Brookfield Infrastructure Partners, Letter to the Unitholders, 1st Quarter, 2019, Part One

Brookfield Infrastructure Partners, Letter to the Unitholders, 1st Quarter, 2019, Part One

Overview

We are pleased to report that Brookfield Infrastructure is off to a strong start in 2019. The business generated funds from operations (FFO) of $351 million in the first quarter, or $0.88 per unit, up from $333 million in the prior year. On a per unit basis, our results were up 4% compared to the prior year, and after taking into account our recent 7% distribution increase, our payout ratio for the quarter was 71% of FFO.

Last quarter we indicated that we had committed approximately $700 million of capital to be deployed into three transactions. In the first quarter, we closed on two of these investments for approximately $430 million: a data center business in South America and a fully-contracted natural gas pipeline in India. We are also progressing the third transaction, the second phase of the Western Canadian midstream business acquisition, which is expected to close early in the third quarter of the year. As cash flows from these investments get fully reflected in our results in future quarters, our run-rate FFO will further increase.

Results of Operations

Results for the quarter reflect strong performance by each one of our operating segments, which in total delivered 10% organic growth over 2018, exceeding our annual long-term target range of 6-9%. Organic growth was generated by inflation-indexation across approximately 75% of our businesses, solid GDP-driven volume growth, predominantly at our transport operations, and contributions from accretive capital projects commissioned during the period. Our results also benefited from recently acquired businesses. These positive factors were partially offset by the impact of a weaker Brazilian real, which reduced earnings by $13 million in the quarter.

The utilities segment contributed FFO of $137 million, compared to $169 million in the prior year. Underlying performance was strong as our operating groups were able to grow results by 5% on a same-store basis over the prior year. This was predominantly driven by inflationary increases to our rate base, combined with another strong quarter at our U.K. regulated distribution business. These contributions were offset by having less capital invested following the sale of our Chilean electricity transmission business in March of last year, higher interest expense associated with a financing completed at our Brazilian regulated gas transmission operation, and a $9 million impact from foreign exchange.

Our U.K. regulated distribution business maintained its momentum, following a record year of performance in 2018. Sales and connections activity exceeded the prior year by 8% and 16%, respectively, and at the end of March, our order book stood at an all-time high of 1.1 million connections, which is 12% higher than the prior year. In particular, the multi-utility product offering continues to be attractive to developers, as evidenced by the strong results which have materialized from our fiber offering, where sales are 50% higher than the prior year.

At our Brazilian electricity transmission business, we are making good progress on the development of 4,300 km of transmission lines. The first three segments, which total approximately 1,600 km of lines, are fully operational and construction for the remaining 2,700 km is on track. In April, we exercised our first option to acquire a 50% interest in 500 km of operating lines from our partner, bringing our ownership to 100%. We plan on exercising our buyout options for the remaining operating lines later this year.

FFO from our transport segment was $139 million for the quarter, in-line with prior year results. The segment benefited from organic growth of 6%, driven by higher tariff and traffic levels across our global toll road portfolio, strong volumes at our container terminals and higher revenues at our Australian rail operations. These positive contributions were partially offset by the previously announced sale of a 33% interest in our Chilean toll road operation that closed in February and the expiry of one of the state concessions at our Brazilian toll road business. FFO for this segment was also reduced by $4 million as a result of foreign exchange, primarily the result of a decline in the Brazilian real.

Despite uncertainty over Brexit, our U.K. port operation is thriving. Container and bulk volumes remain robust, exceeding the prior year by 45% and 5%, respectively. Volume increases from our bulk and unitized customers have been driven by new contract wins and strong organic customer growth. With our container terminal nearing capacity, we are now proceeding with the fourth phase of its expansion, comprising a total capital investment of $17 million. This will increase throughput capacity by a further 20% by mid-2020.

The energy segment contributed FFO of $107 million, which represents a 62% improvement from the prior year. This step-change increase is attributable to organic growth and contributions from two recently acquired North American businesses. Our North American natural gas transmission business delivered another strong quarter, generating FFO that was 23% higher versus the prior year. Results for this business are benefiting from robust demand for transport services and contributions from the first phase of its Gulf Coast expansion project. At our gas storage operations, FFO was 43% above last year as the business earned higher spreads related to cold weather conditions.

Within our distributed energy operating group, several new growth initiatives are underway at our recently acquired North American residential energy infrastructure business. We recently partnered with multiple homebuilders to be the exclusive provider of smart home technology for over 3,000 new homes. This offering will create opportunities for the sale of additional products and services to this new customer base. We are also currently progressing a partnership with a utility in Texas for a pilot program that will offer our residential infrastructure products to a subset of its existing clients. If the pilot is successful, the program has the potential to generate meaningful sales leads when we roll out this offering to the full customer base.

FFO for the data infrastructure segment was $28 million, up from $19 million last year. Recent investments in our global data center portfolio contributed FFO of $7 million for the quarter. FFO from our French telecommunications infrastructure business grew by 13%, due to inflationary increases and new points-of-presence added to our tower network.

Commercialization of the second of four fiber-to-the-home concessions held by our French telecommunications infrastructure business has commenced, with a level of take-up above underwriting and market averages thus far. Our build-to-suit tower program continues to grow, with over 300 towers built over the last 12 months. We currently have a contracted backlog of over 900 towers, which are expected to be delivered over the next three years, providing us with strong visibility into the next phase of organic growth for the business.

Sam Pollock,
Chief Executive Officer,

May 3, 2019