Whitecap buying TORC for $565M, plans 6% dividend hike

Whitecap buying TORC for $565M, plans 6% dividend hike

Whitecap Resources Inc. is buying TORC Oil & Gas Ltd. for $565 million in an all-stock deal, plus the assumption of $335 million in TORC debt, the companies announced Tuesday.

Under the terms of the deal, TORC shareholders will receive 0.57 shares of Whitecap for each of their existing shares, marking a consolidation in the Canadian mid-cap energy industry.

The deal value represents a zero-premium offer for TORC, a relative rarity in the oil-and-gas sector. While such deals have become more commonplace in the precious metals industry, it’s been uncommon to see such transactions in the energy sector.

The boards of both Whitecap and TORC have unanimously endorsed the deal, which is expected to close by February 25, 2021. Whitecap management will continue to helm the company after the transaction closes. The combined entity is forecast to produce an average of 99,000 to 101,000 barrels of oil equivalent per day.

In a release, Whitecap President and Chief Executive Officer Grant Fagerheim said the size and scope of the combined entity would help it weather the continued uncertainty due to demand shocks caused by the pandemic.

“We are combining two strong Canadian energy producers to form a leading large-cap, light oil company geared towards generating sustainable long-term returns for shareholders while prioritizing responsible Canadian energy development,” he said.

“Despite the challenging conditions and significant volatility throughout the year, we have become an even stronger and more resilient energy producer entering 2021 with the combination with TORC as well as the NAL transaction.”

Whitecap announced its $155 million all-stock acquisition of NAL Resources Inc. in August. That transaction is expected to close January 4, 2021.

Whitecap also plans to increase its monthly dividend by six per cent as a result of the deal, to $0.01508 per share from $0.01425, effective in March 2021.

Sources

https://www.bnnbloomberg.ca/whitecap-buying-torc-for-565m-plans-6-dividend-hike-1.1533927

Intact Financial Corp Update

Intact Financial Corp Update

After a decade of buying up rivals to become Canada’s largest property and casualty insurer, Intact Financial Corp. is looking across the Atlantic with its biggest deal yet.

Intact sealed an agreement Wednesday to buy the Canada, U.K. and international operations of London’s RSA Insurance Group Plc as part of a $12.3 billion (US$9.4 billion) transaction. Denmark’s Tryg A/S is taking RSA’s Swedish and Norwegian operations.

Intact’s portion of the deal is $5.1 billion and brings it into entirely new markets in Europe while bulking up its core Canadian business. It supercharges an acquisition spree that has turned the Toronto-based company into the dominant force in Canada’s non-life insurance industry, a little more than a decade after it was cast off by Dutch insurer ING Groep NV.

The RSA deal also will be a major test of whether Chief Executive Officer Charles Brindamour, 50, can replicate the firm’s success in digesting acquisitions on a larger scale and farther afield that it has ever attempted before.

“We have an established track record of integrating companies,” Brindamour, said during a press conference on Wednesday. “We’ve done that many times in the past. We feel that we are in a strong position to tackle that challenge.”

Spinoff Success

Intact traces its roots back to 1809, when a group of businessmen formed the Halifax Fire Insurance Association. That firm was acquired in the 1950s by a Dutch insurer that eventually became part of ING. In 2009, ING divested its 70 per cent stake in ING Canada Inc., which changed its name to Intact.

Brindamour, who had become CEO about a year earlier, wasted little time in bulking up the newly independent insurer. Intact bought French insurer Axa SA’s Canadian business in 2011, bolstering its domestic premiums by almost 50 per cent.

Intact went on to make 12 more deals with a total announced value of about US$3.1 billion before the RSA acquisition, according to data compiled by Bloomberg. The firm serves about one in five families and one in four small- and medium-sized businesses in Canada, Brindamour said.

So far, the strategy has been rewarded. The company’s shares have risen more than fourfold since since May 19, 2009, the day its listing as Intact became official. That compares with a 68 per cent gain for the S&P/TSX Composite Index. Intact’s market value of about C$21 billion is up about fivefold in that time.

Intact has benefited from being an independent, publicly traded company competing against policyholder-owned insurers that can’t make deals the same way, said Victor Adesanya, an analyst with DBRS Morningstar. The company also has a track record of making its acquisitions profitable by spotting trends in the market and exiting unprofitable business lines, he said.

“They’re able to deploy advanced data analytics when it comes to risk selection, segmentation and identifying risk,” Adesanya said in an interview. “They do this better than others in the industry.”

The RSA takeover -- the largest ever by a Canadian property and casualty insurer -- will put that system to the test. For one, it will add significant bulk to the company, increasing annual premiums in Canada from $10 billion to about $13 billion and boosting total premiums about 67 per cent to $20 billion.

Intact’s workforce will balloon 63 per cent to 26,000, its specialty-insurance business will grow by 30 per cent, and it will be navigating unfamiliar regulatory environments in the U.K., Ireland and Denmark.

Brindamour says he has admired RSA for a long time and has thought deeply about the complexity of an acquisition. He said he’s comfortable with the deal now because RSA’s businesses have leadership positions and Intact’s existing operations are in “very good shape.”

He noted that his company’s net operating income per share has grown at a 10 per cent compound annual rate over the past decade and revenue growth has exceeded the industry’s by about 4 per cent a year over that time.

“The reason why acquisitions make sense for us is because we’re an outperformer in the markets where we operate,” Brindamour said.

Sources

https://www.bnnbloomberg.ca/intact-caps-decade-long-buyout-spree-with-12-3b-rsa-deal-1.1524536

Reinsurance is set to grow

Reinsurance is set to grow

At various points over the past decade, we have considered expanding our asset management business to include reinsuring obligations related to long-term annuities, as the capital is of long duration and our investing skills can add value in the investing of the capital. We previously had two misgivings: the first was our strong belief that interest rates might decline, which made it unattractive to lock in long-dated liabilities at high interest rates. The second was the fact that much of the capital from reinsurance activities would need to be invested in credit instruments, and we were concerned that our credit platform was not sufficiently large to take on the scale of capital involved.

Fast forward to 2020: interest rates globally have dropped to near zero, and while rates could go negative, in our view the odds do not favor that for any significant length of time. As a result, we believe the risk involved in reinsuring long-tail liabilities is the lowest it has ever been. Furthermore, our recent partnership with Oaktree has significantly added to the scale of our credit capabilities. Together, these developments have meaningfully changed the nature of the opportunity for us.

Our first step in preparing for this opportunity was to establish our reinsurance business, and we have received a number of licenses over the past few years. The ownership of the business and its operational oversight will be conducted through our newly created Bermuda company for this purpose called Brookfield Asset Management Reinsurance Partners (BAM Reinsurance).

As a next step in building the business, we announced a strategic partnership with American Equity Investment Life (AEL) under which BAM Reinsurance will reinsure annuity policies. We have agreed to take on $5 billion of existing policies in our reinsurance company and take an additional $5 billion of future policies as they are written. The simple story is that we will receive up to $10 billion of cash, invest those funds in our alternatives and income-oriented investment strategies and, if we can out-earn the rates we pay on the liabilities, we will do very well.

