need for capital to fund infrastructure projects. We intend to remain true to our investment strategy by creatively and selectively sourcing the right opportunities to achieve our target returns. We'll utilize our competitive strength of size, footprint, operating capabilities and access to capital to execute on accretive projects. We believe there are opportunities to buy for value in both developed and emerging markets.

Our primary focus for the balance of the year is to advance our robust pipeline of communications, infrastructure and energy transactions that are fairly well progressed. We also remain very focused on the integration plans at our Brazilian regulated gas transmission business and executing on organic capital project initiatives.

With that, I'll now pass it back over to the operator, and we'd be happy to take any Q&A.

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

I wanted to start by asking about the smart meter opportunity. Relative to the rest of the capital project backlog, which has a duration of 2 to 3 years, I believe the capital outlays for smart meters occur over a slightly shorter time period, and you also start to earn a return effectively as soon as you've deployed the capital. Maybe you can just give a little bit more detail there?

Cherilyn, it's Bahir. I'll start off and maybe Sam will chime in as well. But you're absolutely right. We do connect these meters and they take a bit of time to fully get them adopted. But as soon as you deploy the capital, you do earn that return right away. So you are right on that front. Included in our backlog today, there's about $200 million, which we expect to adopt over the next 12 to 24 months, and so that will aid our results further. And as you would have seen from our communication included in our "shadow backlog" that we've spoken about before was an investment in another 2 million meters that will require about $500 million plus of capital, that we're getting pretty close on. And so should we be successful on getting that done, that will boost results further for that segment.

Great. And then it was very encouraging to see the traffic growth on your toll roads. Maybe you can talk a little bit about how the recovery is progressing in Brazil? And how that's impacting both the toll roads and your other GDP-sensitive business, the rail operation?

Cherilyn, this is Sam. I'll start and maybe Bahir might add to it as well. I would say, first off, we're obviously very encouraged with the recent progress in the economy down in Brazil. Bahir, I think, spoke to a number of the statistics that have recently come out with interest rates coming down dramatically from a year ago 14.25% down to 7.5%. That's obviously having a real meaningful impact on the country. Inflation is down to almost I think 3%, but I think in some months it has been almost 0. And we are seeing growth. So that's all positive and that's happening even without, I'd say, a meaningful change on the political side which -- where there are still some uncertainties. We expect that to get cleared up next year with the election. The -- I'd say the improvement in traffic, we really started noticing late spring or early summer. And it's just been accelerating since then. The -- as far as the benefits of this improvement in the economy, I guess it affects us several ways. So the most impacted is the toll roads. It was the most impacted when the economy struggles, both impact from the interest rate and also the economy. And it's the one that's rebounding the quickest. With respect to our railroad, part of the business that's exposed to the industrial sector, I'd say, is benefiting from the improvement in activity there. We didn't see as much of a falloff in that business related to the agricultural sector because that sector actually stayed fairly strong. And so most of the benefits that we pick up in the rail will come from the expansions that have taken place. So that's all positive. But the improvements won't be necessarily as GDP-related. And then, in NTS and the -- and our transmission businesses, they are not GDP-related. But the fact that interest rates are coming down will help reduce interest costs for our transmission business, which is fantastic. And for NTS, the opportunity to finance the business and put some leverage into it will probably happen a lot sooner than we ever expected. As you know, that investment was done on a completely unlevered basis because we thought interest rates were too high. But given that they have moved down so much and that the Petrobras has already experienced a -- an upgrade and the sentiment for capital in the country has improved dramatically, it's likely that we will be able to refinance that business possibly as early as the first quarter of next year.

The next question is from Rupert Merer of National Bank.

So looking at your exposure to Brazil, it's I think 38% of FFO now. I believe over the long run, you plan to reduce that. Two parts of the question. First, how comfortable are you with the exposure right now? And then secondly, how can you manage that exposure? I imagine borrowing is one way, but are you looking at? Any other strategies like currency hedging?

