Q3 2019 Earnings Call
Including the latest phase of TARP capital recycling program and liquidity position.
So our operations performed well in the third quarter.
Generating funds from operations are F AFFO of 338 million.
On a per unit basis as a FFO was 82 cents, representing 15% increase over the third quarter 2018.
Results this quarter continued to benefit from strong organic growth of 9%.
A good solid performance in each one enough our operating segments.
And I was driven by inflation indexation.
There's no volumes Gobank Siderar networks.
At an almost $700 million the new capital projects that were mission and into earnings over the past 12 months.
In addition to the good underlying performance in that it each quarter for our segments. We also benefited from solid contributions from the 1.7 dollars of capital that we put to work.
Over the past 12 months.
As these new investments were primarily funded with proceeds from the recycling of make sure.
De risk assets.
Our FFO included incremental costs.
Arising from $300 million projects that were commissioned in temporary based in the.
In the last year.
Inflation indexation across our portfolio and continued its trend connection activity on our to UK regulated distribution business.
In September our UK regulated distribution business.
Slide 15 years strategic partnership agreement Chi pipe or abroad and.
The partnership well, Greg Scott, it's three leading products of TV voice and broad band on to our fiber network.
That's part of it that deal Sky will become the anchor tenant for broadband services.
In new and existing read through that so developments.
This calculation this strategic relationship with tier one Internet service provider isn't any way to exercise our option to acquire 50% interest in that second segment operating lines from our partner.
Bringing our ownership in this project.
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We currently own two operating transmission line out right totaling 800 kilometers.
And now expect FFO from this.
Business to grow significantly over the next three years.
As we commissioned the remaining line.
And acquire partners standing interest.
Our transport segment contributed 428 million compared to 119 million during the same period of 2018.
Results in the current quarter benefited from volume growth across our ports and toll roads.
As well as higher tariff and Ray ban contractually as laid with local inflation.
The positive contributions were partially offset by them back the distracted volumes on our integrated logistics business.
At our toll road traffic levels can you need to recover from 2016 recession levels.
Well light and heavy vehicle quality remains at our existing roads.
Our above prior year levels and have increased by over 8% since 2016.
At our existing roads.
Together these new investments generated approximately $40 million of FFO in the current period.
Results also benefited from strength at our us gas transmission business as a result of new customer contracts and the commissioning of capital expansion projects.
Over the last few months are distributed energy operations in North America has successfully progress several exciting organic growth initiatives.
Of note we commenced on eastward expansion of our Toronto District energy system that will provide sustainable heating and cooling to a growing expansion of the city.
This expansion could potentially add up to 20 connections to our business and could meaningfully aid our results going forward in the business.
FFO from our data infrastructure segment was $36 million for the period.
Almost doubled the amount earned in the prior year.
And primarily reflects the contribution from recent investments that substantially expanded our global presence.
These investments include a global data center business and a data distribution business in New Zealand.
Additionally, our French telecommunication business reported organic growth of 5%, primarily the result of its built to suit our expansion program.
Integration efforts at our data distribution business in New Zealand are progressing well.
We're looking to execute on a multifaceted margin improvement plan that should drive significant growth in the cash flows in this business in the next couple of years.
We also announced a rollout of the first commercial Fiveg service offering in the country, we should which should position us well to capitalize on the growing data needs in the region.
So that completes.
My recap of our results for the quarter next up I wanted to briefly touch on the state of our balance sheet and funding plans.
Firstly as we highlighted at our Investor day.
In September the monetary stimulus implemented post the financial crisis, and subsequent evolution of the credit capital markets has enhanced ability or the availability of capital across the credit spectrum.
Despite the availability of debt financing, we remain committed to protecting our balance sheet through a conservative and disciplined approach to borrowing.
We use leverages, an optimization tool and in certain circumstances. This can mean accessing the leverage finance markets. However, we do so prudently and without compromising the core objectives of preserving ample liquidity and ensuring resilience through economic cycles to minimize exposure to mark.
And refinancing risk.
In addition, we're always looking for ways to Opportunistically benefit from this attractive interest rate environment.
The completion of our 500 million dollar Canadian corporate bond issuance in October is an example of this approach.
We elected to access the bond market to lock in an attractive fixed rate of 3.4% for 10 year term and we'll use the proceeds partially to redeem a $375 million series of notes in late 2020.
This issuance extends our corporate maturity profile six years and further de.
Term funding and capital plans.
We also proactively secured a long term financing on our UK regulated distribution business amidst the favorable credit market backdrop.
The financing has an average all in cost of 2.4% and has an average term of approximately 15 years.
We ended the quarter with though.