In order to set up this business for the long term but continue to have this reinsurance entity benefit from everything that exists at overall Brookfield Asset Management Inc., we are planning to replicate the success we have had pairing corporations and partnerships for each of our businesses. Thus, we will split off to all shareholders of Brookfield Asset Management a fractional share of Brookfield Asset Management Reinsurance Partners. Each new whole share of BAM Reinsurance, once assembled from fractional shares on distribution to you, will be equivalent in value to a current BAM Class A share. For those of you who follow our listed partnerships, you will know that we have done comparable distributions of “paired” securities in the past. In all cases, the “paired” corporate shares have traded in tandem with the partnership units, thanks to their equivalent distributions and exchange features.

Subject to the receipt of regulatory approvals, we plan to complete the distribution of BAM Reinsurance shares in the first half of 2021. The distribution will amount to a dividend of approximately $500 million of capital, or approximately a $0.33 for each BAM share you own.

Bruce Flatt

Chief Executive Officer

Brookfield Asset Management Inc.

November 12, 2020

Postscript

Insurance companies sell contracts not "products". Products are manufactured goods. Insurance companies like the term product as a sales gimmick to make it seem as though it is a solid object. These contracts are agreements to assume risks. The insurance company gets regular payments for this risk. If there is a claim they have lawyers on staff to negotiate low pay, slow pay, or no pay on claims. The claim language is twisted in legal terms so avoidance of payment or redefining what the contract specifies as payment can be manipulated by the insurance company.

Brookfield is wise to get into this business. Buffet saw an insurance company as a basis for his empire too. It's free money to invest with inflation, actuaries, and lawyers on the side of the insurance company.

Alternatives are the solution

Alternatives are the solution

Low interest rates have been a tailwind for Alternative assets over the last 20 years. Once considered a complementary investment to a traditional fixed income and equities portfolio—and concentrated amongst the largest institutional investors, Alternatives today are an essential and growing part of most investment portfolios. The trend is also accelerating as a result of the recent moves to even lower rates and by the broad range of investments and products across Alternatives now available to investors.

As demand for Alternatives has grown, so too have the breadth and variety of investment offerings. Twenty years ago, investments in Alternatives represented roughly 5% of institutions’ investment portfolios and were largely concentrated in hedge funds and private equity. Today, that number is closer to 25%. Over the same period, the number of investible strategies has grown significantly with the emergence of private credit and real asset investing (real estate, infrastructure, and renewable energy, as examples). Going forward, our clients tell us that these allocations are increasing towards 60%.

The benefits of real assets in a normal economic environment are clear: they offer stable yield underpinned by high-quality contracts. The investments are often private in nature—and are therefore not subject to mark-to-market volatility—and returns are inflation-protected. A low-interest rate environment amplifies these benefits, and is now forcing more investors to either consider Alternatives for the first time or increase their existing allocations.

The reason for this is simple; pension plans, sovereign wealth funds, insurance companies, and many other investors have medium to long-term risk adjusted return targets that can’t be satisfied in the public equity and bond markets. A decade ago, an investor could hold a 10-Year German Treasury bond and earn a 4% yield; today the return stands at negative 1%. And while a select few large institutional investors have built out direct real asset investing capabilities, all have seen the benefits of partnering with asset managers like us who are able to leverage investment expertise and operating scale to drive investment performance and provide access to quality assets.

Across Alternatives, there are many categories of investment across the risk-return spectrum, and these numbers continue to grow to meet the demand of clients. Today we offer private investors over 15 different strategies across five different asset classes, which enables them to build a balanced real asset portfolio that can be tailored to meet their investment objectives. Our listed affiliates are an amalgam of these for public market investors. Beyond the traditional flagship funds, we offer our clients perpetual core private funds, private debt funds, listed credit products and region-specific funds. As we have grown, we have attracted new clients, and their commitments to our funds have grown, as has the average number of funds our clients invest in. From our own experience, it is clear that the allocation to Alternatives is growing faster now than it ever has, and we don’t see any reason for it to slow down.

With interest rates likely to be anchored at close to zero for the next several years, we expect this will also translate into strong support for asset valuations. Our partner, Howard Marks, recently published a letter titled “Coming into Focus” that discusses in depth how lower risk-free interest rates increase asset valuations, which we encourage you to read. We are at the very early stages of this playing out in the private markets, but as transaction activity returns, we fully expect to see higher valuations for the best assets. The recent sale of one of our office buildings in London at 10% higher than the price we paid for the property 12 months ago is a perfect illustration of this point, where lower interest rates increased the discounted cash flow value of the asset. While it could take time for transaction activity to fully ramp up, and contrary to the sentiment that has existed in the market, this sale provides us with clear evidence that the high-quality real asset portfolio we own is today worth even more than it was just nine months ago. 

Bruce Flatt

Chief Executive Officer

Brookfield Asset Management Inc.

November 12, 2020

Tourmaline Announces Formation of Topaz Energy, Unlocking Value in Tourmaline's Significant Asset Base

Tourmaline Announces Formation of Topaz Energy, Unlocking Value in Tourmaline's Significant Asset Base

CALGARY, Oct. 10, 2019 /CNW/ - Tourmaline Oil Corp. (TSX:TOU) ("Tourmaline") is pleased to announce the formation of Topaz Energy Corp. ("Topaz"), a new private royalty and infrastructure energy company. Tourmaline will sell to Topaz: a royalty interest on Tourmaline lands, a non-operated interest in two of Tourmaline's existing 19 natural gas processing plants, and a contracted interest in a portion of Tourmaline's current third-party revenue for total cash and share consideration of $775 million.

Topaz will be a low-risk, high-distribution, hybrid royalty and infrastructure energy company with long-term growth plans. Topaz will be capitalized initially with a $150 to $200 million third-party equity private placement, with Tourmaline retaining a 75% to 81% equity ownership interest. Tourmaline intends to reduce a portion of its ownership as Topaz participates in future acquisition activities and an anticipated Topaz public liquidity event in 2020. The initial acquisition from Tourmaline is expected to generate approximately $90 million in revenue(1) in 2020, of which it is anticipated approximately 75% will be paid out in quarterly dividends ($0.80 per share annually, 8% yield).

The assets to be acquired from Tourmaline will consist of three components:

A gross overriding royalty ("GORR") on natural gas, oil, and condensate production on 100% of Tourmaline's existing lands (approximately 2.2 million net acres).

A non-operated 45% working interest in two natural gas processing plants underpinned by long-term take-or-pay commitments from Tourmaline.

A contracted interest in a portion of certain third-party revenues generated by natural gas processing and handling agreements.

Upon completion of the transaction and private placement, Topaz will have a majority-independent Board of Directors and will be managed initially via a management contract with Tourmaline. The Topaz GORR will provide for an interest in Tourmaline lands and access to multiple, well-defined, future drilling and growth opportunities, including exposure to future Tourmaline production growth. Topaz will begin operations with zero debt and will have a scalable business model with the potential for additional transactions with Tourmaline and other industry participants.

The transaction with Topaz is expected to close in mid-November 2019 and is subject to customary closing conditions and regulatory approvals. Peters & Co. Limited is acting as exclusive financial advisor to Topaz.

Transaction Rationale

The transaction with Topaz will monetize a portion of the currently-unrealized, substantial-intrinsic value in Tourmaline's significant infrastructure complex and Tourmaline's industry-leading low-cost profitable EP business.

This transaction has minimal impact on Tourmaline's forecast 2020 cash flow and no impact on current EP plans.

- Tourmaline will utilize the gross cash proceeds of approximately $135 to $185 million for potential consolidation activities within the existing three operated core complexes, for debt reduction, and for share buybacks under its existing normal course issuer bid. The transaction will make a top-tier balance sheet even stronger.