Rupert, it's Sam. I'll start with that. And again, Bahir might jump in. So I guess the first thing maybe just touching on strategically, are we comfortable with the level we're at now? And I'd say -- I'd almost come out in a different way and say that strategically, we sought to make more investments in the last period of time in Brazil because we felt this was a once in a decade or even longer period of time to buy for extreme value. And so when we look at the investments we made with NTS and with the transmission, these are the most ultracritical assets in the country and we bought them for a tremendous value. So the fact that we're able to lock that in, I'm thrilled with. But I expect -- as we've been telegraphing to the people that the window of these unbelievable opportunities was very short. And so we'll now have to look at different places to invest their capital. And things will just balance out naturally over time. So very comfortable with where we sit. I feel like we have all the right winds at are back in the country and we were able to buy assets that we probably never thought we ever could have buy. So that's good from that perspective. As far as risk management, I think you touched on the main thing, which is the ability to extract out capital through leverage, given that we've underleveraged most of the businesses, particularly NTS. We'll do that. That will help manage some of the currency issues. We probably won't put any currency hedging in place. Historically, we've not found the market to be deep enough and so the cost of hedging really wasn't representative of the true purchase price parody that exists between U.S. dollar and real. So at this stage, we'll do -- we'll put the leverage in, we'll monitor the operations and I think that's the current plan.

Great. And secondly, on Indian telecom, you are viewing a number of opportunities there. We have seen some other transactions in that market recently. How competitive is the market? Are you comfortable you'll be able to achieve your return hurdles?

Well look, our view is that there's more assets for sale than there are buyers. There is -- nonetheless, for a few people like American Tower, who have business there, it was strategic for them to go and buy the portfolio that Vodafone put up. But that's literally probably 1/10 of the assets that are for sale. And outside of American Tower and maybe a few other far aggressive players, there really isn't a deep fire market. And so we do think we can buy for good value and at scale. But time will tell. These are large companies that are selling. They don't have to sell if they don't want to and we'll price our capital appropriately.

The next question is from Devin Dodge of BMO Capital Markets.

The $300 million potential expansion projects at NGPL that you highlighted. Can you help us understand which projects are within that group? Just wondering if it includes both phases of the Chicago Market Expansion and Gulf Coast reversal? Or is there more to it?

Devon, it's Bahir. So the $300 million -- so in our existing backlog is a second phase of the Gulf Coast expansion that we're executing on and hope to bring to completion by next year. And then included in the $300 million backlog number is another phase of that. And that makes up a big bulk of that number in addition to several other smaller contracts that we are doing around the Permian and Waha regions.

Okay. And then, when we think about the Indian market, it seems like there's a lot of opportunity. You're obviously more focused on telecom, infrastructure and toll roads. But are there other sectors that look interesting? And is there a limit to how much capital you'll be comfortable deploying into the market?

It's Sam again. I guess yes and yes. Firstly, just on other sectors. We're mostly focused on roads and telecom, that's where we see the best opportunities today. There are a few other sectors that we've always just monitored. Airports, I guess, is one and transmission is another. But I'd put the likelihood of transacting in those sectors anytime soon as fairly remote. I think we'll stick to the 2 sectors that we're currently looking at. And as far as the amount of capital that we deploy, there is sort of a limit to how much we might be prepared to put in that market. But I'd say a lot of it also depends on how attractive we see the opportunities. So if we are able to do a tremendous investment that we think is a very unique entry point, then maybe we might do something a little larger. But I think it all depends on the situation.

Great, that's helpful. And then just last one for me. On the asset recycling program, any updates you can provide there? I think last quarter you talked about we could see something potentially in the back half of this year or early 2018. Just wondering if that's still the case?

Yes. So yes, we're fairly advanced on one particular situation. We don't have an update for the market yet and we'll just see how things progress over the next little while. But our hope would be that one way or another we would have an update on that soon.

The next question is from Andrew Kuske with Crédit Suisse.

