Q2 2022 Brookfield Infrastructure Partners LP Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Yeah.
Thank you for standing by and welcome to Brookfield infrastructure Partners' second quarter 2022 earnings Conference call.
At this time all participants are in a listen only mode.
After the speaker presentation, there will be a question and answer session.
To ask a question during the session you will need to press star one one on your telephone.
Now I'd like to hand, the call over to CFO , David Crean. Please go ahead.
Thank you operator, and good morning, everyone welcome to Brookfield infrastructure Partners' second quarter 2022 earnings Conference call.
As introduced my name is David <unk>, and Im the Chief Financial Officer of Brookfield infrastructure Partners John .
Joining me today is Sam Pollock, our Chief Executive Officer, and Matt Grimes, Our senior Vice President of our investments team for the infrastructure group.
I'll begin today with a discussion of our financial and operating results for the second quarter of 2022 as well as touch on the strength of our balance sheet and current liquidity position.
I'll, then turn the call over to Matt, who will walk through how de carbonization can influence capital allocation and new investment teams.
Finally, San will provide an update on strategic initiatives and provide concluding remarks.
Following our commentary we will be joined by Ben Vaughan, Our Chief operating officer for our question and answer period.
At this time I would like to remind you that in our remarks today. 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.
We are pleased to report another quarter of record financial results funds from operations or <unk> increased 30% compared to the same period last year, while <unk> per unit was 20% higher at <unk> 67.
Organic growth remained robust at 10%, reflecting the benefits of elevated inflation as well as the commissioning of approximately $1 billion of new capital projects and over $3 billion of capital deployed in new investments over the last 12 months.
Taking a closer look at our operating results by segment, starting with utilities, adjusted EBITDA increased 14% relative to the prior year, reflecting the benefits from inflation indexation, the commissioning of approximately $500 million of capital into rate base and the contribution from two Australian utility acquisitions completed earlier this year.
<unk> for the overall segment was consistent with the prior year. As these noted benefits were offset by the impact of higher borrowing costs at our Brazilian assets, which increased by $25 million compared to the prior year.
After removing the impact of these costs <unk> increased 12% over the same period last year.
Our UK regulated distribution business continues to perform well as connections activity increased 17% compared to last year.
Our order book of $1 5 million connections is at a record high reflecting our backlog of new home deliveries that were were delayed due to the pandemic.
These are expected to drive strong growth into the second half of the year.
We completed two tuck in acquisitions within our North American residential infrastructure business during the quarter, including the largest New York based sub metering provider and a portfolio of 9000 sub metering connections in British Columbia, and Alberta further expanding our existing footprint in Western Canada.
On our European residential infrastructure business. It became one of the first installers in Germany to provide customers access to electric heat pumps under long term rental agreements.
Going to a heat pump usually carries a high upfront cost and resulted in a tds transition process for customers by offering a rental product with a carefree package, we were able to double our expected sales in the first month.
We anticipate increasing customer penetration to those looking for an easy transition to environmentally friendly heat pumps Athene, Matt will elaborate on during his remarks.
Moving onto our transport segment, which continues to experience elevated demand as global supply chain remain constrained.
<unk> was $119 million $199 million for the quarter, an increase of 15% compared with the prior year.
Highlights include a 16% increase in <unk> across our global toll road portfolio, driven by inflationary tariff tariffs and an increase of 8% and traffic levels.
At our diversified terminal operations performance continues to benefit from higher rates congestion surcharges and the contribution from our U S. LNG export terminal, which commissioned a sixth commercial liquefaction train earlier in the year.
Performance has also remained strong in our rail networks with inflationary tariff increases offsetting softer volumes and the impact of foreign exchange.
Our North American rail operation announced it will serve a new U S based electric vehicle or EV ecosystem.
<unk> Motor group, who will invest five $5 billion into a dedicated EV and battery manufacturing facility, along our Georgia Central railway that is scheduled to begin commercial production in the first half of 2025.