- The transaction improves forecast 2020 cash flow per share (debt adjusted)(2) from $6.98 to $7.33, an increase of 5%, assuming the mid-range of the initial proceeds.

- Tourmaline retains an average working interest of approximately 95% in all of its processing infrastructure and will maintain its low operating and corporate cost structure.

- Tourmaline continues to maintain the strong capital discipline required for the free cash flow generation business plan; EP capital spending in Q3 2019 was fully funded by cash flow generated in the quarter. Much stronger anticipated Q4 2019/Q1 2020 AECO prices, coupled with oil/condensate production growth, is expected to continue to improve Tourmaline's free cash flow.

- At Gundy Ck in the NEBC Montney gas condensate complex, Tourmaline was able to ramp up the new c-60A deep-cut gas plant to the full 200 mmcfpd capability in late August, prior to the start-up of the North Montney pipeline. The ramp up increased overall corporate liquids production (oil, condensate, NGL) to an average of 61,000 - 62,000 bbls/d in September.

Analog Devices Inc..Q4 2019, Letter to the Shareholders

Analog Devices Inc..Q4 2019, Letter to the Shareholders

Dear Fellow Shareholders

We are living in a time of astonishing innovation in the Third Wave of Information and Communications Technology (ICT), as we refer to it at ADI. This wave is characterized by ubiquitous sensing, hyper-scale and edge computing, and pervasive connectivity. These technology modalities enable the generation of vast amounts of data that allow us to glean actionable intelligence about the world. As one of the very broadest high-performance analog solutions providers, we play a critical role at the nuanced intersection of the physical and digital domains, by providing the building blocks to sense, measure, interpret, connect, and power the edge. Essentially, ADI is where the data is born.

This era of extraordinary technological change will continue to improve quality of life globally through continuous advancements in areas such as seamless and efficient automation, more sophisticated communications networks, universal and affordable healthcare, environmental integrity, and much more.

Through our research and development (R&D) investments and strategic acquisitions, ADI is better equipped than ever to solve our customers’ toughest engineering challenges from sensor to cloud, from DC to 100 gigahertz, and from nanowatts to kilowatts. And as analog engineering challenges become more complex, our customers are telling us that they want us to provide more complete solutions. This provides ADI with new, attractive opportunities to deliver profitable growth in the years ahead.

Solid Financial Results for Fiscal 2019

In fiscal 2019, we delivered revenue of approximately $6 billion amidst challenging macroeconomic conditions and trade uncertainty. Our business-to-business (B2B) markets, comprised of industrial, automotive, and communications, achieved modest year-over-year growth and outperformed the semiconductor industry again. We delivered industry-leading adjusted gross margins of approximately 70%, adjusted operating margins of more than 40%, and adjusted diluted earnings per share of $5.15.1 Notably, we generated strong cash flow as evidenced by our 33% free cash flow margin, which places us in the top 10% of the S&P 500.

The strength of our innovations and customer engagements, the diversity of our franchise, and our operational discipline have enabled us to consistently deliver strong returns. Over the last five years, ADI has generated a total shareholder return of 148%, or more than double the S&P 500 return.

Our Fiscal 2020 Priorities

As we enter fiscal 2020, I would like to describe the three primary priorities on which we are focused to continue driving ADI’s long-term success.

1. Deepening Customer-Centricity

ADI possesses among the broadest product portfolios, applications expertise, and manufacturing capabilities in high-performance power management and precision and high-speed signal processing technologies, which helps our customers bridge the intersection between the physical and digital worlds.

Throughout the year, we saw robust customer engagement driven by a couple of factors. First, our customers are facing a scarcity of available analog engineering talent and they are increasingly turning to us for that expertise. Second, our customers are encountering more complex challenges in the Third Wave of ICT with digital systems increasingly relying on real-world data to create actionable intelligence.

As a result, we see our customers partnering with us more deeply to gain the full benefit of our technology capabilities and product innovations with relationships starting earlier and lasting longer. As a testament to that, our opportunity pipeline value achieved record levels in fiscal 2019.

2. Efficient Use of Capital

At ADI, we have an intense focus on creating and delivering best-in-class value for our customers and doing so is our first call on capital.

Our success is underpinned by our philosophy that superior innovation drives superior results and we understand that R&D enables our virtuous cycle of innovation-driven success. This is why we invested more than $1 billion in R&D during fiscal 2019. We choose our investment areas judiciously—focusing on what we believe are the most attractive opportunities across our business, particularly in our B2B markets.

Also, given the growing demand for analog technology and the evolving needs of our customers, we have acquired two companies to increase the scale and the scope of our offerings over the past five years.

With the acquisition of Hittite in 2014, ADI became the market leader in high-performance RF and our portfolio now spans the entire frequency spectrum from DC to 100 gigahertz. Since this acquisition, ADI has more than doubled the revenue from this portfolio, and in fiscal 2019, our RF revenue increased more than 30% year-over-year led by growth in industrial and wireless communications.

The acquisition of Linear Technology (LTC) in 2017 added highperformance power management and additional precision signal processing to our portfolio, expanding our offerings to deliver more complete solutions. Our new power management design wins across 5G infrastructure, data center, and automotive are moving to production this year, and we expect a more meaningful revenue ramp in fiscal 2021. This puts us on a path to double LTC’s historical revenue growth rate in the years ahead.

Through our development of cutting-edge innovations and our ability to solve the most difficult problems across a broad array of applications, we generate significant cash flow and are deeply committed to delivering strong shareholder returns. In fiscal 2019, we generated nearly $2 billion of free cash flow and delivered on our target of returning 100% of our free cash flow after debt repayments in the form of dividends and buybacks.

3. Capitalizing on Secular Trends

As the data age rapidly evolves and the demand for edge computing rises, analog technology becomes even more relevant. Currently, a modest 10% of data is generated outside the cloud, and by 2025, this amount is expected to grow to 75%.4 We believe this trend uniquely positions ADI to capitalize in two ways. First, we will be a critical partner in the collection, curation, and communication of our customers’ edge data. Second, with more than 85% of our annual revenue coming from B2B markets, we are well-aligned with the markets driving this increase in data—let me provide you a few examples.

In Wireless Communications, we are pushing the limits of 5G innovation with our market-leading microwave and integrated transceiver portfolio, adding algorithms and optimized power solutions to differentiate our portfolio. These enhancements enable customers to dramatically increase data density, while reducing their radio footprint and power. Importantly, 5G is more than just radio innovation—it requires a complete re-architecting of the core and wireline network to meet the 5G vision of gigabit speeds, low latency, and high reliability. This network expansion is expected to require a significant upgrade to the backhaul system, unlocking another new revenue opportunity.

In Automotive, the center of value creation is pivoting from the internal combustion engine to the electric powertrain and passenger comfort and safety. Again, ADI plays an important role in enabling these advancements. In electric vehicles, our battery management solutions provide customers up to 20% more miles per charge vs. our competition and we are revolutionizing how monitoring and controlling batteries will be solved—and doing so wirelessly. In Level 3+ autonomous vehicles, our high-speed signal processing technology is necessary to deliver the ever-increasing levels of resolution and range required in active safety systems.

In Industrial, the rise of Industry 4.0 and digital factories is increasing the need for more sophisticated sensing, measuring, and actuating solutions. This creates additional demand for our precision signal chain and power management franchises and expands our addressable market for our suite of connectivity and sensor solutions.

