Perhaps the most
commonly successful corporate trait is an emphasis on cost control but with
exceptional firms like Brookfield it’s embedded deep in their corporate culture
and becomes, over time part of who they are…Maximizing the utility of their
debt profile resounds all through this letter.
Overview
As we look back on 2019, it was an exceptional year for
Brookfield Infrastructure. Our financial results and operating performance were
strong and we added high-quality assets to each of our operating segments.
Funds from Operations (‘FFO’) totaled $1.38 billion or $3.40 per unit, an
increase of 11% on a comparable basis and 9% on a total basis, over 2018.
Operating conditions during the year were favorable in all regions, enabling us to execute our full cycle
investment strategy of acquiring high-quality assets, creating value through
active asset management, and recycling capital on an attractive basis. The
capital markets were also strong, allowing
us to raise equity to fund growth and to secure debt at historically low
interest rates.
The following is a summary of our key accomplishments during
the year:
• $2.6 billion of new investments – significantly expanded our data
infrastructure segment and added a largescale North American rail business to
our portfolio. These new investments are expected to generate an average
going-in FFO yield of 12% and provide attractive organic growth opportunities.
• Organic growth of
9% – achieved solid performance across all operating segments, with organic
growth at the high end of our 6% to 9% long-term target range.
• $1.5 billion of
capital recycling proceeds – the sale of six mature assets and several
financings generating proceeds of approximately $1.5 billion and resulting in
an average after-tax IRR and multiple of capital of 17% and 2.6 times,
respectively.
• Announced
Brookfield Infrastructure Corporation (BIPC) – establishing this publicly
traded company will enable us to make the company more accessible to a broader
base of investors. We are on track to launch BIPC at the end of March.
As a result of our strong financial and operating
performance, robust liquidity position and positive outlook for the business,
our Board of Directors approved an
increase to our quarterly distribution of 7% to $0.5375 per unit in 2020. This
is at the mid-point of our 5% to 9% target and represents the 11th consecutive year of distribution increases.
Brookfield Infrastructure’s units also performed exceptionally
well this year, returning 52% and 44% on the NYSE and TSX, respectively. More relevant for long-term focused unit-holders,
our 5-year and 10-year annualized returns of 18% and 22%, respectively,
have considerably exceeded performance of the broader market, as well as all
the relevant benchmarks of our peer group.
Results of Operations
Results for 2019 reflect solid organic growth and the execution of our asset rotation program. FFO
of $1.38 billion benefited from organic growth of 9%, and contributions from
new investments. Our per unit FFO was impacted by equity capital that was
raised earlier this year and not yet fully invested and contributing to
earnings. Excluding this impact, our FFO per unit would have increased by 11%
compared to the prior year.
Our
utilities segment contributed FFO of $577 million in 2019. This is
consistent with the prior year, which included the contribution of
approximately $25 million from the Chilean electricity transmission business
sold in 2018. The segment generated organic growth of 8%, reflecting
inflation-indexation and $300 million of capital commissioned into rate base.
Results also benefited from the initial contribution of the North American
regulated natural gas transmission business acquired in October. These
contributions were partially offset by the weakening of foreign currencies,
which lowered results by $14 million.
Our U.K.
In October, we completed the acquisition of two operating
natural gas transmission assets in North America
and integration efforts are progressing well. These regulated assets operate under a take-or-pay arrangement with an
investment grade counterparty that extends through 2041. In December, the
capital structure of one of the pipelines was optimized through the refinancing
of existing asset level debt and the issuance of an incremental $330 million
facility with a 20-year final maturity.
The implementation of these financing initiatives reduced the weighted average
cost of debt by 30 basis points and extended the weighted average maturity
profile by three years.
Our
transport segment generated FFO of $530 million, compared to $518
million in the prior year. Organic growth of 5% was driven by GDP-linked volume
increases and higher tariffs across most of our operations. The segment
benefited from strong agricultural rail volumes in Australia
and Brazil U.K.
