Just a BIP on the Radar

By Peter Horn - August 2, 2012 | Tickers: BAM, BIP, BPO, GGP | 0 Comments

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Brookfield Infrastructure Partners LP (NYSE: BIP) is a name that shows up on a lot of radar screens.  With a robust 4.4% current yield and a history of dividend increases, why not?  Over the last year, shares have also marched steadily upward from the mid-20s to the low-30s. 

Dividend growth is the name of the game for Brookfield, and a lot of investors like what they see.  Despite the performance, a lot of people are unfamiliar with this MLP.  Since the partnership is young, BIP’s not yet a mainstream name.  I recently dug through their filings to try to figure out what makes this hard-charging four-year-old MLP work and determine what the future might hold for unit holders.  Can BIP continue to deliver future growth after the run the partnership’s been on?

BIP is an infrastructure MLP that stands out due to its astronomical growth.  They're managed by Canadian-based general partner Brookfield Asset Management (NYSE: BAM).  BAM was founded in 1890 as Brascan, a real estate investment company focused on the development of electrical and tram services in Brazil.  BAM now operates worldwide managing roughly $150 billion in "real assets" grouped in the property, infrastructure and power generation sectors. 

To better align their businesses and enhance growth potential, BAM began a series of spin-outs of operating assets into limited partnerships.  In each case, BAM retains partial equity and manages the assets as general partner.  BIP was the first out the door.  BAM reorganized a portion of its infrastructure assets into a newly created Bermuda-based partnership and distributed 60% of its interest in BIP to shareholders in 2008. 

In 2011, BAM followed the same formula with some renewable energy assets, spinning out Brookfield Renewable Energy Partners.  The final piece of the puzzle is set to fall into place soon.  Ten percent of the equity in Brookfield Property Partners will be distributed to BAM shareholders in the second half of this year.  The new LP will consolidate all of BAM’s real property assets, including its current stake in both Brookfield Office Properties (NYSE: BPO) and General Growth Properties (NYSE: GGP). 

For Brookfield, separating the pieces of the business has its advantages.  Each can grow at its own pace.  It also provides additional flexibility to raise capital when needed.  Brookfield has taken full advantage of the opportunity for secondary offerings of BIP units to raise capital at critical junctures.  Initially, BAM rolled only its electrical transmission business and part of its timber assets into the partnership. 

BIP’s managed assets have quintupled in four short years and the partnership has a much more diversified portfolio, both geographically and operationally.  Total assets rose from $1.8 billion in 2008 at inception to $9.3 billion in 2011.  In three years of operation from (2009 to 2011), net income rose from $53 million to $187 million.  Funds from operation (“FFO,” a cash flow metric) rose from $117 million to $392 million in the same timeframe.  That extremely rapid growth has been driven in large part by acquisitions financed by secondary offerings.

The biggest move by far was the acquisition of Prime Infrastructure when it struggled with a heavy debt load in the depths of the recession.  BIP pounced on the opportunity in 2009, acquiring a 40% interest with proceeds from a secondary offering.  When that lifeline proved insufficient for Prime, they completed the merger later in 2010 by issuing additional BIP units to Prime shareholders.  The Prime acquisition provided many of BIP’s most attractive assets (Prime assets are highlighted in blue in Table 1).  More recently, Brookfield used an additional secondary offering of BIP units in 2011 to fund a large expansion of their Australian railway.  The new rail expansion will likely be the major growth driver for BIP in the next few years.

In Q4 of 2011 BIP listed $9.3 billion in operating assets organized into three operational platforms (a full outline appears in Table 1):

Utilities Platform

The Utilities tag is a bit misleading.  It’s a holdover from BIP’s early days when electrical transmission assets dominated the platform.  The common thread here is a regulated rate structure.  The most interesting piece is one of the largest coal export terminals in the world, located in Queensland, Australia.  This terminal has a virtual monopoly on export of coal mined in the Bowen Basin, one of the lowest cost sources of metallurgical coal in the world.