Finally, in Healthcare, demographic and economic pressures, coupled with the availability of new sensing and diagnostic capabilities, are opening up a myriad of new opportunities for ADI. This includes mission-critical X-ray systems, where we are pushing performance to new levels with our photonic conversion solutions by reducing dosage intensity, while increasing image fidelity. And, wearable devices with our clinical-grade vital signs monitoring solutions are poised to enable hospital-grade patient monitoring at the home.

 Our Sustainable Future

ADI has long been focused on responsible sustainability efforts, but I believe the time has arrived where we not only prioritize sustainability, but also environmental regeneration. To this end, ADI employees will increasingly bring their ingenuity and energy to trailblazing new solutions that restore and replenish natural resources and ecosystems, reduce our carbon footprint and the environmental impact of our operations, as well as partner with our customers and suppliers to reduce the impact on our planet.

To provide just one example, our innovative battery management solutions are at the heart of building more efficient electric vehicles, which helps to curtail tens of millions of tons of CO2 entering the atmosphere. Putting this into perspective, every million ton reduction of CO2 emissions is equivalent to the annual CO2 absorption by over one million acres of mature forest. As we look ahead, we believe we have a bigger role to play in engineering a sustainable future. We will be providing more on our strategy and commitments, which are aligned with the United Nations’ Sustainable Development Goals, in our Sustainability Report this year.

Looking Ahead

Over our company’s 55-year history, ADI has navigated several important transitions because of our ability to successfully sense and adapt to technological, demographic, and economic changes. Our leading technology portfolio and customer relationships, business diversity, and focus on continuous improvement has created a strong business model with both a broad array of optionality and opportunity as well as long-term resilience.

 As the world becomes more digital, more autonomous, and more intelligent, I am confident in our ability to deliver stronger performance. This is due to the many thousands of talented people across our company who are passionate about creating industry-leading innovation and dedicated to the success of our customers each and every day.

I have been with ADI for more than 30 years, and I can say unequivocally that I have never been more excited about the prospects and opportunities that lie ahead.

Sincerely,

Vincent Roche

President and Chief Executive Officer

Analog Devices, Inc.

Stock Idea…Analog Devices Inc…ADI on the NYSE

Stock Idea…Analog Devices Inc…ADI on the NYSE

Analog Devices, Inc. (Analog Devices) designs, manufactures and markets a portfolio of solutions that leverage high-performance analog, mixed-signal and digital signal processing technology, including integrated circuits (ICs), algorithms, software and subsystems. Its products include Analog Products, Converters, Amplifiers/Radio Frequency, Other Analog, Power Management and Reference, and Digital Signal Processing Products. The Company is a supplier of data converter products. The Company is a supplier of high-performance amplifiers. Its analog product line also includes products of high performance radio frequency (RF) ICs. The Company's DSPs are used for high-speed numeric calculations. The Company offers its products for applications in various end markets, such as industrial, automotive, consumer and communications. The Company operates in the United States, Rest of North/South America, Europe, Japan and China.

Business Model Themes

Analog Devices is one of the world's largest analog chipmakers, with an especially strong position in analog signal processing chips. We think it is well-positioned to profit from more advanced and higher-priced semiconductor content in automobiles, 5G wireless networking equipment, and industrial applications like medical devices and factory automation equipment in the years ahead.

Analog chips are used to convert real-world signals, such as sound, temperature, and pressure, into digital signals that can be processed. We believe Analog Devices has a wide economic moat because of its proprietary analog designs and high customer switching costs; since analog chips are neither particularly expensive nor do they require cutting-edge manufacturing techniques, high-quality analog chipmakers tend to retain design wins as long as the end product is being built, all while maintaining healthy pricing and strong profitability over time.

Most of Analog Devices’ organic sales come from data converters and amplifiers used in various end markets, such as wireless base stations, and the company expanded into power management chips via its acquisition of Linear Tech. An especially promising end market for the firm continues to be the automotive sector. Not only are traditional cars adding electronic content in their vehicles such as sensors, active safety systems, and advanced infotainment systems, but also hybrid and electric autos are doubling and tripling the amount of chip content inside of each vehicle. 

We're also seeing a similar trend of increased chip content in industrial applications like robots, factory equipment, and medical devices. ADI has tens of thousands of customers in these end markets. Further, ADI's signal chain semiconductors will likely be prominently used in 5G wireless network equipment. Nonetheless, ADI still faces challenges in a fragmented analog market. The firm has many competitors with equally strong expertise in analog chip designs, and the semiconductor industry is highly cyclical. Regardless of new product releases, Analog Devices' sales probably will continue to ebb and flow with the rest of the sector.

Sustainable Competitive Advantage (Moat)

We believe that ADI has a sustainable competitive advantage, thanks to intangible assets around proprietary analog chip design and manufacturing expertise, as well as switching costs that make it difficult to swap out analog chips for competing offerings once they are designed into a given electronic device. We are confident the firm is more likely than not to generate excess returns on capital over the next 20 years.

We believe that leading analog chipmakers benefit from favorable characteristics that lend themselves to economic moats. Moats for chipmakers with analog expertise tend to come from intangible assets associated with the strength of proprietary chip designs, as well as switching costs that make it difficult to swap out analog chips for competing offerings once they are designed into a given electronic device.

We believe analog engineering talent is difficult to come by, as greater emphasis is placed on digital chip improvements, and it often takes years to train up-and-coming analog engineers in the intricacies of chip designs. Thus, it is extremely difficult for startups to replicate the many years of analog expertise held by incumbents. Leading analog chipmakers also face stringent quality requirements in some end markets, such as the automotive industry, for example, where defects can only be tolerated as low as one part per million.

Although the analog chip market is quite fragmented, it would be difficult for any startup to achieve this level of quality while still being to satisfy high-volume production. Furthermore, analog chips tend to make up only a small portion of a product's bill of materials, so purchasing decisions tend to be based on performance rather than price, helping ADI and its peers retain pricing power. Automotive, industrial, and communications infrastructure customers, in particular, are unlikely to choose an inferior analog chip in order to save pennies on the cost of a piece of equipment worth tens of thousands of dollars.

Similarly, engineers are loath to swap out an analog from an existing design (again, only to save a few pennies on cost) because of the onerous redesign and retesting costs associated with the switch. One can imagine the frustration and possible reputational damage to a product if a perfectly functioning electric toothbrush or thermostat were to fail because of an unforeseen change in how the analog chip interacts with the rest of the circuit board. Again, such damages would be amplified in far more expensive equipment like cars, planes, or satellites. 

ADI and its chipmaking peers tend to profit from these high switching costs by having lower ongoing R&D and capital expenditure investments than digital chipmakers, which helps to contribute to healthy returns on capital for shareholders. In particular, buyers of analog semis typically don't demand smaller chips packed with more transistors, but rather, reliable products that deliver the desired accuracy and precision in power management or signal processing. Shrinking the chip might not necessarily enhance accuracy (and might even serve to reduce it), so analog chips tend to be made with lagging edge manufacturing techniques.

ADI and some of its peers take this benefit one step further by concentrating on end markets where product lives are measured in decades, as opposed to the increasingly short life cycles associated with consumer devices like PCs or handsets. ADI likely earns less than 10% of revenue from personal electronics devices like smartphones, tablets, and PCs. All else equal, we are less confident in outsize economic profits from chipmakers that serve the handset and PC industries, given the shorter product life cycles, intense competition, and customer concentration as a handful of tech titans exert tremendous buying power.