In 2019, our U.K.
FFO
from our energy segment was $412 million, an increase of 53% over the
prior year. This significant increase is primarily attributable to the $1.2
billion of capital deployed to acquire two North American businesses in late
2018 and a natural gas pipeline in India North
America .
FFO
from our data infrastructure segment totaled $136 million in 2019, an
increase of over 75% relative to 2018. This step change in FFO was a result of
contributions related to capital deployed at our French telecommunications
business, as well as four new investments which enabled us to establish our global data infrastructure franchise.
These acquisitions include three data storage operations in the U.S. , Brazil
and Australia , as well as an
integrated data distribution business in New Zealand
Our French telecommunication business has been supporting
customers with several large-scale organic growth projects. Through its
build-to-suit tower program, the business has strengthened relationships with
major mobile network operators by assisting them in meeting their national
coverage requirements. We commissioned 245 towers in 2019 and expect to have a total of approximately
1,000 build-to-suit towers operational in the first half of 2020. Additionally,
our fiber-to-the-home deployment is ahead of underwriting, with almost 35% of
the portfolio now built or under construction and the first network scheduled
to be completed in the first quarter of 2020.
Balance Sheet & Funding Plan
A key element of our
investment strategy is to finance our businesses with long-term debt at
attractive fixed interest rates. Financing markets remain very strong and
credit investors are seeking exposure to high-quality infrastructure assets
like the ones we own. As a result, we continue to identify opportunities to optimize the capital structure at our
operating businesses and secure attractive all-in rates. During the fourth
quarter, we closed financings for new acquisitions, and opportunistically
enhanced the debt profile of several existing businesses.
The most noteworthy acquisition financing this quarter was
$2.6 billion of financing in the institutional term loan market to fund the
acquisition of our North American rail business. This debt issuance was heavily oversubscribed, as credit investors seek
high-quality names that are financed at prudent levels. We achieved
enhanced pricing and terms that are consistent with high-quality investment
grade issuers. We raised seven-year financing with attractive terms and a
coupon of LIBOR + 200 basis points.
We capitalized on favorable markets to re-do the financings
of several existing businesses in our portfolio. We raised approximately C$2
billion at our North American residential energy infrastructure operation to refinance existing higher cost debt in
the business. We also recently refinanced the debt at our U.K.
Despite a year of outsized capital deployment, our balance sheet remains healthy with $3.0
billion of total liquidity, including $1.9 billion at the corporate level.
We are also making good progress on the next phase of our capital recycling
program, completing three asset sales announced last quarter. The sale of our
Australian district energy and distribution business closed in November (BIP
proceeds – $280 million). The divestment of our regulated distribution
operation in Colombia
Furthermore, during the fourth quarter, we signed a binding
agreement to sell our North American electricity transmission operation for
proceeds of approximately $60 million to BIP. We established this business over
a decade ago as part of a government-led program to support renewable power generation
in Texas
Spotlight on Value Creation
Our investment strategy consists of three core components: (i) we buy high-quality infrastructure
assets at attractive entry points, (ii) we employ an active asset management
approach and (iii) we monetize assets at their full value potential and start
over again by investing into higher returning opportunities. Our deep
operating expertise is central to the second component of our strategy. During
each year of ownership, but particularly
in the early years after we acquire a business, we identify and implement
initiatives that increase the value of our businesses. Value is created through
various means, including margin improvements, revenue growth, as well as
capital structure optimization. Since the acquisition of Enercare in late
2018, we have been focused on several initiatives that highlight our active
approach to asset management.
Enercare is a leading provider of essential residential
energy infrastructure such as water heaters, furnaces, air conditioning
(“HVAC”) systems and other in-home services. The business operates in a sector
and region that we understand well and this business shares a number of similar
features with our U.K. Canada and significant
growth potential in the U.S. U.S.
