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
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