Steady Results Despite a Wobbly Economy

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Global infrastructure owner Brookfield Infrastructure Partners (NYSE: BIP) reported earnings just after the elections in the US.  The company has insulated itself from much of the volatility in the global economy through their operations structure.  More than 80% of their cash flow is generated from either regulated businesses or through long-term contracts.  This insulation from the whims of the global economy has enabled the company to invest heavily over the past year.  The results of these investments clearly show in this earnings release.

Transport and Energy

The biggest news of the quarter is that the company completed the expansion of their Australian railroad ahead of schedule and under budget.  This led to FFO growth from railroads to increase 140% due to the expansion as well as a favorable grain harvest.  As the sole rail network in southwestern Australia they have an asset that simply cannot be replicated creating a lock on the region.

The other big news was closing their acquisition of an additional interest in their Chilean toll road by increasing their ownership to 50%.  They also announced that they plan on buying a 60% interest in the largest toll road operator in Brazil.  These businesses should continue to drive substantial opportunities for future growth both in bolt on acquisitions as well as upgrades and other developments. 

Utilities

Their utilities segment continued to perform well with the biggest news coming from their acquisition of a UK regulated distribution business which they’ll be recapitalizing and merging into their own business.  Additionally they boosted their stake in their Chilean transmission system by purchasing a 10% interest in Brookfield’s Asset Management’s (NYSE: BAM) stake. 

This segment contains two of the premier utility assets in the world.  Their Chilean transmission business transmits electricity to 98% of the population in Chile while their coal terminal in Australia handles 20% of the global seaborne metallurgical coal.   A competitor can’t replicate these assets giving the company a moat like no other.

Timber

If there is one weak spot at Brookfield infrastructure it’s in their timber business.  Log prices continue to be weakened by demand.  While log price are weak, timberland values still remain robust as investors anticipate a future recovery in prices.  For this reason as well as the company’s reinvestment needs they plan on selling some of their timber assets in the near future.  Their holdings are in coastal locations which provide access to the Asian export market meaning they are very valuable to a buyer.

Buyers could range from a pension fund to a TIMO to a publically traded REIT.  Of the Timber REIT’s Plum Creek (NYSE: PCL), Rayonier (NYSE: RYN) and Weyerhaeuser (NYSE: WY)  all have land holdings in Washington state and could have an interest in Brookfield’s US Timberlands.  All three have been active buyers or sellers in the region over the past few years.  One thing is for sure, Brookfield is expecting to sell these and other non-core assets very soon to help pay for their strategic growth initiatives.

Financing

What funds they don't acquire through divestitures came via two separate financings the company announced.  These included an issuance of $500 million of equity via a secondary offering that priced at $33.25 per unit. In addition to that they issued $400 million of corporate bonds.  Those bonds were a bit of a diversion from their plan to predominantly finance via non-recourse debt at the asset level.  The company does plan to target less than 10% of their debt to be at the corporate level. 

Bottom Line

It was another steady as she goes quarter from Brookfield Infrastructure.  I own a small 2% allocation in my virtual “No Drip, No Mess” Portfolio that I’d eventually like to boost to a 5% position if the price is right.  Ideally I’d be adding to the position of shares dropped below $30 each as that would represent a 5% distribution going forward.  Until that time I’m content to keep holding as the company’s steady business continues to deliver value. 


latimerburned owns shares of Brookfield Asset Management. The Motley Fool owns shares of Brookfield Infrastructure Partners and Weyerhaeuser Company. Motley Fool newsletter services recommend Brookfield Infrastructure Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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