The analog chip space is highly fragmented, but ADI is the only firm with a substantial market share lead in any subsegment of the business. The firm has nearly 50% share of the data converter analog chip market, and these chips are widely used in communications infrastructure equipment, in particular, as they convert analog voice signals to digital signals for processing, and vice versa. We believe that ADI will retain its relatively dominant position in converters over time.

Management

We view Analog Devices as a well-run organization and an Exemplary steward of shareholder capital. Vincent Roche, a longtime ADI veteran, became president in 2012 and took over the CEO role in May 2013. Ray Stata, one of ADI's cofounders, is chairman of the board. Analog Devices has done a good job of distributing cash to shareholders, raising its dividend to $0.62 per quarter and targeting a 15% annual dividend increase. ADI announced that it plans to distribute 100% of its free cash flow to shareholders through dividends and opportunistic stock buybacks.

We approve of ADI’s acquisition strategy. First, the firm made a smart move to acquire Hittite Microwave, as the firm paid what we consider a reasonable 30% premium for a highly profitable radio frequency chipmaker. We believe ADI will benefit from selling Hittite products into 5G wireless equipment in the years ahead. We also think ADI made another shrewd deal to acquire Linear Tech, the highest-margin analog chipmaker. ADI has taken on a relatively high degree of leverage to buy Linear, but strategically, the deal makes quite a bit of sense and we anticipate that ADI will generate healthy free cash flow in order to pay down the debt over time.

(The above information was edited from a Morningstar Equity Analyst Report)

David Driscoll on BNN-Bloomberg’s Market Call…August 25, 2020

David Driscoll on BNN-Bloomberg’s Market Call…August 25, 2020

Market Outlook

A quick look at the TSX 60 Index shows the discrepancy between value stocks and growth stocks. To date, 32 of the 60 stocks have yields above 2.0 per cent. Their total return (dividends re-invested) are down 12.8 per cent versus the TSX 60 total performance, down 0.2 per cent. This variance between value and growth also occurred during the run-up to the bursting of the tech bubble in 2000 and carries a strong warning for tech-only investors.

After the bubble burst in March, 2000, the NASDAQ index fell 71 per cent until March 2003, while value stocks regained their footing and outperformed tech for the rest of the decade. For example, Microsoft Corp. reached a high of US$59.56 on Dec. 27, 1999 and dropped to a low of US$15.15 on March 9, 2009, a drop of 75 per cent. It didn’t return to its US$59.56 price until Sept. 27, 2016, a long 17 years to return to break-even.

 

Successful investing is not about how much you make on the upside but how much you avoid losing in the bad markets. If you have a dollar and it drops 75 per cent, you’re left with $0.25, meaning you need to make 400 per cent to get back to break even. In Microsoft’s case, it took almost two decades to do so – most investors don’t have that much time to wait. In today’s market, avoid stocks with high P/E ratios and high betas and you may still be profitable in 20 years.

 

Top Picks

 

Atrion Corp. (ATRI Nasdaq) - Last purchased on August 10, 2020 at US$663

 

Atrion is a leading supplier of medical devices and components to niche markets. Atrion’s proprietary products, ranging from cardiovascular and ophthalmology products to fluid delivery devices, are sold to end-users and distributors worldwide. The stock has traded at its current price level since mid-2017 as revenues have temporarily flattened. However, the company has new products to introduce in 2021 and it just raised its dividend 13 per cent to US$7 a share on higher expectations.

Analog Devices (ADI NASD) - Last purchased on August 10, 2020 at US$116.76

Analog Devices  is a global leader in the design and manufacturing of analog, mixed signal, and DSP integrated circuits to help solve the toughest engineering challenges. Some examples are to help telecoms scale their 4G and 5G networks more quickly and economically. In automotive, it makes road noise cancelling solutions. It’s also active in autonomous driving engineering. Its acquisition of Maxim helps it become a leader in digital health care and high-speed data connectivity for cameras, radars and processors. It’s the leading semiconductor company for electrification. The dividend was raised 15 per cent this year.

Steris PLC (STE NYSE) - Last purchased on August 10, 2020 at US$155.88

Steris provides infection prevention through sterilizers and washers, surgical tables, lights and equipment management systems and endoscopy accessories. Its Life Sciences subsidiary grew 21 per cent in the recent quarter because of demand for sterilization consumables and equipment. The rest of its business has slowed because of a drop in elective surgeries but once things return to normal, they should enjoy rising revenues and profits from all divisions. The company recently increased its dividend 10 per cent to US$1.60 a share.

David Driscoll,

President and CEO

Liberty International Investment Management

Low Interest Rates Mean Higher Valuations

Low Interest Rates Mean Higher Valuations

There is almost no debate that a good portion of the last few months’ stock and bond market reflation has been due to the money pumped into the financial system by governments post-Covid, as well as the oil market collapse. What has been lost in this story is the fact that, contemporaneously, central banks around the globe reduced interest rates to zero. It also appears that interest rates will stay at zero for a good while—and barring a change in the macro environment, rates will stay in a low range for the next five to 10 years. Zero to low rates have great influence regarding the valuations of assets and businesses.

Streams of income that have durability to them will be even more valuable when markets recover, as low interest rates make cash flows from investments such as alternatives even more compelling. Even recently, institutional and retail savers were able to earn ±2% in government bonds, but with all government debt now paying a nil return. Thus, the alternatives of real estate, infrastructure, renewables, private equity and private credit have become even more compelling. It is very likely that long-let property, contracted or regulated infrastructure, long-leased renewables and private credit assets will have higher valuations a year from now than they did a year ago.

As an example, someone who owns an office building that is fully leased to good-quality tenants with rents locked in for the longer term, generating $50 million of cash flow pre-Covid, could take on and service about $700 million of 4% debt and have $22 million cash flow left over for the equity owners. With interest rates dropping, that mortgage is now at approximately 2.25%, meaning the cash flows to the equity have become ±$35 million. The value of the equity on this property was ±$600 million pre-Covid—and today it’s likely ±$1 billion.

A second example concerns the value of an operating business with stable cash flows. Westinghouse, a company we own, provides engineering and technology services to owners of nuclear power plants. It has had extremely stable revenues through the last six months, and we expect that to continue in the future. The EBITDA was $600 million pre-Covid (and still produces that), and at a 10 times multiple of cash flow, that business was valued at $6 billion last year. With approximately $3 billion of debt, the equity was approximately $3 billion. Now, with the world searching for returns and this business having proven its resilience, a multiple of 12 to 15 times is potentially more reasonable. If so, the equity of the business is now approximately $4 to $6 billion, suggesting an increase of upwards of $3 billion over its value at the start of this year.

Of course, the above does not apply for assets where the cash flows are uncertain. Although it is also very possible that many of these assets will also receive higher multiples, it may take time for investors to gain confidence in those income streams so that they can be awarded.

Bruce Flatt

Chief Executive Officer

Brookfield Asset Management Inc.

August 13, 2020

Perspective on Interest Rates

Perspective on Interest Rates

Citi global strategists Robert Buckland expects continued drops in inflation-adjusted bond yields, and that’s not good news for bank stocks (my emphasis),

“Unprecedented global QE [quantitative easing] is keeping a lid on nominal bond yields despite rising inflation expectations. This favours US and EM equities, traditional Cyclicals, IT and Growth strategies. It remains a drag on Defensives and Value. The Japan experience suggests capped nominal yields can be a heavy burden for Financials … QE has two key jobs: stabilize markets and finance deficits. The first has been done, but the second will take years. Hence rates are likely to stay low even if economies recover and inflation picks up. We expect break-evens to keep rising. Overweight traditional Cyclicals, especially commodity stocks. Overweight EM. Underweight Defensives.”