Transport and Energy Platform

The transport segment is highlighted by BIP’s Aussie rail system.  Their below rail operations are the sole freight provider for southwestern Western Australia, with access to five ports.  It’s currently undergoing extensive expansions that will boost capacity 50%, providing service to several new mines in Western Australia.  This project will add revenue in phases between now and 2014.  BIP also operates a large collection of ports, located primarily in Europe.

Timber Platform

The timber assets are an interesting wild card.  BIP holds timberlands located in western North America.  Their proximity to the coast makes these timberlands more profitable, allowing lower cost export to Asia.  Log prices are still weak though, and volumes remain low.  Long term, a turn here could be a major source of improved revenue for the Partnership.  This is a waiting game like most housing-oriented plays.  But at least it’s not bleeding red ink like it was in 2009, because the pricing of some select woods is beginning to strengthen.

Table 1. Brookfield Infrastructure Partners Operating Assets.  Assets as of Dec. 31, 2011 are shown.  BIP operates in three platforms: Utilities, Transport and Energy, and Timber.  Assets have grown substantially from inception in large part due to acquisitions.  The biggest driver of growth was the acquisition of Prime Infrastructure, an Australian/UK Infrastructure Trust.  That acquisition brought considerable opportunities for organic growth, particularly in rail operations.  The Utility segment also has substantial capital commitments that should enhance revenue in the future.  Original assets contributed to the partnership by Brookfield are highlighted in light red.  Assets added in the Prime Infrastructure acquisition appear in blue.  Additional assets added post-inception are highlighted in light green.  A detailed list of BIP's assets can be found at: http://www.brookfieldinfrastructure.com/content/about_us/our_operations-3330.html

Can BIP deliver  organic growth?

BIP certainly has a solid current yield.  But higher yields can be found in the MLP universe.  BIP’s results have also benefited from a good market for troubled assets, and the fact that the Partnership isn’t shy about diluting current unit holders needs to be considered when purchasing.  The dilution has been significant.  Total distributions by the Partnership rose 269% from 2009 to 2011.  But dividends per share rose only 24% over the same timeframe due to the number of new units issued (see Figure 2).  Can BIP have similar growth going forward?  Can they now grow internally?  I think so.  While more Prime-sized acquisitions at bargain prices seem unlikely, there are now some organic opportunities for growth.

When looking at BIP’s cash flow, the Timber platform is almost a non-factor, contributing only 7% of BIP’s FFO.  Any turn here will add to cash flow.  Utilities led all segments in 2011 with 58% of 2011’s FFO.  These are regulated revenues that are stable, but there is some room for expansion.  Scheduled CapEx will expand BIP’s rate base, boosting income from their transmission assets in Chile.  In addition, a new Texas wind-farm transmission line project will come online in 2013.  Unit holders can expect cash flow improvement from this platform as a result of these investments.  The remaining Transport and Energy platform (35% of 2011’s FFO) is another segment that will see substantial growth.  Planned expansions of their Australian railway are expected to boost rail EBITDA in phases through 2014, eventually reaching $150 million annually.  Since the contracts are take-or-pay, this estimate is actually a minimum that reflects fees for service independent of actual volume.  Under certain circumstances, revenue increases could actually be higher. 

With a solid pipeline of projects, organic growth over the next few years seems likely.  Utility projects planned total $352 million.  Projecting FFO increases based on their current return on assets estimates an increase of $28 million annually from these projects.  Similarly estimated, the $150 million in annual EBITDA from the Aussie rail expansion should net roughly $75 million in annual FFO.  That $100 million in incremental FFO expected between now and 2014 is about a quarter of 2011’s FFO.  With a current yield of 4.4% and the potential for greater than 25% cash flow growth over the next few years, BIP looks like an interesting prospect for growth-oriented income investors.

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