We expect our rail network will transport inbound materials to support production as well as provide outbound transportation of new vehicles to markets across the United States.
Additionally, in May 2022, the Western Australian government formally announced the first package of federal and state government funding towards the Western Australia in agricultural supply chain improvement program.
Total Australian $200 million program, we expect our Australian rail network will receive approximately $60 million to upgrade our track to handle incremental capacity. The program combined with our existing capital plans will facilitate the shifting of more grain freight from truck onto our rail network.
Our midstream segment generated <unk> of $170 million for the quarter nearly triple the prior year, primarily due to the acquisition of our diversified Canadian midstream operation.
Same store results were favorably impacted by the robust commodity price environment and higher utilization of our existing infrastructure compared to the prior year.
Commissioning at our Heartland petrochemical facility within is progressing in line with our expectations during the quarter. We completed the startup of our polypropylene plant and shipped our first railcars of the product to our customers. The entire Heartland complex is scheduled for an integrated startup in the third quarter once fully in service approximately 70%.
<unk> of our volumes are contracted on a nine year weighted average term.
These are agreements are structured to provide cash flow stability and eliminate direct commodity price exposure similar to our other midstream operations.
<unk> from our data segment was consistent with the prior year at $60 million.
<unk> underlying growth from additional points of presence and incremental megawatts commissioned in the last 12 months as well as inflationary price escalators were offset by the impact of foreign exchange.
Our French telecom operation has been selected by a local municipality to rollout 15000 additional fiber connections to the home.
This is estimated at approximately 22 million euros of growth capital underpinned by a 25 year concession agreement with the local authority.
This is an attractive addition to our existing fiber network of over 700000 connections our fiber business expects to complete the rollout in 2023 with commercialization rates significantly exceeding our plan levels.
Now I'd like to touch on the strength of our balance sheet, our corporate and asset level balance sheets are well capitalized with limited exposure to rising interest rates through proactive issuance of fixed rate and long dated debt.
Capital markets remain open and supportive of our business due to our strong investment grade credit profile and high quality asset base.
In April we proactively issued $600 million of corporate issuance corporate notes in the Canadian debt market the.
The offering was significantly oversubscribed and split between a 12 year and a 30 year tranche with an average coupon of approximately five 5%.
Also during the quarter, we completed several asset level financings to reduce risk by opportunistically locking in fixed rates and extending our average duration, most notably in investment grade markets at our diversified Canadian midstream operation and our UK regulated distribution business.
Following this activity approximately 90% of our borrowings have been fixed for an average duration of over eight years with less than 1% maturing in the balance of this year.
From a funding perspective at the end of the quarter. We ended we ended the quarter with $2 8 billion of available corporate liquidity and have since made significant progress on our asset recycling strategy as Sam will highlight we have secured asset sales that will add over $700 million to our current liquidity position and fully fund our new investment activity.
For the balance of the year, we have three additional sales process underway that are combined to generate approximately $1 $5 billion of net proceeds.
I would like to thank you all for your time this morning, and I'll now pass the call over to Matt.
Yes.
Thank you David and good morning, everyone.
I'm pleased to be joining today's call to discuss decarbonization of the global economy, and the resulting investment opportunities.
Our view is that this multi decade initiative will require substantial infrastructure investment to improve and replace existing energy supply chain.
To achieve these aggressive targets governments businesses and individuals must balance increasing energy consumption with the goal of reducing carbon footprints. This fundamental shift in how the world is pallet is expected to be a catalyst for growth in our existing businesses, both organically and through new investment activity.
<unk>.
We separate these opportunities into two categories, firstly supply side, which relates to the industries and companies directly responsible for the carbon emissions and secondly demand side, which focuses on consumer preferences for energy efficient solutions.
On the supply side, we believe the fuels used today to power the global economy will lead the transition to a net zero economy will be runoff safely and responsibly.
