Q2 2021 Brookfield Infrastructure Partners LP Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Brookfield infrastructure Partners L. P core.
2.2021 results and at this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
To ask a question during this session. Please press star 1 on your telephone please be advised today's conference call is being recorded.
At this time I will turn the call over to David Grant C. F O. Sir Please go ahead.
Thank you operator, and good morning, everyone. Thank you all for joining us from.
Second quarter earnings conference call for 2021.
My name is David and I am the chief.
Officer.
Partners joining me today is Sam Pollock, our Chief Executive Officer, and our debt.
The speaker this quarter, David joint investment professional responsible from a transport.
Following our remarks, we look forward to finding a questions.
At this time I'd like to remind you net in responding to questions as well as talking about our growth initiatives and our financial and operating performance. We may make forward looking statements.
They are subject to known and unknown risks and future results may differ materially from.
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.
Now with respect to performance. We're pleased to report that Brookfield infrastructure had another strong quarter funds from operations or <unk> totaled $394 million or <unk> 85 per unit, an increase of 18% compared to the second quarter of 2020.
<unk> were fueled by the ongoing economic recovery, which is driving growth within our base business.
For the last 3 months, we have also announced a number of strategic initiatives that strengthened our balance sheet and demonstrated robust access to capital markets conditions supporting capital markets activity at our global operations remained favorable, allowing us to complete almost $7 billion of asset level of refinancing activity across our portfolio.
In combination with over $1.3 billion of net proceeds from 2 recently completed asset sales our balance sheet is in excellent shape to fund an extensive investment pipeline.
Now as it relates to our results for the second quarter, an 18% increase in <unk> was supported by strong growth from our base business contributions from new investments and higher volume is attributable to the continued economic rebound.
Excluding the recovery of shutdown related volume declines in the prior year, our organic growth for the quarter was 90%.
Solid level of growth includes inflationary tariff increases and the commission of approximately $900 million in new capital projects in the last 12 months.
Adding the recovery at both connections and income at our UK regulated distribution business and toll road volumes, our base business grew by 16% relative to the prior year.
These positive factors were partially offset by the impact of asset sales completed in the last year, which has resulted in nearly $2 billion of proceeds as we deploy that capital at higher returns should accelerate our earnings base.
Now focusing on the key highlights of our operating segments, starting with the utility, which generated <unk> $190 million, an improvement of 21% over the prior year.
All businesses within this segment continued to perform well in the current environment with results, reflecting 10% organic growth due to inflation indexation and the commissioning of almost $400 million into rate base during the last year.
Results also benefited from the acquisition of the remaining interest in our Brazilian regulated gas transmission operations.
These contributions were partially offset by the impact of asset sales as part of our capital recycling program.
Specifically at our UK regulated distribution business, we reported another strong quarter, new connection activity more than doubled relative to the shutdown impacted levels in the same period last year and our connection sales have grown nearly 30%.
This increase in connection sales was in part driven by robust pickup for water connections, which exceeded plan by 45%.
And the water market continues to open future sales are expected to include a much more meaningful percentage of water network connections, which will complement our existing gas electricity and fiber offering.
<unk> from the transport segment with $173 million, an increase of 36% compared to the prior year.
On a same store basis segment results grew by 26% at the economic expansion is propelling higher volume right.
Operations with volume sensitivity are seeing strong year over year increases and continued to build momentum from the second half of 2021.
Further transport <unk> benefited from contributions from our U S. LNG export terminal that closed in September of last year.
Which has partially been offset by the partial sale of our Australian export terminal completed in December.
Focusing on volume for the quarter activity across our transport networks continues to accelerate as government imposed restrictions ease.
Rail operations volumes increased 4% relative to the prior year and were supported by a recovery of pre pandemic carload level and record operating efficiency metrics at our North American rail business.
Strong activity across both container and bulk products resulted in aggregate volume growth at our core assets of approximately 18%.
Lastly, chocolate profit toll roads increased approximately 30% of commuter volumes return and heavy traffic levels remain robust.
During the quarter, our U K port operations secured several new commercial wins and contract enhancements.
Together these opportunities should require approximately $30 million of capital and increase the company's run rate EBITDA for the business by over $10 million annually.
Initiatives will increase container and bulk capacity and are anchored by long term inflation linked contract protected by minimum volume guarantees.
Moving to our midstream segment, where <unk> totaled $60 million, an increase of 14% from the prior year on a same store basis.
