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

Resiliency in Uncertain Times – Spotlight on Regulated Terminal...Brookfield Infrastructure Partners

Resiliency in Uncertain Times – Spotlight on Regulated Terminal...Brookfield Infrastructure Partners

We often characterize BIP as an investment for all seasons, highlighting the recession resistant characteristics of our business. Our cash flow profile is stable and predictable which is a function of the regulated and contracted nature of our assets.

A great example of this resilience through market cycles is our Regulated Terminal in Australia. As background, the terminal serves as a critical link in the global steel supply chain from one of the highest-quality and lowestcost basins in the world (the Bowen Basin). This fully regulated terminal operates under an established regime and has long been a steady contributor within our utilities segment.

The business has the key characteristics that we look for in infrastructure assets:

• Strategically important asset that is an essential link to global export markets and supported by a highquality and long-life resource

• Established regulatory framework provides a utility-like risk profile, and stable and predictable cash flows with a full pass-through of operating and maintenance costs

• No volume or commodity exposure as revenues are earned under long-term, take-or-pay arrangements

• Robust downside protection with a mechanism for socializing costs amongst counterparties in the event of a default and no force majeure provision in customer contracts

• Creditworthy counterparty profile comprised of some of the world’s largest mining companies

For these reasons, the economic slowdown had virtually no impact on the operational and financial performance of the business. Similarly, in the past, we have had experiences with extreme weather events, where this business continued to receive full revenue payments despite the terminal being unable to operate for periods of time.

Brookfield Infrastructure acquired the Regulated Terminal at an attractive entry point in 2009, as part of the multifaceted recapitalization of Babcock and Brown. Over 10 years of ownership, we have created value in several ways – (i) we executed significant capital projects that increased the regulatory rate base, (ii) we enhanced operating efficiency by improving working capital requirements and (iii) we reduced the cost of capital through opportunistic financing initiatives. This has, to date, resulted in returns of close to four times our invested capital.

Sam Pollock

Chief Executive Officer

Brookfield Infrastructure Partners L.P.

August 5, 2020

Doubling Down for a Renewable Future

Doubling Down for a Renewable Future

We have been building our renewable power business for the past 25 years, but the technological and manufacturing advances in the solar industry over the past five years may make the next 25 years even more exciting than the past 25. For context, we own approximately $10 billion worth of shares of our renewable partnership, in addition to the fee income that results from our managing renewables investment funds on behalf of our clients. As a result, this is a very meaningful part of our business, and we expect it to become much larger.

Our renewables partnership has a ±$20 billion equity capitalization, and along with other client capital we manage, this backs ±$50 billion of operating assets, a substantial development pipeline, and a depth of expertise across solar, wind and hydro renewable facilities.

Only five years ago we were not investing in solar because of the high cost of construction, subsidies required to enable projects to earn a reasonable return, and technology issues. Today, solar no longer requires subsidies in many countries and is amongst the lowest-cost sources of power globally. As a result, in a very short time we have added 3,000 megawatts of solar to our operations and have an additional 10,000 megawatts under development. To put this in perspective, solar panel costs are now 25% of what they were seven years ago. At that build cost, solar is very competitive in most markets, and it has the added benefit of being the most renewable.

 We recently completed the merger of TerraForm Power into Brookfield Renewable on an all-stock basis. TerraForm Power was one of the largest owners of solar globally prior to its bankruptcy in 2016. We acquired approximately 60% of it through a financial restructuring, implemented a new operating plan, and restarted the growth of the business. This has given all TerraForm shareholders, including us, a 35% compound return and over a tripling of value since our involvement with the business began.

More recently, we agreed to acquire a 1,200-megawatt solar development project in Brazil. This is one of the largest solar development projects in the world, and it will require both our development and energy marketing capabilities to bring the project to completion. We should be able to drive down procurement, installation and operating costs to deliver further value over time, which could make this an exceptional investment.

We continue to believe we are in the early innings of significant growth in renewables, and we are doubling down on this. We believe our disciplined cash flow focus and our global operating platform will continue to enable us to generate value from this sector for many years to come. With the growth we foresee, it appears that 10 years from now, solar will likely be the largest sector of our renewables business. That’s quite a change from five years ago, when we weren’t convinced it represented a prudent investment.

 Bruce Flatt

Chief Executive Officer,

Brookfield Asset Management Inc.

August 13,2020

 

Data Infrastructure is the Next Frontier

Data Infrastructure is the Next Frontier

 For a number of years, we have been investing in the backbone infrastructure behind the internet and mobile phones. We have now reached critical mass with these investments, and as a result they will constitute an increasingly meaningful part of our business.

 Most importantly, we are in the midst of a once-in-a-hundred-year upgrade cycle for data infrastructure. The aging copper infrastructure is no longer able to cope with demands imposed by an increasingly interconnected world. These networks are therefore being replaced by fiber infrastructure, which can support increases in data demand, lower latency and faster broadband speeds. Concurrently, wireless networks are undergoing a transformation to support enhanced connectivity for 5G that is fast coming.

 On a combined basis, these upgrades are expected to require trillions of dollars of capital globally over the next five to seven years. Historically, such investments were funded by telecom operators, but given increasing demands on their capital, they are now seeking funding partners. They are also increasing their reliance on neutral-host, shared infrastructure models to enhance their return on capital.

 Our original thesis for investing in data was based on the belief that data infrastructure assets have utility-like characteristics with favorable growth trajectories and play a central role in connecting people, places and objects. The importance of these networks was further reinforced during the pandemic, as access to robust and reliable connectivity became a basic need for performing routine activities such as working from home, remote learning and telemedicine. This was exemplified by our U.K. fiber networks, where average data consumption increased 40% compared to the same period last year.

 As we expand our operations, we now are reaping the benefits of being one of the largest owners of cell tower portfolios globally, with a contracted base of over 180,000 sites in six countries. In addition, we continue to grow our data center business with approximately 70 sites in 14 countries able to serve the scale and latency requirements of a diverse customer base, and we have fixed and wireless networks serving over 2.5 million residential and enterprise customers.

 There are also exciting opportunities embedded within our broader business. Continued adoption of cloud computing is expected to require very substantial incremental data center capacity over the next decade. At the same time, the users and operators of these facilities are focused on achieving their stated carbon reduction targets. We are well positioned to help support these goals. Combining our renewables group activities with our data center offerings could be a game changer for us.

Bruce Flatt Chief Executive Officer,

Brookfield Asset Management Inc.

August 13, 2020