Our existing midstream assets are predominantly natural gas highly utilized and strategically located we believe these characteristics favorably position us to participate in the energy transition through the adoption of emerging technologies as well as through the shift in the global energy mix from coal to natural gas.
LNG and eventually to hydrogen.
To date, we have been most active on demand side decarbonization initiatives to assist those seeking ways to increase energy efficiency lower energy consumption and reduced reliance on fossil fuels.
Recently, we have made investments in smart meters and sub metering, which enable energy demand management through real time information about energy usage.
We are also investing in building a platform of residential energy infrastructure businesses in North America and Europe .
Combination of evolving regulatory requirements and growing preference for low carbon high efficiency in home energy solutions provide significant tailwind for this segment.
As essential in home infrastructure increases in cost and complexity customers should be more inclined to adopt all rental model to alleviate the high upfront cost of new technology, such as heat pumps and solar panels.
Through Homeserve, we will extend our rental model value chain by offering high minded subscription based recurring repair policies, but residential infrastructure products.
This investment creates an opportunity to scale, our existing residential energy operations in North America, where we constantly have a large presence.
In the U S alone HVAC installation replacement and subscription base for paying memberships currently have an addressable market of in excess of $40 billion that is expected to grow at a 5% compounded annual growth rate over the long term.
In Europe , where we have a smaller presence this acquisition accelerates our growth plans and provides a model for expansion in 12 markets, we know well.
As the global economy moves closer to net zero targets, all new investment opportunities, we will have transition elements given our focus on generating sustainable long term returns for our unit holders.
Operating capabilities extensive development experience and ability to leverage the brookfield ecosystem positions us well to secure supply and demand side decarbonization investment opportunities. We look forward to sharing our progress with you in the future.
That concludes my remarks for today I will now pass the call over to Sam.
Thank you, Matt and good morning, everyone.
As David discussed we had a strong first half of the year.
On top of our operational achievements and strong financial performance. We have successfully deployed a secured new investments for bip totaling approximately $2 8 billion.
Well in access of our estimated $1 5 billion annual target.
As mentioned last quarter, we successfully invested approximately $700 million into two Australian utility investments, including the take private of an Australian regulated utility business <unk> and the.
<unk> of an Australian smart metering business and tell a hub.
This quarter, we have secured three additional acquisitions in the utilities and data segments for a further capital commitments of approximately $2 1 billion.
In early May we announced an agreement to acquire unique group a provider of wholesale and retail telecommunications services to customers and businesses in Australia.
We have now received shareholder and court approvals and expect this transaction to close in early August .
Total brookville equity for the investment is estimated to be $850 million with <unk> share at approximately $200 million.
During the quarter. We also signed an agreement to acquire Homeserve, a leading global provider of home services operating across North America, and Europe , which Matt discussed earlier on the call.
The total equity required for this investment is estimated to be $5 billion.
With <unk> share at approximately $1 3 billion.
The acquisition is expected to close in the fourth quarter of this year.
In July we secured our third acquisition at 51% interest in the <unk> 17 in the half billion dollars German tower portfolio alongside another institutional investor.
This marquee portfolio of approximately $36 30.
<unk> hundred 6000 tower Telecom towers in Germany, and Austria was acquired from Deutsche Telekom.
Europe's largest telecom operator.
Deutsche Telekom will retain a 49% stake in the assets and we will continue to be an anchored customer under a 30 year Master services agreement.
Total Brookfield equity for the investment is estimated to be $2 5 billion.
With bip share at approximately $600 million.
During the quarter, we were equally successful on the capital recycling front.
In the past several weeks, we signed definitive agreements to sell four assets generating nearly $900 million in aggregate proceeds to bip.
In June we signed an agreement and close the sale of our 49% interest in a U S container terminal business in Los Angeles, and Oakland to our existing partner.
Over our eight year whole period, we successfully execute our business plan to grow and diversify volumes as well as fully automate operations at the Los Angeles terminal.