Profit margins on lending for banks depend on the difference between longer terms rates (the ones they charge borrowers) and short-term rates where they borrow the money to lend. Flat yield curves mean low profits on loans.

Scott Barlow,

The Globe and Mail

Overview…Brookfield Asset Management

Overview…Brookfield Asset Management

In the last three months, we had our best fundraising period ever. In total, we raised $23 billion of capital for deployment. At the same time, however, the global shutdown had ramifications on most businesses, including a number of ours. Economies are now slowly re-opening, and while the world is not in the clear yet, things are beginning to get back to some semblance of normality. While we do not expect full recovery of the global economy until well into 2021, we believe the worst is over, and our own businesses are slowly recovering.

Our cash and capital available for investment is substantially greater today than it was six months ago and at any other time in our history. We currently have $77 billion of cash, financial assets, undrawn lines of credit and uncalled capital commitments from clients. We added approximately $23 billion of capital available for investment during the period, which included broad-based fundraising across virtually all our strategies.

The standout was $12 billion of commitments raised to date for our latest distressed debt fund, which we expect will be one of our largest funds raised to date when it has its final close. As demonstrated by this fundraise and the capital deployment so far this year, we believe Oaktree is now poised for significantly higher growth in the current environment, given its contrarian, credit investing focus.

Despite the logistical restrictions of the lockdown, we were active and made a number of investments during the quarter. In general though, we have been keeping our powder dry, waiting for opportunities we believe will come.

The Environment was One to Remember

The market environment was nothing short of stunning during the quarter. It’s not worth going into detail here, as you all know what happened in the markets, with GDP numbers, and with employment. What tends to be forgotten is that interest rates are now zero almost everywhere in the world. Government debt is rising at an unprecedented pace due to the provision of enhanced unemployment support, and more is to come as stimulus spending is just beginning.

The increased levels of government debt will have long-term effects on many things, the most important of which is that governments will have to increase taxes, offload spending onto the private sector, and sell assets. This should bode well for the scaling up of our infrastructure and renewables businesses.

The stock market has rebounded sharply. This reflects the substantial price increases of technology stocks, but it is worth noting that hidden behind this growth is the rest in the S&P 500 trading at an average price/earnings multiple of 23. This multiple is high relative to history but given where interest rates are, it seems more reasonable.

Bruce Flatt

Chief Executive Officer

Brookfield Asset Management

August 13, 2020

Overview...Brookfield Infrastructure Partners L.P.

Overview...Brookfield Infrastructure Partners L.P.

During the quarter, the global economy experienced a sharp retraction due to various measures imposed by governments. Over the past month, we have been encouraged by the return of economic activity with the gradual reopening of economies. While many sectors have been hard hit, the infrastructure sector has demonstrated its very high resiliency of cash flows. As we communicated previously, each of our businesses was deemed essential and has provided largely uninterrupted service throughout this challenging period.

Brookfield Infrastructure generated Funds from Operations (FFO) totaling $333 million in the second quarter, which was relatively consistent with the prior year. Our assets performed well on a local currency basis and only a very small portion of our overall revenue was affected by the global economic shutdown. Results reflect certain timing impacts that should be recovered over time. These include delays recognizing earnings associated with the buildout of a contracted backlog of projects in our U.K. connections business, and reduced traffic on our toll roads, for which we expect to be fully compensated under force majeure provisions in our concession agreements.

Across all geographies where we have GDP sensitive revenues, we have seen strong recoveries in volumes once restrictions were lifted. While we are pleased with the faster than expected recovery, many of these businesses are not fully back to pre-covid levels as certain safety protocols are inhibiting productivity at construction sites and commuter traffic levels are still impacted by employees continuing to work from home. We may not see a full recovery until later in the year or early 2021. However, barring any further shutdowns, the impact of the economic slowdown on Brookfield Infrastructure’s results in the next few quarters should be modest.

Over the past several months we have seen a significant rise in the stock market, as well as the recapitalization of numerous businesses impacted by the slowdown. Consequently, infrastructure asset values have held up and companies that we expected to sell assets to raise liquidity took on more debt as they were able to access the debt markets. Nonetheless, we have a strong pipeline of investment opportunities to deploy our capital and we remain patient in anticipation of large value opportunities that we believe will arise once stimulus measures abate. We have also relaunched various asset monetization opportunities, as the investment market for high quality essential businesses is robust. The stable performance of our mature assets throughout the height of the volatility underlines the value of essential infrastructure businesses. Consequently, we expect high levels of interest from prospective buyers.

 Outlook

Our outlook for the balance of the year is more optimistic than when we last reported in May. While we remain cautious with respect to potential setbacks in the global recovery, we are encouraged by the pace of reopening and strong performance of our businesses. Results for our assets that have volume exposure have been, for the most part, quicker to rebound than we initially anticipated. At many of our businesses, results are ahead of plan for the year as communities emerge out of lockdown and economic activity ramps up further. While our payout ratio in the first half of 2020 is higher than our target range, we believe it will normalize as economic conditions improve and the Indian telecom tower transaction closes. We expect this acquisition to be accretive to our overall cash flows.

In the second half of 2020, we will focus on the execution of capital recycling initiatives. We are confident that the merits of investing in mature, de-risked, cash flow producing infrastructure assets will be more appealing to prospective buyers than ever – particularly with the expectation for low interest rates for the foreseeable future.

Our investment teams around the world are pursuing a number of large and strategic investment opportunities as well as follow-on acquisitions. An ongoing area of focus for us is on data infrastructure. We believe the sector offers significant opportunities given the large-scale investments required to replace the aging copper infrastructure with fiber and upgrade wireless networks to the new 5G standards. With increasing demands placed on their capital, telecom operators are looking for funding partners to reduce the strain on their balance sheets and deliver the next generation networks required to support an increasingly interconnected society. We remain patient in this regard but believe we have laid a substantial amount of groundwork and will aim to advance these opportunities in the coming months. Our liquidity position, combined with access to several sources of capital, will allow us to move quickly when a catalyst emerges for such transactions.

On behalf of the Board and management of Brookfield Infrastructure, we thank our unitholders and shareholders and wish you continued health.

 Sam Pollock

Chief Executive Officer

Brookfield Infrastructure partners L.P.

August 5, 2020

Results of Operations…Brookfield Infrastructure Partners L.P.

Results of Operations…Brookfield Infrastructure Partners L.P.

 During the second quarter our business generated FFO of $0.72 on a per unit basis, down 5% from the prior year. The single largest impact on quarterly performance was the 27% depreciation of the Brazilian real which reduced FFO by $30 million. Adjusting for this alone, FFO per unit would have increased 3% compared to the prior year. Results for the quarter benefited from our capital recycling strategy. We deployed $1.2 billion of capital over the last 12 months at an average going-in FFO yield of 12%. These new investments were primarily funded with $1 billion of proceeds from asset sales and refinancing transactions at a much lower cost of capital. These positive factors were offset by lower market sensitive revenues, which were concentrated in our transport segment because of temporary lockdown measures. Overall, the impact of the economic shutdown reduced FFO by $27 million, with most of this being timing related, and therefore not expected to be a permanent loss.