$3 billion of total liquidity, including approximately 2.2 billion at the corporate level.
Our liquidity position will be supplemented by almost $600 million in the coming months.
Upon closing of three recently signed capital recycling initiatives, which Sam will discuss further in his remarks.
Overall this latest phase of our capital recycling has been very successful.
Thus far in 2019, we've secured or completed five initiatives.
Once we close the three advanced sales that were working on we would have generated almost 1.1 point 1 billion of liquidity.
On some recent investment in that sell initiatives I'll give an outlook for the business.
Before I do that though I want to briefly recap our recent announcement to establish Brookfield infrastructure Corporation, or what I'll defer to going forward as Pepsi.
Despite having a unique asset base and an attractive financial profile, we've come across many investors that are unable to own units in our business as a result of our limited partnership structure.
To address this issue, we decided that we would launch Pepsi, which will provide investors with an alternative way to gain exposure to our global infrastructure business.
Did see will be established as a publicly listed Canadian corporation upon receipt of various regulatory approvals, we tend to list Bip C shares on the New York and Toronto stock exchanges.
Now for those of you who are unable to listen to our Investor Day presentation. This is how Betsy works.
The corporation will be creates.
It it by wave a special distribution that will be analogous to at units split.
We currently anticipate that FIP unit holders will receive one share of Pepsi for every nine units have been held on the record date in respect to that special distribution.
On a go forward basis investors will have the option of buying a bit LP unit or a betsy share.
50 shares will be structure with the intention of being economically equivalent to bip units with identical distributions and the ability to exchange Bip C shares into bip units at any time.
We expect the initial market capitalization of 50 to be approximately $2 billion and the transactions being structured our tax free basis to both Canadian and us unitholders.
The aggregate market capitalization of Brookfield infrastructure should be unchanged by the introduction of Pepsi.
Now, we see many benefits in establishing Betsy.
First.
It will expand our investor base.
For those investors that cannot invest in bip units today, if Steve will provide an opportunity to own and economically equivalent security.
With that traditional corporate structure.
Second.
It will broaden our eligibility for index inclusion.
As passive index investing grows and popularity is increasingly important that brookfield infrastructure be included in the major global indices.
While Pip is currently included in the S&P TSX comps index and the S&P TSX 60 index.
Fifth C shares should be eligible for inclusion in several other global indices, which we expect will further expand our investor base.
And finally there'll be tax advantages for some investors.
For us investors 50 dividends are expected to be qualified and the federal tax rate on dividends will drop meaningfully to 24%.
Compared to 41% on bit Lps distributions.
For Canadian investors Bfc dividends will be considered fully eligible dividends.
All BMC shareholders will have simpler tax reporting and we will receive common dividend reporting slips.
Now subject to regulate receipt of regulatory approvals, we plan to complete the transaction in the first half of 2020.
I'm glad to say that the initial reaction from our unitholders to launch of Bip see has been very favorable and as a result, we are excited to bring this initiative this initiative to fruition.
No.
I'll, let me move on I'll touch on our current strategic initiatives and some recent asset sales.
And beginning with our new investments we are progressing several attractive initiatives that have either been secured our in advance stages.
We recently achieved financial close on our North American gas pipeline business investing approximately 140 million of equity for a bit.
In the coming months, we expect to invest a further $1.1 billion across various businesses and the two biggest initiatives underway, our gensix in Wyoming and a tower portfolio owned by reliance Jio.
In that regard in July we announced the $8.4 billion take private acquisition of Jesse and one.
Meiomi.
Which we will be acquiring alongside institutional.
Investors with Bips share the investment being approximately 500.
Billion dollars.
We are pleased to report that we recently received approvals from both Gnw shareholders and a surface transportation board and the transaction. Therefore is on track to close in the fourth quarter. Following receipt of the remaining customary regulatory approvals.
In addition.
We're also finalized an agreement with reliance jio to acquire a large scale portfolio of 130000 telecom towers in India.
This transaction is being negotiated on a bilateral basis and leverages our existing relationship with relax.
Hence industries, the counterparty to the Indian pipeline business, we acquired earlier this year.
We have substantially complete our due diligence and are currently finalizing transaction documents.
Station.
We expect to sign.
At that business at an annual rate of approximately 10%.
This was achieved but commissioning several accretive capital projects and improving margins by reducing energy line losses.
Upon closing, which is expected in the fourth quarter, we anticipate earning an after tax IR of approximately 18% in us dollar terms and generating a multiple of cap of almost three times our initial investment.
The second one I'll touch on is our divestment, our district energy and distribution business in Australia for approximately us $280 million.