These enhancements combined with the supportive market backdrop and constrained terminal capacity created an opportune time to monetize the business at an attractive valuation.
Our exit multiple was over 40 times pre pandemic EBITDA and was approximately 20 times last year's normalized EBITDA, which was a record for the business.
The sale resulted in an IRR of 19% during our holding period with proceeds after debt repayment of 700 million or approximately $280 million net to bip.
We also signed agreements with Indian toll road business.
And the exit EBITDA multiple of over 14 times with proceeds of over $600 million or approximately 200 million net to bip.
Closing is expected in Q4 and is subject to customary regulatory approvals.
In mid July we signed an agreement to sell our 500 mobile Telecom tower portfolio that was previously owned within our New Zealand Telecom business in.
In 2019, we acquired a 50% stake in a fully integrated telecom network, where approximately seven times EBITDA.
Three years later, we were able to successfully exit the towers at a 34 times 2023 pro forma EBITDA.
And returned nearly all of our invested capital.
The transaction is expected to generate proceeds of $1 billion.
Which resulted in a $140 million net to bip with closing in Q4. This year following customary regulatory approvals.
And most recently, we reached an agreement to carve out and sell a portfolio of 24 100 kilometers of newly constructed electricity transmission lines in Brazil.
Total proceeds will be approximately $800 million.
Approximately $240 million net to bip, which implies an IRR of 22% in U S dollars.
We expect the transaction will close in Q4, and we'll be focused on the organic build out of the remaining 3000 kilometers of transmission lines in the country.
As David has highlighted his remarks, we continue to be active in our capital recycling program with three additional sale process underway.
We anticipate that combined these transactions could generate $1 5 billion of proceeds.
That will be used to fund future M&A activity.
I will now conclude my remarks with a few comments regarding our positive outlook for the business.
From a macro perspective, we.
We are seeing central banks make a concerted effort to tackle high inflation through substantial interest rate hikes.
Although these actions have increased the probability of recessionary conditions in many of the markets in which we operate.
The highly contracted regulatory nature of our revenue should cushion effects on our businesses.
Nonetheless, we will continue to operate prudently by monitoring inflationary cost pressures within our businesses and maintaining high levels of liquidity.
From a deal flow perspective, we may be entering a period, where we can buy businesses for value <unk>.
Generally we expect that infrastructure assets will hold their value through recessionary conditions, given the resilient nature. However.
However should liquidity in the market become tighter certain owners of high quality assets may become over extended which will allow us to use our liquidity and access to capital to make investments at attractive entry points.
For the remainder of the year, our priority will be to complete the investments and asset sales that we have secured or in the process of securing.
Once again, we expect to exceed our annual investment deployment target and Thats, our financial results should remain strong and well ahead of last year.
Finally, I'm pleased to announce that we've just published our second annual ESG report.
Which summarizes our approach and continued commitment to sustainability across our businesses.
As you've heard from Matt de Carbonization is a key topic of focus for Brookfield infrastructure is expected to drive future investment opportunities.
A copy of the report can be found on our responsibility page of our website.
That concludes my remarks for today I'll now pass the call back over to operator for questions.
I'm the analyst.
As a reminder to ask a question you will need to press star one one on your telephone please.
Please standby, while we compile the Q&A roster.
Our first question.
Comes from the line of Robert Hope of Scotiabank.
Robert Hope your line is open good morning, everyone.
First question as I can.
Click conditions softened does it change where youre focusing.
Your timing for new investments or maybe to put this another way do you think that softening conditions could yield opportunities in verticals, where you're getting a little bit more quiet in recent years something like transport.
Hi, Robert maybe I'll tackle that one this is Sam.
I would guess.
That.
Yes, maybe I'll start by saying at the moment, we're at the early stages of any.
No real impact from the rising rates.
So I think the.
Potential opportunities are probably in the quarters ahead of us.
