Brookfield Infrastructure Partners L.P. (NYSE:BIP) Q4 2022 Earnings Call Transcript

Brookfield Infrastructure Partners L.P. (NYSE:BIP) Q4 2022 Earnings Call Transcript February 2, 2023

Operator: Good day, and thank you for standing by. Welcome to the Brookfield Infrastructure Partners Q4 Results Conference Call 2022 Results Conference Call and Webcast. . It is now my pleasure to introduce Chief Financial Officer, David Krant.

David Krant: Thank you, Andrew, and Good morning, everyone. Welcome to Brookfield Infrastructure Partners’ Fourth Quarter 2022 Earnings Conference Call. As introduced, my name is David Krant, and I’m the Chief Financial Officer of Brookfield Infrastructure Partners. I’m also joined today by our Chief Executive Officer, Sam Pollock. I’ll begin with the discussion of our fourth quarter financial and operating results as well as touch on our balance sheet strength and robust liquidity position. I’ll then turn the call over to Sam, who will reiterate the merits of owning infrastructure investments throughout market cycles and provide an outlook for the year ahead. Following our commentary, we will be joined by Ben Vaughan, our Chief Operating Officer, for a 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. With that, I’ll now move on to a discussion of our record results. 2022 was another successful year for Brookfield Infrastructure. The essential nature of our assets showcased their attractiveness by continuing to generate predictable and growing cash flows. Funds from operations, or FFO, for the year was $2.71 per unit, representing a 12% increase over the prior year. We ended 2022 with our highest quarterly FFO to date of $0.72 per unit, which exceeded the prior year by 11% and resulted in a payout ratio for the fourth quarter of 64%.

We’re entering the new year in a solid position to expand the company organically and through acquisitions, driven by the significant momentum in a number of our operating businesses. This momentum is further supported by our long-term debt maturity profile and significant liquidity. Taking into account the strong results for the year and a favorable outlook for the business, the Board of Directors have proposed a quarterly distribution increase of 6% to $1.53 per unit on an annualized basis. This marks the 14th consecutive year of distribution increases. I’ll now go through the key drivers behind our strong financial and operating results for the year. FFO totaled $2.1 billion, reflecting a 20% increase compared to 2021. Results benefited from organic growth for the year of 10%, capturing elevated inflation in the countries where we operate and volume growth across the majority of our critical infrastructure networks.

During the year, we commissioned over $1 billion of new capital projects that are now contributing to earnings as well as deployed a further $1 billion into new acquisitions that favorably impacted results. Starting with the Utility segment, we generated FFO of $739 million, an increase of 5% over the prior year. This growth reflects an average inflation indexation of 8% that positively impacted almost our entire asset base and the contribution associated with $485 million of capital commissioned into our rate base. Results also improved from the contribution of 2 Australian utility acquisitions completed in the first half of the year. Partially offsetting these results were the impact of higher borrowing costs at our Brazilian utilities as well as the sale of our North American district energy platform completed during 2021.

Our U.K. regulated distribution operation recorded another strong quarter of sales activity, ending the year with a total of 339,000 connection sales and a record order book of 1.5 million connections. This was the company’s best year of sales and was 5% higher than our record set last year. Performance was solid across all utility offerings with notable outperformance in the sale of water connections, which increased by over 40% relative to the prior year. In Australia, our regulated utility business recently secured an agreement to build greenfield electrical infrastructure to support a blue-chip customers construction of 3 new hyperscale data centers. The project will help connect new utility-scale renewable power generation and highlights the attractiveness of building greenfield utility infrastructure to support Australia’s transition to net 0.

We’re continuing to grow our global residential infrastructure platform that has a presence in 5 countries and offers a range of heating, cooling and energy storage solutions. Most notably, in Australia, our smart metering business signed a contract with one of the largest energy retailers to deploy up to 1 million smart meters over the next 10 years. This opportunity will require total capital expenditures of over AUD 600 million and is additive to the contracted growth profile we acquired with the business. Across the residential platform, we continue to see exciting opportunities to launch new product offerings and help provide homeowners with decarbonization solutions, a trend that will be further accelerated with the integration of the recently completed acquisition of HomeServe.

Moving to our Transport segment. FFO was $794 million, an increase of 13% compared to the prior year. Results primarily benefited from inflationary tariff increases across all our businesses. Higher volumes supported by strong economic activity surrounding our networks and the commissioning of approximately $400 million in capital expansion projects during the year. Our rail networks realized an average annual rate increase of 6% and benefited from strong demand for bulk goods and commodities that underpin the global economy. Our global toll road portfolio, annual traffic levels and tariffs increased 4% and 10%, respectively, compared to the prior year. And finally, at our diversified terminals operations, rates have been strong, and volumes for the year were up 8% compared to the prior year.