Results for the quarter reflects strong GAAP transportation volumes as well as the commissioning of the second phase of the Gulf Coast expansion project at our U S gas pipeline.
But were offset by the previously announced sale of 12, 5% stake in the pipeline, which was completed in March.
Our midstream businesses continued to benefit from a strengthening of commodity environments supporting customer growth plans and initiatives. This has led to several longer term commitments from our customers, including a 15 year multi facility contract from a major producer that will support the modernization of a key asset in Western Canada.
In addition, with the support of customers and community stakeholders, we're investing several projects that once operational will continue to reduce carbon emissions and are evaluating the feasibility of hydrogen opportunities across our existing asset base.
Finally, the data segment reported ethical of $60 million, which was 40% higher than the prior year.
This increase was primarily due to the contribution from the Indian Telecom business acquired last year as well as organic growth supported by the build to suit tower and fiber to the home program at our French Telecom operations, which have led to local currency EBITDA, increasing 13% relative to the prior year.
Our Asia Pacific Data Center operations commence construction of a facility in New Zealand and initiated a large scale expansion at an existing location in Adelaide Australia.
New Zealand is our first in the country and is anchored by a contract with a leading global hyperscale customer.
These projects will require approximately $135 million of capital with bip share being approximately $40 million and are scheduled for completion in the second half of 2022.
Now before turning the call over to Dave joined I'll briefly highlight the strength of our balance sheet, we maintain a dynamic approach to managing our debt maturity profile and derisking the balance sheet and with interest rates low everywhere, we are pushing out our maturities and lowering our overall cost of debt.
During the quarter, we completed several initiatives to further strengthen our balance sheet and enhanced our debt profile.
Cross our portfolio, we raised nearly $7 billion to refinance existing debt at attractive long term rates, while extending maturities between 5 and 10 years and most of them.
As we advance our pipeline of investment opportunities and organic growth projects, which Sam will touch on shortly we have a robust balance sheet to support these initiatives and remain opportunistic in our approach.
Following the completion of the sale of our U S District energy operations in mid July total liquidity currently stand at 6 and a half billion dollars of which approximately $5 billion resides at the corporate level.
Levels position us extremely well to funds Brookfield infrastructure upcoming investment opportunities.
Now with that I'll pass the call over to day.
Thanks, David and good morning, everyone. Since day, 1 and I'm pleased to be joined today's call to provide a spotlight on our north American transport operations.
Any of you know U S. GDP grew 6.5% in the second quarter. The economy now exceeds pre pandemic side. Many of our businesses are benefiting from the economic recovery and are well positioned to deliver even stronger performance against a favorable economic backdrop, we have 2 assets in North America that exemplify growth potential we're seeing.
From the platform Genesee and Wyoming marching in W and tray pack.
Tire integrate and drive value in smaller rail operations. In addition, GW benefits from consolidation and M&A activity in this sector more broadly.
From class, 1 railroads combined or acquire smaller networks competition indoor operational considerations can lead to unique transaction opportunities G. N dummies expansive network and strong reputation in the independent reliable and safe operator, they've got a logical partner for any class 1 going through this process as an example, when C. S X enel.
The acquisition of Panam rail in 2020, there were both ownership and operational complexities that created the opportunity for Jimmy W. Did become the operator of the Pan am Southern critical real connection into the Boston area. After the transaction receives regulatory approval.
Current merger activity in this sector, which I'm sure everyone has read about could unlock similar opportunities.
Moving over to tray pack. This is our container terminal business with locations in Los Angeles, and Oakland, the largest and ninth largest ports in North America to deepwater ports or near irreplaceable and provide critical infrastructure from the import and export of goods into and out of the United States, We invested in trade back in 2014 and into.
It is automation at the Los Angeles terminal early in our ownership we have developed 1 of the most environmentally friendly and lowest cost terminal North America trade back and therefore has a significant competitive advantage over other terminals.
That are able to weather various market conditions, and we'll capture higher margins as economic activity accelerates.
Driven by robust customer demand year to date volumes are up 24% and 13% in Los Angeles and other 1 respectively and we expect this trend to continue and the economic recovery differentially benefits. The U S are just import and export facilities.
Tray pack and our industry, leading turnaround time.
He terminal of choice for shipping lines seeking to improve their transit time.
In North America over the last few months shipping lines from all 3 global alliances have contacted trade back from inquire about available capacity, noting our strong reputation for reliable service.
Commerce penetration expands and retailer demand shorter and shorter lead times trip back is uniquely positioned to capture more services increased its volume and growth market share items.