One of the core components of this business is a gas distribution network that serves the state of Tasmania.
And we acquired this business is part of the Babchuk and Brown recapitalization in 2009.
Over the last decade, we made a substantial investment in the business to expand its newly built network and increased customer connections.
Our exit price translate to about an 18 times EBITDA multiple which is a strong valuation that reflects the the stability and positive growth outlook for the business.
The sales expected to close in the fourth quarter of 2019.
And then last transaction I'll touch on is an agreement to sell a further 33% interest in our Chilean total business at a purchase price that's consistent with the sale. The initial 33 percentages that close early this year.
The sale resulted an after tax IR of 16% in US dollar terms and the multiple capital of 2.4 times.
The sales expected to close in the fourth quarter and will result in a $170 million in proceeds to bip.
Now looking ahead, our outlook for Brookfield infrastructure is positive as our financial position remains strong and much of the business is underpinned by networks with high barriers to entry and cash flows that are highly regulated and contracted.
For 2020, we anticipate our organic growth to be near the top end of our 6% to 9% long term target range.
In addition, we expected our recently secured investments will be fully contributing to results next year and generating an average going in FFO yield of approximately 12%, which is highly accretive to our results.
So in summary, our priorities for the year ahead, our four fold.
First we're focused on closing the $1.1 billion of recently secured transactions and those include the two marquee trends transactions I mentioned earlier second we are pursuing a robust pipeline of new opportunities, which could lead to another year of outside investments.
Third we will continue to execute on the next phase of our capital recycling strategy with the objective of generating over $1 billion and proceeds from asset sales in 2020.
And finally, we are advancing the creation of Bips C to enhance the assess ability of Brookfield infrastructure to investors and that as I mentioned, we're targeting to complete in the first half of next year.
So that concludes our remarks for today's call ill pass it over to the operator, and we'll be happy to take some questions.
Thank you ladies and gentlemen, if you have a question at this time. Please press Star then one key on your touched on telephone.
Yes, good question husband, and certainly wish to remove yourself from the Q. Please press the pound key.
One moment for questions.
Our first question comes from Cherilyn Radbourne with TD Securities. Your line is now open.
Thanks, very much and good morning.
I wanted this morning with a question on fee.
Sounds like the launch is progressing well and one of the questions. We get from investors is how the initial 2 billion float might grow in size over time. So maybe you can talk about that.
Hi, Hi, Sharyland I'll, maybe I'll start but the.
Yes, the here, it's closer to law the mechanics, and maybe we'll have them just add anything if I missed anything but.
Yes, you're correct, we expect the initial market capitalization to be about the 2 billion.
I think the opportunities to increase it really relate to.
Additional cost base, we have another company and our ability to to do follow on.
Distributions to investors.
We also will have opportunities to.
Issue new units in the future whether that as part of transactions or as part of a.
Just new capital raises so I'd say those are the the primary ways.
That will see the scale of pepsi's market cap growing on flow growing up there are other things that we're looking at which are probably little premature to get into but.
Yes, there may be other things to do as well.
Great and then on the Brazilian electricity transmission business, we haven't talked about that in a while can you remind us how much capital should ultimately go into that build out and how we should think about to cadence of ethanol ramping up over the next three years.
Hi share limits here, maybe I'll tackle that one give you all the numbers and may be Ben fine might want to add some color.
But to.
To date, we've spent about $230 million of capital.
About 60 million of that it was the equity Bips equity portion.
And.
And we'll probably have about another.
Hundred million dollars to go to complete the Buildout and that would be bips portion.
In addition to that.
We're always job, we probably will buy out our partner's interest you would've seen.
In the quarter, we bought out that Oh, our partner's interest in the second operating line, albeit that so.
Yes that was pretty small in the Grand scheme of things as the business grows.
That component is going to grow as well and it's going to be about $200 million. So when all said and done a dip would probably spend anywhere between $4 million to $500 million in that business and thus far as the run rate.
FFO.
In that business it will probably be.
Probably about $60 million, if I have all my numbers are straight today, the contributions pretty small, but a lot of that is backend loaded cherilyn comes into 2022.
Our take 60% about number comes action in 2022.
And the rest is more done on a staggered basis.
Great that's helpful and that's my two questions. Thanks.
Thanks Sharon.
Our next question comes from Robert Kwan with.
Your line is now open great 10, good morning.
Actually if I can just follow up on that be here, so 60 million of Fs. So on.
400 to 500 million of total investment.
Is that correct.
Robert.
I don't I'd, probably say 60 on 400 Yep feels about right. Okay, so 15% kind of AFFO yield okay.
You also talked about in the New Zealand business.