 Utilities

 Our utilities segment generated FFO of $130 million, compared to $143 million in the prior year. Results reflected a higher rate base due to inflation-indexation and approximately $280 million of capital commissioned in the last 12 months. This segment also benefited from the contribution from our North American regulated gas transmission business acquired last October. These contributions were more than offset by a delay in the recognition of connections revenue at our U.K. regulated distribution business, the loss of earnings associated with the sale of an electricity distribution utility in Colombia and the impact of the weaker Brazilian real.

 FFO for the quarter from our U.K. regulated distribution business was better than we expected. Construction quickly rebounded in May and June as homebuilders reopened their sites, with new connection activity averaging 65% of planned levels throughout June. While physical distancing protocols have limited our ability to add connections at full capacity, construction is now operating at approximately 85% of ‘normal’ levels and continues to improve. The business also recently secured its two largest capital projects of the year, representing approximately 28,000 new connections across four of our utility offerings. These initiatives reflect a rebound in building activity and the positive sentiment we are seeing from home developers. Moreover, this business stands to benefit further given recently announced stimulus to boost national housing demand – from early July 2020 until March 2021, the government has removed stamp duty tax on the first £500,000 of property value. Since these measures took effect, U.K. home sales are approximately 35% ahead of last year.

 The privatization and de-listing process at our Colombian regulated gas distribution business is going as planned. In July, we completed a tender offer and successfully acquired a further 20% of the company for $90 million (BIP’s share – $25 million). We now own 75% of the business alongside our institutional partners. We are currently working through the final steps to de-list the company, which should be completed in the coming weeks.

 The build-out of our electricity transmission operation in Brazil is progressing well. Despite the implementation of social distancing protocols, productivity is high and is generally consistent with prior years. We commissioned approximately 400 kilometers of transmission lines during the quarter and construction of the remaining 3,300 kilometers is on plan.

 Transport

 FFO from our Transport segment was $108 million compared to $135 million in the prior year. Results reflected higher volumes across our Australian and Brazilian rail networks, as well as the contribution from our recently acquired North American rail operation. These positive factors were more than offset by the loss of earnings associated with the sale of a European port business and the partial sale of our interest in our Chilean toll road operation. Results were also affected by a weaker Brazilian real and lower volumes following governmentimposed lockdowns, which together reduced results by $29 million. Among these factors, (i) foreign exchange accounted for $14 million and (ii) $13 million relates to lower volumes at our toll roads, for which we expect to be compensated, based on force majeure protections and ongoing dialogue with local regulators. The true economic impact from the downturn is therefore limited to $2 million (or less than 1% of BIP’s total FFO) in our port operations.

 Energy

 Our energy segment generated FFO of $106 million compared to $96 million in the prior year. Performance was insulated from the current economic environment, as over 75% of cash flows are underpinned by take-or-pay contracts with an average maturity of 11 years. Results benefited from higher transport volumes at our North American natural gas pipeline, over 55,000 new customers at our North American residential infrastructure business and the contribution from the federally regulated portion of our western Canadian midstream business acquired in December. These contributions were partially offset by the loss of income associated with the sale of our Australian district energy operation completed last November.

 Despite volatility in the global energy markets, our Canadian natural gas midstream operation recorded results that were ahead of prior year levels. This performance reflects the attractive contract profile, with over 85% of revenue earned under long-term, take-or-pay arrangements with primarily investment grade counterparties. Given the solid liquidity position of our counterparties, we do not foresee any significant concerns arising from a prolonged period of lower commodity prices. The Montney basin has impressive long-term economics due to high liquids yields, therefore most producers have a long-term supply cost less than current commodity prices.

 Our North American residential energy infrastructure operation continues to operate with strong durability. Results reflect the fulfillment of good customer demand for cooling equipment, and our U.S. “sales to rental” strategy that has gained substantial momentum, achieving record HVAC rental conversion rates of over 55%. We are also making progress with our Canadian expansion outside of Ontario, having secured over 3,000 new long-term contracts in western Canada during the quarter. Following the securitization financing at our Canadian rental business in 2019, we have been exploring ways to further optimize our capital structure and efficiently fund growth. In that regard, we are working on a securitization financing at our U.S. business which we expect to have completed during the second half of the year.

 The stability of our North American district energy operation has been showcased in recent months. This business serves a highly diversified customer base across multiple geographies and industries and generates almost all its EBITDA from volume agnostic capacity contracts. Throughout this period, we advanced several expansion projects and are seeing heightened interest from prospective customers looking to minimize the upfront capital spend associated with purchasing standalone heating and cooling equipment. Construction remains on target for the eastward and westward expansion of our Toronto system, which have the potential to collectively increase EBITDA by approximately $20 million when commissioned.

 Data Infrastructure

 FFO from our data infrastructure segment was $43 million, which was 43% higher than the prior year. Our French telecom business benefited from inflationary price increases and our build-to-suit tower program, which has added over 200 new sites. Results also reflected the contribution of earnings associated with recently acquired data transmission and distribution operations in New Zealand and the United Kingdom.

 Our South American data center business finalized an agreement to build two new hyperscale facilities in Mexico that will add 36 megawatts of storage capacity over the next few years. These facilities will require $330 million of capital and are anchored by long-term, U.S. dollar denominated take-or-pay contracts with a leading global technology company. The initial phase is scheduled to come online in 2022 and is expected to contribute $50 million of EBITDA on a run-rate basis. Since investing in this business just over a year ago, we have increased contracted capacity by 24% and secured expansions into both Chile and Mexico, expanding the company’s existing footprint outside of Brazil.

 At our New Zealand data distribution business, we have made progress with the margin improvement program that was core to our investment thesis. At the time of acquisition roughly one year ago, we identified a comprehensive multi-year, cost-out initiative to drive EBITDA margin expansion from low-20% to mid-30%. Our team is focused on reducing expenses, rationalizing non-core product offerings, and improving utilization of our utility-like broadband and wireless services. We expect these efforts, in combination with other activities underway, to result in annual FFO growth of approximately 10% over the next five years.

 Our U.K. tower business continues to perform in line with our underwriting and has been successful in activating two new indoor systems in marquee buildings across the U.K. since closing at the end of 2019. This segment is expected to demonstrate good growth momentum as in-building connectivity remains a critical utility-like service for landlords and tenants with approximately 80% of mobile usage happening indoors. In light of this success, we are exploring the potential to export the in-building wireless model to other geographies where Brookfield has a large real estate presence to facilitate our market entry. Given the over 300 million square feet of owned office and retail real estate, we believe this could represent a significant growth opportunity.

 Balance Sheet & Funding Plan

 Our liquidity position is robust with approximately $4.3 billion of total liquidity, including approximately $3.2 billion at the corporate level. The business is further supported by a healthy investment grade balance sheet, and we have no material debt maturities for the next several years. During the quarter, Brookfield Infrastructure’s credit rating was reaffirmed at BBB+.

 We have completed over $2.0 billion of financings so far this year. Our ready access to low cost debt capital is due to our conservative financing structures and many years of developing a track record as a high-quality borrower. We recently completed our first asset-level green bond issuance at the metered services operation of our North American residential energy infrastructure operation. The 10-year issuance of C$150 million priced at a coupon of approximately 3.8%.

Sam Pollock

Chief Executive Officer

Brookfield Infrastructure Partners L.P.