To put it up there. Thank you for your time this morning, and I'll turn the call over to Sam.
They can do.
And those funds.
Morning, everyone today, I will discuss the exciting strategic initiatives, we currently have underway.
We had the call with our outlook for the down from 2021.
As David mentioned earlier in the call. We ended the quarter with a significant cushion to our liquidity position because we recently completed the latest phase of our capital recycling program.
We received proceeds totaling $1.8 billion. Thus far in 2021. This is nearly half of our planned capital recycling activity that we expected through 2023.
With respect to our asset rotation is the basket of our Canadian and U S District energy platforms close in June and July respectively resulted in aggregate proceeds to Brookfield infrastructure of approximately $1 billion. In addition, we received net proceeds of approximately $350 million.
These previously announced carve out of our smart meter Brookfield.
B U K.
Now turning to our growth initiatives, we continue to progress a number of acquisitions and organic opportunities.
With respect to our busy privatized in inter pipeline, we believe our patience has paid off.
On July 27, Ipos Board of directors formally recommended the existing shareholders accept our offer.
The termination of the proposed transaction from another company and recommendations from 2 leading independent proxy advisers to put against that transaction.
We now expect a clear path to acquire a company with the tender offer expiring Tomorrow August 6.
Based on conversations today with many IPO shareholders.
Conflict that we progressed with the privatization before.
Simple deploy approximately $2 billion.
Central Midstream operations.
The completion of this acquisition is expected in the third quarter will Mark the start of the next expansionary period for our business, which should drive strong ethical per unit accretion.
We look forward to discussing our plans for the business at our upcoming Investor day event in September.
In July we announced a joint venture with digital real estate, Isabel, but operating data centers in India.
Our intention is to replicate our successful partnership in Latin America, where we have jointly developed 9 data center since 2019.
India is a burgeoning data center market with the opportunity to develop urban sites for a high quality counterparty and a global client base.
Our outlook for the balance of the year is strong the global economy is experiencing solid growth low interest rates and a need for additional capital to put large scale investments in both developed and emerging markets. The.
The combination of these market forces should bode well for our business.
I P. L is poised to be a naval contribute to our results going forward as we shift focus to value creation.
During our extended diligence period, we identified a number of strategic priorities from the company that will help drive top line growth for years to come.
We are also progressing new investment initiatives.
Yes.
Our focus on using our companion sites operating operating expertise and access to significant capital to differentiate yourself.
There are new investment opportunities.
Global growth expectations continue to pick up.
We are well positioned across each segment to capitalize on the increased economic output in ethanol demand.
Organic growth has historically provide sustainable cash flow growth and pick up momentum.
Inflation in the markets in which we operated at higher than normal levels and GDP growth rates are near highs not experienced since the period following the global financial crisis.
This economic rebound that should benefit our volume sensitive businesses, which primarily consist of our transport assets and certain utility and midstream operations.
You're seeing elevated levels of customer led expansion projects.
Which have added to our growing backlog of contracted commercial lines projects.
This leads to increased visibility to organic growth for the next year.
In combination with elevated inflation levels into contracted backlog of over $2 billion.
We expect annual organic growth at or above our high end.
6% to 9% target range in the near future near term.
Lastly, capital recycling activity remains robust and is a key contributor to our solid balance sheet.
It is basically 2 with approximately 2 billion of net proceeds and we continue to progress for processes to monetize other mature and Derisk businesses, we anticipate generating approximately $1.5 billion to $2 billion of proceeds in the next 12 to 18 months to recycle into new investments.
That concludes my remarks for today and I'll pass the call back over to the operator to open the line for Q&A.
Yeah.
Thank you Sir and as a reminder, please press star 1 on your keypad at this time for questions and we will pause for a moment to compile the Q&A roster.
Yeah.
Yeah.
Yeah.
And the first question will come from the line of Robert Kwan of RBC capital markets.
Great Good morning.
A lot of talk about the building backlog here and I'm just wondering when you look at the returns that you've locked in on on your backlog.
How does that compare to history and if you can even just as while numerically frame, where the backlog sits expected return wise versus your 12% to 15% equity IRR hurdles.
Yeah.
Maybe I'll.
I'll start with that 1 Robert and then.
David or David will jump in with some other perspective.
Yeah, I think for the most part.
It comes to organic growth.
Yeah. These are the types of projects that you tend to have less competition to work because they relate to our franchise area or other.
You know.
Specific business perimeter, where you don't have as much competition. So you don't see the same cost of capital pressures that you do on new investments, where you know people are you utilizing you know various means to compete so.