Since we acquired the business, it was our belief that
Enercare’s capital structure was not optimal given the contracted cash flow
profile of the business. Enercare has over one million long-term rental
contracts with low rates of attrition, consistent real price growth, and high
renewal rates. We examined available financing structures and ultimately
concluded that Enercare’s Canadian rental business was uniquely positioned for
a securitization financing. In December, we recapitalized the business through
the issuance of approximately C$2 billion of primarily AAA-rated securitized
debt. This is a marquee financing, as it
is the first of its kind for this type of business in the Canadian market. The
proceeds were used, in part, to redeem C$1.4 billion of public bonds, and we
achieved an overall reduction in the cost of debt by 50 basis points while also
substantially improving the credit rating of the assets (from BBB low to
primarily AAA). The securitization facility also provides a mechanism to
efficiently fund organic growth and future tuck-in acquisitions, thereby
reducing the need to inject capital to fund growth. This financing was very
accretive to our underwriting and improves the competitiveness of the business.
To facilitate rental growth in the U.S. Texas
With the Canadian securitization complete and additional
growth strategies underway (that will be financed in a much more accretive
manner), we are well-positioned to expect equity returns in the high teens and
potentially higher, exceeding our conservative base case underwriting for this
business.
Update on Strategic Initiatives
The fourth quarter was very active from an investment
perspective. In December, we expanded our data infrastructure segment
committing nearly $1 billion (BIP’s share) in three separate transactions. This
includes the previously disclosed Indian
Telecom Towers
• U.S.
Data Transmission and Distribution Business – In late December, we
agreed to acquire 100% of Cincinnati Bell Inc. (“CBB”) in a take-private
transaction investing $480 million (BIP’s share). CBB is a leading fiber-to-the-home business in the U.S. , serving approximately 1.3 million
residential and business customers in greater Cincinnati
and Hawaii
• U.K.
Telecom Towers – In December, we completed the acquisition of a U.K. U.K.
and has significant potential to
leverage Brookfield ’s real estate holdings to
expand into other jurisdictions outside of the U.K.
At year end, we closed the previously announced acquisition
of Genesee and Wyoming
We have also made advancements in the formation of
Brookfield Infrastructure Corporation (BIPC). Subject to receipt of regulatory
approvals, BIP expects to complete the special distribution of class A shares
of BIPC to BIP’s unit-holders in the first half of 2020.
BIPC will provide investors with an alternative way to gain
exposure to our global infrastructure business. We believe a corporate entity
will be attractive to many investors, particularly in the U.S. and Europe ,
who have historically been averse to our partnership structure. BIPC’s class A
shares will be structured with the intention of being economically equivalent
to BIP LP units, including by having the right to receive identical
distributions; BIPC’s class A shares will also be exchangeable into LP units
(or the cash equivalent, at BIPC’s sole discretion) at any time, as well as
provide simplified tax reporting and other tax advantages.
Outlook
We have entered 2020 with both positive and negative
developments in regard to global growth. The signing of Phase I of the trade
deal between the U.S. and China China China
Looking beyond current headlines, our business is well
positioned for continued growth and our outlook remains positive. We anticipate
delivering another year of organic growth at the high end of our 6 to 9% target
range. We are focused on executing the next phase of our capital recycling
program and it is on track to raise a further $1.5 billion. We plan to redeploy
this capital into higher yielding new investments which should provide for
another period of outsized FFO growth. While
quarterly results this year may be impacted by the timing of new investments
and sales, we anticipate that our run-rate exit FFO per unit in 2020 will be
12-15% higher than current levels.
The past year was one of the most active and dynamic in our
company’s history. On behalf of the Board and management team of Brookfield
Infrastructure, I would like to thank our unit-holders for their ongoing
support. I look forward to updating you on our progress throughout the year
ahead.
Sincerely,
Sam Pollock
Chief Executive
Officer
February 10, 2020
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