I guess the question, it really relates to your liquidity position and the asset liquidity. Have you telegraphed (inaudible) lots of opportunities out there. You (inaudible) more liquidity than you normally have. So how do you think about normal liquidity? And then how do you also think about just the cost of having that excess capital on your balance sheet right now?

Andrew, I'll touch that one. So -- because I think the -- it's an interesting question -- because I think you can approach it as there's obviously a mathematical cost. You can always calculate the drag of carrying liquidity and the negative of that. But we've always felt that strategically having liquidity and being able to respond quickly and aggressively to exciting opportunities that come up, you can't put a price on. And that for us we should always put ourselves in that position. And even though we might take a little bit of flak for having too much liquidity at certain points in the cycle, you just can't -- that optionality of having that cash available to take advantage of those things is priceless. And so that's kind of our view, right or wrong. I know mathematically, it may not work for some, but we just think that's the way we should run the business.

That's helpful. And then maybe just tapping into another liquidity pool and this is one of the dialogues at the Brookfield day, was effectively the high-network channels and the private bank channels. What initiatives does BIP specifically have now or planned into the future really to have that (inaudible) ?

This is really Bahir's alley. He spends a lot of time thinking about accessing new investors for BIP. So maybe I'll turn it over to Bahir to talk a bit about some of the stuff that you're doing with -- and in fact, some of the analysts yourself included are super helpful in that regard.

Yes, it's great. And so this is an initiative that we started off here in Canada. And just given the familiarity with the people here, it's -- it bodes very well for that investor basin. We've been doing a lot of sort of teaching sessions, et cetera. We're using a number of the banks here in Canada. Now we've expanded that program into the U.S. where we're getting a huge amount of success through, again, using the various brokers and you've been helpful in that regard Andrew and some others as well, because there's an immense amount of capital that's out there. In the U.S. and Europe and to a lesser extent in Asia, we think that the opportunity set is big, but it's just going to come with more education. But I think our story bodes well for this investor base. And this is definitely something that we're going to be very focused on for the balance of the year and heading into 2018. Is that helpful, Andrew?

That is helpful. And is there any kind of target size you're thinking of that market and like the gee whiz number that Blackstone's got? At the top of the house about almost $50 billion of capital from private bank channel. (inaudible)

Yes. So look, I think we're probably talking 2 different things a little bit. When Blackstone talks $50 billion like they're -- they're really getting large checks from (inaudible). And I think most of their non-mammoth checks are really using the traditional channels that we would use. And I suspect when it relates to infrastructure, they don't have near the penetration that we would. And I think it'll take them some time to do that. I guess where we're -- we have a number of things going on, not just for BIP but for BAM. We do -- we are looking at super core funds that will tap into different groups that Blackstone has targeted. I guess what Bahir and I were mostly talking about here was expanding the BIP investor base. And we don't think that we've really maximized the number of people who could invest in a unique infrastructure story. And we know that based on our contacts with investors in our institutional funds, the appetite for infrastructure product is massive. And we think that most of those people who aren't the large institutions, just look at it as a proxy.

(inaudible) what Size?

What size? Well, I don't know. It's -- I would love to see Bahir expand the investor base by $500 million to $1 billion a year, if he could.

The next question is from Robert Kwan with RBC Capital Markets.

Maybe just building on the question around potential limits on investment in India. Just when you look at your overall business, and I guess this is all still building on the Brazil question. How do you think about where you want to be in terms of a cash flow or asset mix between OECD and emerging markets?

So Robert, we don't have hard and fast percentages. I think we've always felt that just based on the activity level we see and the actual opportunities that 70-30 was -- 70% OECD, 30% maybe emerging market was a realistic or likely outcome. I just think it's going to go through phases. And our -- I guess, our strategy is to make sure that we're diversified across sectors, across regions, invest when we can buy unique and scale franchises anywhere when that opportunity arises, we act decisively. And over time in our regular business as we just sort of buildup through organic opportunities and different things, things will level out. So...