What that means is our return.
La was tends to be more consistent throughout the cycles, and we don't see the highs and lows. The same degree that you do.
And the M&A cycles, and so I think our you know plus or -15% returns.
Feel are are still consistent we haven't seen a big drop off from that in fact in some respects you know with lower interest rates may be in fact that might benefit a bit during this period of time, because a lot of those projects are evaluated on an unlevered basis and on a levered basis.
And as for the amount of projects.
You know as we telegraphed on the call.
We're seeing a increase in the level of our backlog I think if you looked forward 6 months to a year, our hope would be that our backlog.
We will be at levels higher than what we traditionally have and that's just because that's a reflection of the growth of the economy that we're seeing and and just the number of customer initiated projects that that are coming our way. So obviously things can change.
You know with all these new variants, where this lands over at Epsilon or.
You know the Delta you know those can always slow things down, but if we don't see a slowdown because of that then I think.
There could be a a great level of backlog on core.
Yeah. The only thing I would add I think Robert just from a from a quantitative standpoint.
I think our backlogs around $2.3 billion, which is pretty near I'd say the last few years, but we've taken out our smart meter buildout that we sold our district energy operations I've come out of that so from a like for like basis, we're probably in year, 2 and a half to $2.6 billion, which would be elevated for for our business. So I think that that's really what's driving some of the report.
Backlog.
And it has been for everything a lot of customer initiated demand.
Got it.
Just turning to acquisitions can you talk about the geographies and the asset classes, where you're seeing.
The best opportunities and more importantly, good value, but also on the flip side are there asset classes, you're really interested in acquiring other that's gonna be airports, which you've talked about in the past where valuations just keep very high relative to your own views on value.
Yeah.
So.
Yep.
Day the.
The large majority of our off of opportunities.
Or in Europe, and North America.
If I look at our pipeline.
Uh huh.
Probably more than usual I'd say, we still have a.
Situations that we're progressing.
And in South America, and in Asia, but probably less than what we've seen in the past on a relative basis.
And then you know so that's I would say that from a geographic perspective I'm looking at a.
From a sector perspective.
You know Theres no doubt.
We are seeing lots of opportunities and in data.
And that remains a big focus for US just a you know the amount of capital that's being invested.
You know.
2 to just improve the connectivity are both the fixed and wireless networks.
<unk> is off the charts and so you know we're in discussions profit with every single strategic player out there.
About how we can help out.
And so I think that will continue to be a big focus for us.
I'm encouraged by the the level of transfer opportunities. So day. It is extremely busy looking at a number of situations that there appears to be a lot more capacity constraints and so people are looking at.
Spending their networks to deal with that increase in capacity in the various.
The bottlenecks that they have in their systems and so I think the engagement with the shipping companies in particular, it's higher than it's been in Love Love All the time.
So I think we're very encouraged by that.
And we continue to look for opportunities are in the utilities sectors, where oh, well you know traditionally for from a debt perspective returns might have been a bit lower but are the capital needs are higher you know as a as electrification of society. You know it takes off so I think we're hope.
There could be opportunities for us.
And those sectors as well.
Got it and just on any asset classes that you're really interested in acquiring but your views on value or much lower than where we're the market.
Yeah.
Yeah.
So.
Maybe you you mentioned I think airports earlier and I didn't touch on that yeah. We are.
That's a sector we've been looking to get into them you know it's been noise in Australia built transactions over there with.
It's a great asset.
The it does feel like a lot of these assets are trading at levels that you know maybe today don't make sense.
But we're always trying to see if we can come up with the value proposition for those type of assets debt that we can make work.
So I I don't think there's debt there's no sector that we're avoiding because we're saying it's a it's.
It doesn't make sense, but what I would say is you know we have a large set of opportunities and so we're picking the ones, where we think we can get the best risk adjusted returns. So we're not trying to force getting into an area, where we're just still going to focus on driving returns in and are deploying capital where it.
If our advantages.
Okay. That's great. Thank you very much.
Okay. Thank you.
The next question comes from the line of.
Mirror of National Bank.
Hi, good morning, everyone.
I'm sorry.
Looking at that day liquidity quite a high liquidity level right now $6.5 billion and you mentioned the capital recycling initiatives remain robust.
Now looking at the IPL deal it looks like you could be issuing stock there. So maybe liquidity will remain high following that deal to.
How should we be thinking about.
Pace of other investment going forward versus capital recycling and where.