We do expect that.
Valuations for the most part as I mentioned in my remarks in the interest for infrastructure assets should should hold.
As many investors are.
Looking past <unk>.
<unk> term conditions and the compounding impact of inflation will support valuations.
But but as we also said and as you alluded to that there will be some groups.
And investors, who have taken on too much leverage and as a result could face liquidity and so we.
We think the opportunities could arise and.
The assets that typically are most affected are the ones you highlighted which are trends transportation assets and thats because they tend to be more GDP focused and arent has contracted so.
They will be.
The ones, where we will see some some pressure.
At the moment.
We haven't.
Seen any particular opportunities arise in that front, but.
I think over the coming quarters thats were likely the opportunities could arise.
Alright, I appreciate that and then just as a follow up just looking at your own liquidity.
No form of the asset sales and pending acquisitions Youre kind of where you are right now could we see you further bolster your liquidity or even accelerate additional asset sales to further bolster the balance sheet. If we do enter and recessionary conditions that could yield some incremental opportunities for euro for yourself.
I'll talk a little bit Dave Mike.
I had some comments as well.
For the most part.
We have a.
Our five year plan on when we think.
We think it's appropriate time too.
Dispose of our businesses.
Based on where we think.
They are in their lifecycle of them where we've.
Achieved most of the.
The operating plans that we've set up for them.
We do take into account each year changes that have taken place within those assets and.
And market conditions, but for the most part.
We have so many.
Way to access capital.
We tend not to look to accelerate asset sales, so I guess in short.
Yes, we probably wouldn't do that we probably wouldn't change our.
Our timing on asset sales.
We would utilize.
<unk> forms of capital that we have.
But the only thing I would also add is.
Every year.
Given the scale of our business we have a.
A number of large businesses that we intend to sell and so we have.
Continuous source of capital from.
Recycling activities that are available to deploy in new opportunities.
Thank you.
Okay. Thanks, Greg.
Thank you. Our next question comes from the line of.
Maurice Choy of RBC capital markets Maurice Choy. Please go ahead.
Good morning.
To follow up on that question about new investments you mentioned that infrastructure assets tend to hold their value through recessionary conditions.
At least until the sellers have liquidity issues as you say.
Therefore, seeing more opportunities to buy assets at a lower going you right.
Greater organic growth versus buying assets at a good a deep value, which has been the hallmark of what fuel ofer.
Recent years.
Hi.
I think I didn't quite get the.
The full question I think let me just paraphrase and tell me if I got this right I think the question was.
In this market condition.
We have an opportunity to.
Buy it at lower multiples, reflecting maybe.
Lower.
Platform value or goodwill.
Or not reflecting as much growth in the in the business.
Hi.
Yes.
Understood.
The mix between buying assets at deep value.
Versus buying assets.
Lower going in yield.
Especially given that sellers are not selling or lowering the price.
<unk>.
I guess, the lack of security issues on their side.
Okay.
<unk>.
So.
I think the.
I don't think today the opportunity for some of those deep distressed acquisitions exist I don't think.
That's the market we're in so I don't see this is not.
Okay.
The financial crisis type conditions, nor the conditions we saw.
In Brazil back in 2015, 2016, where we had some really deep value opportunities thats not to say they might not or they could rise, but it is not here today that's for sure.
But I do think that the opportunity to buy.
Growth platforms at lower valuations, yes, I think that is definitely.
The market environment, where we are.
And what we would look to do.
That makes sense.
Thank you for that.
My second question is about midstream you, obviously have some exposure primarily through your midstream segment, but also through some of the assets of its segments.
Including in transport, how do you broadly view your exposure to the sub sector.
Whether it is this related to the IPO of assets or not do you see the potential to add more exposure or even find options to monetize some of these assets in the near term.
Okay.
The.
No.
I think what we've.
Mentioned in the past and would reiterate today is that yes.
We think midstream investments are a key component of our.