Number of.
The things that you're doing to tenants improve margins and you mentioned significant improvement I'm. Just wondering kind of similar are you able to quantify.
How how big that could be as well as just the types of things that you're doing.
Hi, Hi, Robert Alds, I'll start and others might chime in so are going in our FFO yield that in that business will probably be.
Mid.
Double.
Double digits.
After maintenance Capex Dawn more looking at this number on an AFFO basis, so it'd be in high.
Single digits.
There is going to be a number of margin improvement programs that we're going to be executing a actually in the next 12 to 24 months.
I think at this stage, we'll probably refrained from describing totally.
What they are but that should take our at AFFO yield.
Into the 11% to 12% range within the next two years.
I I think as we progress the various plan there will have some more color.
Ed.
As to exactly what we're going to be doing there and so are we look forward to updating you in subsequent quarters on.
Great. Okay. Wagner's finished I'm turning to the Australian rail business can you just talked about some developments are down there things are going on you can touch on.
The grain side of things as well and and whether there maybe some some capital associated with with maybe more grain.
Yeah, Robert it's been speaking I can touch on that.
Drilling rail business is going well on the green side.
We we have a new contract in place with our.
GBH, which is our major grain client down there and we expect volumes to be very consistent in grow modestly over time as they have.
For many years and in fact, our arrangement with them going forward.
You know includes.
Good pricing, but also a contribution of the capital to maintain the tracks and so we don't expect any.
Anything other than sort of a steadily appreciating flow of grains on the rail and instead of a growing relationship over time with the green the grain handlers.
Maybe the only thing I'll add.
I'll just add two comments too, but both of them here in the Ben mentioned on Vodafone.
Yeah.
The nature of the initial.
Efforts underway really are in relation that you expect with a corporate carve out where you know we're eliminating a number of the.
Corporate costs and transition arrangements that we have in place with Vodafone and so there will be we think some some initial low hanging fruit to to do that.
And steps as a Standalone company.
And then in relation to the the rail business.
You know Ben mentioned.
The grain side, which we're very pleased to.
To move forward with the the co op down there and a and strengthen our relationship with them and grow just grow and.
And move grain very efficiently for all the the farmers.
But probably the opportunities that are most meaningful these days.
Relate to.
Some of the iron ore.
Mining companies that continue to look for opportunities to.
Increased production.
We have a couple customers who have initiatives underway and ER today most of the contracts were signing with people tend to be on the shorter term side, we havent seen someone commit for 10 plus years, but we are signing two and three year contracts for higher volumes, which again saw positive for the other business.
Great Thats, great color Sam just on some of those contracts are there was just using existing capacity on the lines are in a fit is deploying capital.
How do you think about that given the shorter contracts and just some of the history you had around iron ore movement.
Yes, so that's a good uptick that's a great question and that really comes down to the the nature of the negotiations that we have with with our customers.
The extent that we can just.
Yeah invest modestly.
Two.
Manage additional tonnage then it's an easy discussion and those are are being done to extent that some of them are looking for.
And larger investment from US then that's when we're looking for longer term contracts in place or other.
Financial assurances in order to get those deals done. So today most of that have done on the shorter term minimal capital involved but we are hopeful that we can do some longer term contracts that might involve us deploying some capital.
Okay, great. Thank you.
Our next question comes from Rupert Merer with National Bank Financial Your line is now open.
Good morning.
Good morning.
I've a couple of high level questions on the economic outlook.
First it looks like we could have some positive news on trade disputes this morning.
The potential rollback of tariff I think you've said in the past that you've seen a limited impact from trade disputes on your logistics business is that still the case or or do you think you could see some.
Direct visible benefits from from a reduction of tariff.
Maybe I'll I'll I'll start and then banner Bahir might chime in as well, Yeah, I would say four for most of our businesses.
They're not impacted directly by some of these trade situations.
But there are regions where.
Yes.
The yes, some of the reductions in overall global trade, you know might impact our businesses on longer term basis. So yes. Today is probably the two countries, where we have the biggest logistics investments would be in Brazil.
In Australia.
In Brazil, it's more of an agricultural story, so depending on yelp.
How the us China.
Trade war plays out that can either be very very positive for Brazil or could be kind of neutral.
Depending on if the and culture volumes, you don't decline and view. So that's the that's one factor.
In Australia.
Australia economy is really dependent on how well China does you know and to extend that China is negatively impacted by.
These trade wars with us than it has sort of a bit of reverberating impact on.
Yes look for Australia I'm here today, our businesses there are a little slower than we've seen in the past I mean, Australia has been a this success story of the last 25 years, and it's still doing fairly well all things considered but yeah. That's something we watch out for us just.