Where do you think this liquidity level will will stand maybe at the end of this year and the other next year.
Yes.
I'll start there and then.
Maybe.
People will.
Jumping as well, but.
First of all you know I I can't speculate or predict where liquidity will end up because obviously it depends on a number of transactions that may or may not take place both from the sell in divestiture side.
You know, we always look to maintain healthy levels of liquidity. So that we can be option is to.
To take advantage of investment opportunities as they arise.
Yeah, we are we have.
I'd say are an extremely.
Robust.
The pipeline of opportunities to invest and can't.
Can't say, whether or not we will succeed in all of them, but are you. If we do I think we are it could be at a level that's higher than what we've seen over the last number of years.
And so that's 1 of the reasons why we maintain.
Our high level, and and you know as it relates to <unk>.
The other capital recycling I think you know we have a number of people asking questions about how we pace you know those are.
Processes and.
Typically.
While this is a great time to sell assets and I think we've mentioned that in the past.
We don't try to.
Accelerate transactions.
Had it when we typically try to try to time them from a business plan perspective, you'll each invest.
Investment, we make we have a a pie.
Fix or improve and then sell a strategy to it and we try to get as much of those business plan initiatives done before we.
Sell it the risk business that that's always been our our plan and and typically you do well in spite of whatever environment. We have what will will follow that strategy you know other than if.
We just feel that someone's preparedness to pay us even if a project isn't quite 100% debt don't forget the late pay for that day, maybe even late accelerated a bit but for the most part.
Yeah, we just follow our our long term investment strategy, bringing our investments to the market when it makes sense.
And and utilize the many tools that we have in our toolkit to finance new investments, whether that's from capital recycling, whether it's Ah Ah you know take advantage of of issuing debt or equity in the capital markets, we have lots of ways of financing growth.
Okay very good thanks, thanks for the color.
Looking at results in Q2 can you give some color on what you think the residual impact from the pandemic could be how much of a headwind would you say the pandemic was in the quarter and it was looking at your Crystal ball, maybe whats the outlook for the next few months barring any are any impact.
From from our fourth wave of course.
Yeah.
Yeah, Robert It's Ben here.
I think it's.
What we're seeing is a tremendous recovery from the pandemic across the board. So we're seeing it in all regions.
There may still be some fits and starts as there's a lot of other media attention on variances Sam mentioned, a couple of them earlier, but at this point, we're seeing a lot of momentum like I said the momentum heavily on the side of a return to normal and growth across the board.
So while there may be little you know fits and starts here and there at this point we have no reason, we're not seeing any change in that direction over them and from across the global portfolio.
So I don't know if that's helpful. But that's that would be my color on that what.
What are you seeing any.
Residual impacts on some of your businesses like <unk> like toll roads are you able to quantify what the impact is today.
Yeah, I remember I said, its very very modest I would say the only region, where we had a sequentially quarter over quarter, a little step back with interest in India, That's quarterly loss.
A million a true some very nominal the other businesses that were impacted in the prior year like other UK connections business was back up to pretty shutdown levels. Our Brazilian toll road is continuing to have strong heavy traffic. So I'd say, it's just just thought I'd say.
And.
And India Haynesville or early day, it was supposed to be only impact on our financial results this quarter.
Okay, Great I'll leave it there.
Thank you.
Yeah.
Thank you and our next question will come from the line of Frederic Bastien from Raymond James.
Yes.
Hi, guys. There was no mention of a foreign exchange headwind or tailwind in your prepared comments can you can you provide some color on any related impact in the quarter and whether you remain appropriately hedged on that front.
Yeah, David here I can I can handle that 1 I think from all our popular in reverse order from a hedging perspective, we're extremely happy with where we're at today.
So 80% of our off over the next 24 months is is either denominated in U S D or hedged back to it. So I think that that's a really pretty much believes Brazil as the only other hedged currency in our portfolio.
In terms of the impact this quarter I'd say there were very very modest I think the way I had finished pretty flat year on year. It might've been up a percent so very nominal on a quarterly average net of hedge currencies are all in line with the prior year. So that's in the middle of matching it might've been a million or 2.
Other first following tax a plus or minus of currencies.
And David what do you expect to impact to be if currencies stay the same maybe for the second half.
Yeah second half 3 I, if it stays where it is would be a bit of a tailwind maybe 3 or 4% at the current levels and our hedge currencies are in life. So I've had a modestly positive.
Okay. Thanks for that.
No I appreciate that the devastating floods from a few weeks back.