This was driven primarily by robust demand for U.S. LNG export through our terminal as well as the commissioning of the fixed liquefaction train earlier in the year. Within our Midstream segment, FFO for the year was $743 million compared to $492 million in the prior year. This step change is primarily a result of the acquisition of Inter Pipeline that we completed in the second half of last year. Results were further aided by elevated commodity prices, which led to increased utilization and higher market-sensitive revenues across our base businesses. Our North American Gas Storage business had its best fourth quarter on record as we captured the benefit of higher natural gas prices along the U.S. West Coast, stemming from curtailed gas supply and volatile winter weather conditions.

Photo by Ricardo Gomez Angel on Unsplash

The reliable energy supply provided by our gas storage infrastructure is playing a critical role in the shift toward intermittent energy sources that need to be matched to elevated demand usage during periods of extreme temperatures. At Inter Pipeline, the conventional system saw a 6% increase in volumes compared to the fourth quarter of last year and reached record levels since 2018. We continue to progress the ramp-up of the Heartland Petrochemical Complex as the PDH unit achieved initial production of polymer-grade propylene, leveraging our experience of large start-up activities, production of propylene will increase in a staged manner over the coming months. We expect to reliably achieve high levels of integrated polypropylene production by mid-2023, with full run rate contribution to financial results by the second half of this year.

Finally, our Data segment generated FFO of $239 million, which was consistent with the prior year. Our underlying data businesses performed well as they continue to benefit from increasing customer utilization and network densification requirements. This year’s growth was driven by additional points of presence and inflationary tariff escalators across our portfolio. These positive effects were partially offset by the impact of foreign exchange on our euro and Indian rupee-denominated cash flows. In November, our U.K. wireless infrastructure operator completed the purchase of a portfolio of approximately 1,100 towers from a strategic investor who sold as part of competition approval requirements. The transaction required approximately $70 million of equity, of which BIP funded $20 million.

The acquisition is expected to increase EBITDA by over 30% and will double the existing tower portfolio in the U.K. to solidify our position as the largest pure-play tower company in the region. This excellent operational finish to the year, combined with the strength of our financial position gives us optimism as we enter 2023. Our corporate balance sheet remains well capitalized as reflected in our investment-grade credit profile. During the quarter, we further derisked our maturity profile by raising $700 million in the Canadian debt capital markets. The issuance had an average term of 7 years and proceeds were used to refinance existing debt. With respect to our asset level nonrecourse borrowings, we proactively refinanced several near-term debt maturities.

This includes refinancing that Inter Pipeline and our U.K. port operation. We also completed the initial debt funding associated with the U.S. Semiconductor joint venture. As a result, less than 2% of our borrowing base is maturing over the next 12 months. This, combined with the largely fixed rate balance sheet that has an average term to maturity of 7 years provides us with tremendous financial flexibility. Finally, we ended the year with corporate liquidity of $3.4 billion. During the fourth quarter, we completed the sale of 2 previously announced transactions as part of our capital recycling program. With the closing of the telecom tower portfolio in New Zealand and the first tranche of our recently constructed electricity transmission lines in Brazil, we raised nearly $400 million net to BIP.

Our liquidity position will be further enhanced by the proceeds from the sale of our Indian toll road portfolio and our 50% owned freehold landlord for in Victoria, Australia. After the previous sales did not receive regulatory approval, we signed a binding agreement to sell the port to a reconstituated consortium for AUD 1.2 billion. which was a 30x EBITDA multiple. Closing of these transactions is anticipated to occur in the first half of 2023, with net proceeds to BIP of approximately $260 million. Finally, we are progressing several advanced-stage sale processes, which — and we recently launched the next round of asset sales that we expect will garner significant interest considering the current economic environment. Together, these processes should generate over $2 billion of net proceeds for the partnership this year.

I’d like to thank you all for your time this morning, and I’ll now turn the call over to Sam.

Samuel Pollock: Thank you, David, and Good morning, everyone. I’m going to begin my comments today with a few words on why infrastructure assets are an attractive choice for investors during this economic environment. And I’ll follow that with a summary of our strategic initiatives and conclude with an outlook for our business. This past year, the global macroeconomic environment was characterized by elevated levels of inflation and corresponding interest rate increases that created market uncertainty and volatility. Although inflation appears to be cresting in most countries, it is possible that certain structural dynamics prove hard to abate such as the effect of deglobalization, energy security and a tight skilled labor supply.

This may result in continued near-term market volatility and downward pressure on corporate earnings with cyclical exposure. Investments in infrastructure assets, such as utilities, pipelines, ports and telecom towers are essential for the function of the economy and society. While not agnostic to the macro environment, they typically perform well through all parts of the market cycle and notably outperformed during economic troughs. This ability to generate steady long-term returns is driven by several key characteristics. Now first, their highly contracted or regulated revenue is generally long duration, and therefore, provide sustainable cash flow predictability. Second is their embedded inflation indexation, which expands our lease maintains margins during periods of elevated inflation.