Yes, what happens to that region.
Because of the impact to China.
Alright, very good no thanks to the color and secondly.
And Investor Day, you highlighted that you're well positioned in the event to the local economic downturn just wondering how your view on the global economies informing your.
Your decision, making process for the timing of of investments and can you give a little bit of color on the pipeline of opportunities today and and what's your thoughts are about to investing in this climate.
Okay, maybe I'll I'll.
I'll jump in here as well.
So look I think.
We're somewhat agnostic as to.
Whether or not we're investing into weaker or stronger economic conditions because yes.
We tend to take those into account in all our underwritings.
What we typically look for and probably the most important a factor that affects the the pace in posture of our investment program is this scarcity of capital we tend to and I know I've said this on many calls in the past look to deploy capital where.
Money is scarce or where people don't have access to capital and stay away from those regions, where capital is abundant and and being given away and so.
Having a global franchise, where we can move capital.
Amongst different sectors in different regions allows us to.
Invest in a way, we think where we can achieve good risk adjusted returns.
Where that translates today is you know we are seeing.
You know better opportunities in the data and energy sectors. Those are the two sectors, where capital is more scarce than let's say in the utility sector or transportation sector on certain parts of transportation sector.
And then from a global perspective.
Yes, we.
Yes, we see good opportunities.
In Asia in particular, India, Theres, a banking crisis, and so people like ourselves who have access to international credit and Ken.
Can combine passes there I think at good value.
South America is a region that.
Today capital isn't as strong as a as other markets, we find north America's not too bad, particularly in the energy sector. We think we can find good opportunities.
Here and maybe the most challenging market where capital.
Is abundant and being priced unfairly today would be Europe , and that's largely due to negative interest rates and people just trying to.
Race to the bottom, but even there yet we still find some opportunities once in awhile.
So I hope that gives it a little bit of color I realize it's high level, but.
Yes, that's perfectly so thanks very much.
Our next question comes from Robert could tell you will see RBC capital markets. Your line is now open.
Good morning. Thank you I just wanted to see if you can provide more color on 'em GWR enough closing that transaction whether or not.
But there will be a clean closing or if we'll have to structure around.
Other the role for situation or any Oh competition concern.
Hi, I Robert.
So.
There's a great news is that the two most important.
Approvals, we have received which is shareholder approval number one and two the surface transportation Board approval.
The the last critical approval that we need is a sifys approval, which is is one that all foreign investors generally required to.
Hi assets in the United States.
Given our footprint in the United States and the numerous transactions that Brookfield has a whole is done in the U.S., we feel highly confident that we should get those that approval and hopefully get a relatively soon.
And so I think as far as completion and risk we think it's relatively low at this stage a we also had some great news this week on the financing front.
Be here and his team did an unbelievable job and executing financing and maybe all that to be here do a little victory lap here [laughter]. Thanks, Thanks for that Sam.
Yes, so just picking up on what Sam just noted we did a finance.
Bid the debt related to this acquisition in total we'll be doing about $2.5 billion in the U.S. bond market.
This financing was very well received by bond market investors are the deal was almost five times oversubscribed.
Don that LIBOR, plus 200, which is well well inside of our underwriting case, which is a.
Terrific start for us.
And in our understanding is that this is the most successful.
Financing done in de leveraged finance market at least since the financial crisis.
So that was terrific and really highlights the robust tax credit characteristics of this business.
And the underlying strong fundamentals and the scale of the business that we're acquiring so very very positive or early start for us on this acquisition.
Okay and just on.
Just one tester brookfields appetite for investing in in the Middle East there's been.
Some energy deals that are recently.
How would you describe brookfields appetite for investing there, particularly energy assets.
Its so it is a region will consider we have lots of strong relationships with.
A number of the sovereign funds in that region, they've been great supporters as you mentioned that there had been a few transactions that the that have been completed or last 12 months.
Chicken in Abu Dhabi, and we've also looked at district energy assets in that region as well.
Yes, it's not a market where theres a lot of investment activities. They tend to come up every once in awhile.
So I can't tell you that we will do something but I would just say that it is a region that.
We would consider.
Okay, great. Thank you.
Thanks, Jeremy.
I'm showing no further questions in queue at this time I'd like to turn the call back to Mr., Paul look for closing remarks.
Okay, well. Thank you operator, and thank you everyone for joining our call. This morning, we look forward to updating you on our progress next quarter and so on behalf of my colleagues. We wish you the best for the rest of year and.
And if we don't speak before the holidays are happy holidays.
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program you may now disconnect everyone have a [noise].
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