Portfolio mix.
And what we think are very attractive assets and critical too.
The world economy.
We recognize that.
Midstream assets.
<unk> evolve and transition.
Into different fuels over time, but for the most part.
They are going to be critical.
Critical for the next couple of decades.
As far as.
Quantum or web.
Percentage.
We would have within our broader portfolio.
That will always evolve because we are constantly.
<unk> and selling assets depending on their.
Our maturity profile.
And.
That will.
We have a specific targeted minded with the right amount is I think our goal is always to have a diversified portfolio across sectors and regions. So that.
We have.
Minimal exposure to changes in political regulatory our sector dynamics that might take place from time to time.
So other than trying to balance that diversity requirement.
We don't really have a.
Our percentage in mind.
Great. Thank you very much.
Thank you. Our next question comes from the line of.
Robert Kelly of CIBC, Robert Kelly. Your line is open thanks, and good morning, everyone I'd like to start with.
Comments on de Carbonization, and maybe you can discuss what ways Youre, most likely levered your sister companies and their renewable and transition platforms to secure new opportunities.
Hi, Robert maybe I'll tackle that one.
I guess the the first thing I would mention is that.
While we have.
Different investment groups.
Deploy capital within the various funds, we're all one team and so we work very closely with the renewable and transmission group and so it is something it is very seamless as to how we exchange information and ideas and philosophies.
The.
Yes.
We very much.
Compare notes on opportunities and particularly.
I think what we try to achieve is.
Within our existing franchises that we already own.
Take the learnings from the various groups to drive value within those businesses and I think some of the.
The ideas that we talked about on the.
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Okay.
Hi, operator can you hear me.
Our cancer.
Okay are we on the line now.
We are sir and Robert fatality. His line is still open as well.
Okay. Thank you.
Were dropped off I think as you were talking about within the existing franchises you take the learnings and drive value.
Yes, So first of all let me just apologize for the the line dropping and.
Clearly we need to make.
Data investment in that country.
But.
Just coming back to the the lessons learned yes, we.
We've got we work very closely with the renewables transition group on our strategies.
Sure.
Not only best practices, but just the learnings from our various investments.
And.
Yeah, we yeah, we collectively thank from a Brookfield perspective to that.
Yes, the decompensation trends.
Represent an opportunity to invest many billions of dollars over the next couple of decades.
And in particular, not only on new investments, but on investments and franchise that we have today and obviously the residential infrastructure business, where we're tackling the demand side equation.
We think is particularly large.
And.
And so we have benefited.
From the.
The assistance of the renewables group so when in charge.
Yes, we are working closer together and that will continue to do so.
Okay I just wanted to follow up on.
The HBC polypropylene plant start up a bit.
Okay.
With a little bit more color on how that sort of process is going and others.
It takes time in there.
Can't rush it but.
Is the product on spec.
Had to call on a contractors to perform any weren't warranty work or anything like that.
And then other than startup.
The facility, 70% contracted is there anything more.
Quarter to Derisk.
That asset and consider other options, such as partnering or perhaps divesting a stake.
Okay.
Sure Robert It's Ben speaking, maybe I'll handle the first part of that question.
And maybe just to remind everyone since we took over.
Al.
The first phase of getting Heartland up and running was to complete construction and so we'd now that is behind us and the startup. It was planned to occur in three phases. The first was to get the central utility block up and running.
The second was to operate the polypropylene plant and then the third is to start the PTH side of the facility. So in the spring of this year, we successfully commissioned the central utility block and there weren't any major warranty claims or any material issues Robert in that store.
We we got it running wish what I would describe as normal course startup challenges but.
Got it up and running in July this year, we commissioned the polypropylene plant and maybe just to add a bit of color to what Dave mentioned in his speaking notes.
We were able to achieve full output.
From the extruder and achieve full capacity on a daily basis for rail car loading.
So the the polypropylene and the plant is up and running well.