And third is their ability to grow during all economic cycles due to their essential nature and role in promoting economic growth. Combined, these attributes make the asset class and appealing investment choice in all market conditions. Now there are many views on what lies ahead for the economy. The optimist or glass half full market participant could argue that inflation has peaked and will come back within the target raise by the end of the year, implying that fiscal policy today has been effective where you could be in the skeptic or glass half empty investor cap, which might be the view that a tight labor market and continued wage pressures will make inflation tougher to abate in 2023 and that central banks will continue to raise interest rates higher than currently projected.

Now we lean towards a more optimistic view of the year ahead, but we expect market fatality to persist until the direction of interest rates is more settled. More importantly, Brookfield Infrastructure has a highly contracted inflation protected and well financed infrastructure company should perform well in either scenario. In terms of our strategic initiatives, we had a successful year for capital deployment that build upon 2021’s record deployment. Over this 2-year period, we invested over $5 billion into new assets. During 2022, we secured $2.9 billion of investments that are now closed and will begin contributing to results right away. We also entered into a partnership to construct a state-of-the-art semiconductor foundry in the U.S. This innovative transaction has added approximately $4 billion to our capital backlog and pioneered a new investment structure to deploy our large-scale and flexible capital.

With the recent closings of HomeServe and DFMG, which are part of that $2.9 billion and the ramp-up of the Heartland facility over the next several quarters and elevated inflation levels, visibility into our cash flow growth has rarely been stronger. This growth should be sustainable over the longer term, given our large capital backlog of organic projects and our proven ability to grow on the business through accretive new investments. Favorable sector trends, which have been the catalyst for our recent acquisition activity, continue to support our investment pipeline. In addition to evaluating several corporate carve-outs, a large component of our deal pipeline is comprised of public to private opportunities. As we stated in the past, the infrastructure super cycle is creating long-term investment opportunities that will require trillions of dollars.

This is generating large-scale opportunities for well-capitalized players that can invest in growing operating platforms or be a partner of choice for government or corporate entities that have less access to the capital markets. That concludes my remarks for today, and I’ll now pass it back to the operator to open the line for questions.

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Q&A Session

Operator: . And our first question comes from the line of Cherilyn Radbourne with TD Securities.

Cherilyn Radbourne: I wanted to start with a question on the M&A pipeline. In terms of the corporate carve-outs and take private opportunities currently in that pipeline, maybe you could give us a bit of color on those life sector and by geography and comment on whether the year-to-date market rally has made any of the take private less attractive? And if you were able to establish toll hold positions at lower prices?

Samuel Pollock: Cherilyn, I’ll take that question. So as you can appreciate, I’ll probably be somewhat vague in my answer to that — to those questions. But what I can say is that — there are situations where we’ve taken modest toll hold. So I can confirm that. That is part of our strategy to mitigate costs and to give ourselves a competitive advantage. But as far as the balance between the 2, I’d say it’s equally balanced. There are a number of companies, strategics, who don’t have the same access to the capital markets or have seen their share prices drop. And as a result, in order to raise capital to continue to grow their businesses, they are looking to private investors to either buy a whole businesses or to invest in a partnership basis on certain elements of their business.

So that is definitely a source of opportunities for us. And similarly, despite the market rally, which you mentioned that took place in January, the market rally wasn’t even across all companies or sectors. And so there still remains a number of situations, which we think remains priced at an interesting level. And there’s still a discrepancy between where those valuations lie and where we think they would sit from a private market perspective. So we continue to progress those situations. As far as sectors and geographies, they’re fairly well balanced between North America and Europe, I’d say. That’s where the largest percentage line. And sector-wise, I think we have opportunities across all the sectors that we pursue. So it isn’t really concentrated per se in one sector.

Cherilyn Radbourne: That’s very helpful. And then David, this one is probably for you. On the record CapEx backlog, which is always nice to see. Maybe you can help us better understand the duration of the backlog? And how much of it relates to the Intel partnership where it appears that you’ve already deployed about 1/3 of the expected outlay?

David Krant: Hey Cherilyn, I’m happy to answer that for you. So in terms of our backlog, you highlighted, obviously, Intel was the big contribution or addition to it in the fourth quarter. And that’s a $14 billion capital project. So our share of that CapEx would be about $3.7 billion, $3.6 billion, $3.7 billion that we’ve added to our backlog in Q4, Cherilyn. So that’s on a net to BIP basis. the spend to date figure that we referenced in our materials of $1.1 billion, that’s at a 100%. That’s — so our share of that is roughly 250. So we’re not near the same completion percentage that you may have inferred. We’re probably closer to somewhere in the 5% to 10% completion on construction. So it’s still pretty early days on that construction project.

It’s likely to span several years. So our backlog still remains over that next 3-year period that we plan on completing and commissioning. I’d say that’s the biggest large-scale project we have in the backlog. The rest are smaller type rollout additions like we had at the U.K. at EnerCare some of the installations. So much smaller, shorter duration projects that we replenish quarterly with new sales as well. So that’s kind of a bit of color around the composition as well.