August 5, 2020

Update on Strategic Initiatives…Brookfield Infrastructure Partners

Update on Strategic Initiatives…Brookfield Infrastructure Partners

 The economic cost of the downturn will be that many industrial companies and all governments will be significantly more indebted. Once the immediate measures to stabilize economies and businesses have been implemented, governments and businesses alike will need to evaluate alternatives to source capital to repay excessively high debt levels. We have spoken in the past about the secular trend of governments seeking investment from the private sector to acquire and build out infrastructure. With inflated deficits, along with the desire to stimulate economic activity, we expect the impetus for this to become even more pronounced. In addition, many corporations will be susceptible to tighter credit markets and they will need to reduce debt levels through asset sales. Suffice it to say, this is an attractive environment for Brookfield Infrastructure to source investment opportunities for the foreseeable future.

 At the moment, the vast majority of our global investment team have returned to the office, which has reinvigorated our transaction and outreach activities. We are currently focused on executing several medium sized tuck-in acquisitions for various businesses in our energy, transport and data operations. As a result of the potential synergies, we believe that these acquisitions should be highly accretive if secured. Furthermore, we are evaluating numerous new investment opportunities in all of our regions.

 During the quarter we made progress on various initiatives:

 • North American Electricity Transmission – The sale of our North American electricity transmission operation closed in July, resulting in $60 million of proceeds to BIP and an IRR of 21%. We are advancing two other asset sale processes that we expect will generate over $700 million of additional liquidity. We believe that essential and de-risked infrastructure businesses that performed uninterrupted throughout this recent period will attract strong interest at premium prices.

 • Indian Telecom Towers – The closing of our large-scale acquisition of 130,000 telecom towers in India from Reliance Jio is expected shortly. We have received positive feedback recently from Indian regulators that the remaining approvals are on track. Since we signed our deal, Reliance Jio has raised approximately $20 billion of equity capital from technology companies and private equity investors which has further solidified the credit quality of our anchor tenant. We will invest approximately $500 million of equity (BIP’s share) in the business.

 • Capital Markets Investments – During the broad market sell-off in March, we acquired stakes in several high-quality infrastructure companies at attractive entry points. The ensuing rebound allowed us to monetize some of our positions and realize substantial profits in a short period of time. We have fully exited a number of these investments, realizing total profits of approximately $40 million (BIP’s share – approximately $25 million). We continue to accumulate positions in a handful of companies that we hope will lead to broader strategic initiatives in time.

 • U.S. Midstream – Dislocation in North American energy markets may provide unique opportunities to invest at value. Our focus is on highly contracted businesses with solid counterparties, limited exposure to volume and pricing risk and long-life, critical infrastructure that complements our existing operations. We believe several opportunities exist to implement this strategy, both in the public and private markets.

 Lastly, we are very pleased with the market’s response thus far to Brookfield Infrastructure Corporation (BIPC). Not only has there been significant demand for these shares but BIPC was also recently added to the Russell 2000 Index. We intend to support the growth of BIPC’s public float to improve the company’s trading liquidity, and recently completed our first initiative in this regard in coordination with Brookfield Asset Management, who agreed to sell a portion of its holdings in BIPC. This successful secondary offering in Canada increased the public float of BIPC by approximately 15%.

 Sam Pollock

Chief Executive Officer

Brookfield Infrastructure Partners L.P

August 5, 2020

Brookfield Renewable Partners Spinoff of Corporate Shares

Brookfield Renewable Partners Spinoff of Corporate Shares

When I checked my portfolio recently, I discovered 195 BEPC shares along with my original 780 BEP.UN units. Where did these new BEPC shares come from?

On July 30, Brookfield Renewable Partners LP (BEP.UN) completed a special distribution – or unit split – in which investors received one share of a new company, Brookfield Renewable Corp. (BEPC), for every four BEP.UN units held.

The purpose of the unit split – similar to one completed in March by Brookfield Infrastructure Partners LP (BIP.UN) – is to increase demand from retail and institutional investors who are unable or unwilling, for tax or other reasons, to hold limited partnership units. The BEPC shares give investors, including exchange-traded funds, a way to access Brookfield Renewable’s global portfolio of hydro, wind and solar facilities through a traditional corporate structure.

Will the BEPC shares pay a dividend?

Yes. BEPC shares and BEP.UN units will pay the same quarterly dividend/distribution of 43.4 US cents, with the next payment scheduled for Sept. 30. The key difference is that BEPC’s quarterly payments will consist entirely of eligible dividends that qualify for the Canadian dividend tax credit (DTC), whereas BEP.UN’s distributions have typically included a mix of eligible dividends, foreign income and return of capital. This makes BEPC’s new shares attractive for non-registered accounts, where the DTC reduces tax payable.

Will my BEP.UN units pay the same distribution as before or is the payout reduced?

To reflect the unit split, BIP.UN’s payout is being reduced by 20 per cent. However, including dividends from your BEPC shares, you will receive the same pretax quarterly income, in aggregate.

What is the adjusted cost base (ACB) of the BEPC shares? And what happens to the cost base of my BEP.UN units?

If you hold BEPC or BEP.UN in a registered account, the ACB of your investment is irrelevant. However, if you’re investing in a non-registered account, you’ll need to know the ACB of your BEPC shares and BEP.UN units in order to calculate your capital gain or loss when you eventually sell. According to information provided by Brookfield Renewable, the ACB per share of the BEPC shares is $58.28, as determined by the volume-weighted average price of BEPC on its first five trading days on the Toronto Stock Exchange. To calculate the new ACB per unit of your BEP.UN units, subtract the total cost base of your BEPC shares – and any cash received in lieu of a partial share – from the total cost base of your BEP.UN units before the split, then divide by the number of BEP.UN units you hold.

The BEPC shares are “exchangeable.” What does that mean?

BEPC shares are exchangeable on a one-for-one basis for BEP.UN units, but I don’t recommend it. BEPC shares are trading at an 8.3-per-cent premium to BEP.UN units – the shares and units closed at $62.28 and $57.50, respectively, on Friday – so you would be throwing money away by making such a swap now. Unfortunately, the exchange option only goes one way: You can’t exchange your BEP.UN units for BEPC shares. There is nothing to stop you from selling BEP.UN and buying BEPC, or vice versa, but be mindful of any capital gains tax that would apply.

Which is better, BEPC or BEP.UN?

If you are investing primarily for income – and doing so in a registered account where the dividend tax credit is moot – BEP.UN might look more appealing, as it is yielding about 4 per cent compared with BEPC’s yield of about 3.7 per cent. However, it’s possible that BEPC could widen its price premium over BEP.UN, in which case BEPC might be the better pick because of its potential for greater capital gains. Note that when Brookfield Infrastructure completed its split, BIPC shares initially traded in a tight range with BIP.UN. But BIPC shares soon began to pull away; they now trade at a 13.5-per-cent premium to BIP.UN. Evidently, there has been strong investor demand for the corporate shares.

Regardless of which vehicle you choose, I expect that you will be rewarded over the long run with capital growth and rising income. Brookfield Renewable has a deep pipeline of growth projects, a track record of successful mergers and acquisitions and the backing of parent Brookfield Asset Management (BAM.A). Brookfield Renewable is aiming to raise its dividend/distribution at an annual rate of 5 per cent to 9 per cent, so whether you choose shares or units, your income will almost certainly grow for many years to come.

John Heniz, The Globe and Mail