(technical difficulty)

I guess hope to convey to our investors that we shouldn't focus too much on the near-term blips and that really we should focus on are we buying great businesses at certain points in time? And then longer term, ensuring that the business does have that diversity that protects us from a counterparty risk or sectoral risk or disruptive technology risk and currencies. I think we shouldn't focus too much on currencies. We need to focus on the whole array of risks.

Understood. And I guess as you tilt kind of away from that longer-term mix towards more emerging markets? Can you just talk about how you think about trying to set yourself up and whether it's debt leverage or payout ratio? Do you actively look to be more conservative, given that sometimes when things go soft globally, a lot of the correlations in EM go to 1?

Well, it happens naturally because each business gets financed on a stand-alone basis using investment-grade metrics and we just can't leverage Brazil or other markets aggressively and we don't. So our -- that acts as a barometer in any event. And I think we've always had a very conservative robust balance sheet and our payout ratios have never been high. So I don't expect that we will change what we're doing. We'll just continue to run the business conservatively. Keep our payout ratios in that 65% to 70% ratio. And obviously, keep an eye out for the future. If we see anything that worsens and we'll manage the business accordingly.

Got it. And if I can just finish on the new Indian toll roads. Given that their finishing construction are new. Is the return profile is expected to be, I guess, as a parallel similar to Avian, which was at the time a ramping return profile or is it expected to be different. And then I don't know if you're willing to give any comments on expected returns.

Yes. So the good news is one of the roads is safely done now. And through the second road, there'll be probably February-ish. And yes -- look, I would -- what I would say is we should earn mid- to high-teen type returns. We think that we are getting a premium to what other people are paying for complete roads, probably 300 to 400 basis points. And so it definitely pays for us to be more creative when we do this. And in relation to the profile, I think the -- Avian probably had a bit more of a curve to it. The going-in FFO there was relatively low. But it was due to a number of factors. Some of it was due to a ramp up. But it also had -- it'd come off a period of time when there was an earthquake, and so traffic was a little depressed when we first bought it. And then also, because it has such a favorable tariff regime where we get inflation plus 3.5% real, which is more favorable than what we get in Indian roads, you have much more of a growth profile for the cash flows. So this one is more steady, higher going-in returns. That one was a very unique road and it's played paid out fantastically obviously, but it's a different profile.

(Operator Instructions) The next question is from Matt Borys of Raymond James.

Further on your capital recycling program, do you think current market conditions are favorable for the sale of any particular asset types? And which of your segments are you looking at for these sales?

Matt, it's Bahir. So we definitely think the current market environment bodes very well for mature fully sort of contracted and stable assets. There's a lot of people out there vying for these kind of assets and I think we have a few in our portfolio today that are sort of ideally positioned for those. So definitely, we do think that this is -- we're in a period here for a couple of years, but that's going to be quite favorable.

Can you disclose which segment you're looking at?

I would just say that we are just looking to sell, as I mentioned, pretty mature assets. But I can't get into much more detail than that.

Okay. Fair enough. And are there any opportunities in the emerging market, Brazil, India for your district energy offering? Or does it kind of only makes sense in developed markets at the moment?

We are not currently pursuing anything. We have reviewed and analyzed the markets a little bit for that. I guess today, we have mostly focused on markets where there are established precincts and more brownfield type of rollup opportunities as opposed to -- I'd say India and Brazil would probably be more greenfield type systems. And so just from a time and energy perspective, we just felt that there's a lot of other places to focus on before we go and spend time in those markets. But I'll just say longer term, absolutely, those are markets we should focus on wherever there's real estate development. And particularly as the projects become bigger and the ownership of the real estate is more institutionalized, then that makes for a great market conditions.

This concludes the question-and-answer session. I'll now hand the call back over to Mr. Pollock for closing comments.

Okay. Well, thank you, operator, and we would just like to thank everyone who's on the call this morning. We appreciate your interest and all questions. And look forward to updating you on our progress next quarter.

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