Brookfield Infrastructure Partners LP

Good day, ladies and gentlemen, and welcome to the Brookfield Infrastructure second quarter conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star and then zero on your touchstone telephone. As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, Mr. Bahir Manios, Chief Financial Officer. Sir, you may begin.

Thank you, operator, and good morning, everyone. Thank you all for joining us, for joining Brookfield Infrastructure Partners' second quarter earnings conference call for 2019. Joining me on the call today is Sam Pollock, our chief executive officer, and Ben Vaughn, our chief operating officer. Following our remarks, we look forward to taking your questions and comments. At this time, I'd like to remind you that in responding to questions and in talking about our growth initiatives, and our financial and operating performance, we may make forward-looking statements. These statements are subject to known and unknown risks, and future results may differ materially. For further information on known risk factors, I'd encourage you to review our annual report on Form 20F, which is available on our website. Moving on to our operating report this morning, I'm pleased to discuss our results of operations for the second quarter and provide you a quick update on our liquidity positions. We reported another strong quarter with funds from operations or FFO of $337 million or $0.85 per unit for the three months ended June 30, 2019. This represents increases of 15% and 13% respectively over the same quarter of the prior year. The second quarter results are the first to reflect the full benefit of the most recent phase of our asset rotation strategies. To summarize this strategy, last year we generated combined proceeds of $1.5 billion from selling an interest in a mature, de-risked electricity transmission business in Chile and completing a financing at our Brazilian regulated gas transmission business. These monetizations occurred at values that represented a 7% average FFO yield, and the proceeds were subsequently redeployed into seven higher growth businesses across our utilities, energy, and data infrastructure segments that generate, on average, a going-in FFO yield of 12%. The value created through this phase of capital recycling is meaningful. In this quarter alone, it contributed incremental FFO per unit of almost 5 cents on a per-unit basis, and on an annualized basis, it should benefit our FFO by approximately $75 million. Thank you. Our results for the quarter also benefited from both organic growth and the contributions from capital recently deployed in new investments. Our FFO also grew organically by 10% relative to the prior year, marking the second consecutive period of growth that exceeded our annual long-term target of 6% to 9%. Contributing to this outsized growth, our volume increases that averaged 2% across our business inflation indexation of approximately 3%, and earnings generated from the commissioning of almost $650 million of capital expansion projects that were completed during the last 12 months. FFO from our utility segment totaled $143 million for the quarter, compared to $139 million in the prior year. The business delivered organic growth of 10%, primarily the result of $275 million of from projects that were commissioned into the rate base this last year, and the benefit of inflation indexation across our portfolio. These positive factors were partially offset by interest charges associated with the debt financing completed in the prior year at our Brazilian regulated gas transmission business, as well as the impact of foreign exchange. Within our utility segment, we recently agreed to construct another 900 kilometers of transmission lines. to expand our existing Brazilian electricity transmission business. We expect this line will require $30 million of capital from Brookfield Infrastructure and will be completed in 2021. Inclusive of this project, we're currently in the process of building almost 5,200 kilometers of lines in the country, which will provide very attractive risk-adjusted returns under 30-year contracts. Our transport segment contributed FFO of 135 million compared to 133 million during the same period of 2018. Results in the quarter benefited from volume growth across our ports and toll road businesses, as well as rising tariffs, which were 4% higher than those earned in 2018. These positive contributions were partially offset by the impact of the sale of a 33% interest in our Chilean toll road operation that closed in February. Within our transport segment, I wanted to do a bit of a spotlight this quarter on our global ports business. This operating group generated FFO of $26 million, representing an 18% increase over the prior year. The year-over-year increase was driven by strong volumes globally, which increased by 10%, in addition to a 5% improvement in rates. In particular, our UK port operation reported another excellent quarter, with container volumes exceeding the prior year by 5%. This was predominantly the result of new customer mandates and increased economic development in the area surrounding our port line. In Australia, revenue at our container terminal was 8% ahead of the prior year, primarily due to new services that commenced in the second half of 2018 and higher average tariffs. And finally, our North American ports business recently won a new contract that will add approximately 2,000 moves per week at our Los Angeles terminal. We expect the service to increase EBITDA generated by this business by approximately 10%. FFO from our energy segment was $96 million, which is a 78% increase relative to the prior year. The increase was mainly attributable to the $1.2 billion of capital deployed in the last nine months to acquire a North American residential infrastructure business, a Canadian midstream operation, and a natural gas pipeline in India. Additionally, results benefited from higher natural gas transportation volumes, and the commissioning of capital expansion projects at our U.S. gas transmission business. I'll highlight two businesses within this segment this quarter. First, at our North American District Energy business, construction is underway on a large thermal storage site that will serve as a hub to expand our deep lake water cooling system in the western corridors of downtown Toronto. This particular area of the city is undergoing significant redevelopment, and we believe there is potential to add over 50 buildings to our network over the long term. This project will require approximately $20 million of capital from Brookfield Infrastructure and is expected to generate substantial returns once it's commissioned in 2021. Second, at our North American residential infrastructure operation, we are successfully advancing our growth plans in the U.S. During the quarter, we completed a $30 million acquisition of a business based in Phoenix, Arizona, that services 12,000 heating, ventilation, and air conditioning, or HVAC, customers. This acquisition expands our presence to a new, fast-growing region of the country, and our business will benefit as these service contracts are converted into long-term rental contracts over time. With the highly fragmented residential infrastructure segment in the U.S., we believe there will be additional opportunities to complete tuck-ins and build scale on an accretive basis. Also, our business recently launched its pilot program with a utility in Texas to offer our residential infrastructure projects to a large subset of its current client base. Early indications and feedback show that the program has been well received. Lastly... Customer adoption of our lease offering for heating, ventilation, and air conditioning equipment has proven very strong in the U.S. and has significantly exceeded our expectations. Our data infrastructure segment generated FFO of $30 million in the second quarter, a 58% increase over the prior year. The increase was primarily the result of contributions from new investments that we recently made in a global data center portfolio. as well as the benefits of inflationary price increases and new towers added to the network at our French telecommunication business. The second quarter of this year was the first period to see full contributions from the capital we have deployed to establish a large-scale global data center platform. Today, our business is well diversified and includes 49 facilities on four continents. Integration efforts are now largely complete, and the various businesses we acquired are performing in line with expectations. In our South American data center business, we have focused on the build-out of several new sites, which are all underpinned by attractive long-term contracts to investment-grade global hyperscale customers. So far this year, we have commissioned four new data centers and added 21 megawatts of capacity. We expect to construct two new centers this year, which will add a further 18 megawatts of capacity. The total expected capital spent for these projects is approximately $290 million, with BIP share being $35 million. And upon completion, these new sites will more than double our current EBITDA in this business. In addition, we're also on track to complete our first data center network in Chile by 2020, and we're preparing for future expansion into Colombia and Mexico. And finally, before I conclude my remarks today, I wanted to touch briefly on our liquidity position. Our balance sheet continues to be healthy with total liquidity of $3 billion, with almost $2 billion of that residing at the corporate level. Recently, in July, we added to our liquidity position by way of an equity issuance of approximately 20 million units, which provided capital of approximately $825 million. Additionally, we're making good progress on a number of capital recycling initiatives, including the sale of a further 33% stake of our Chilean toll road business. There are also four ongoing processes that are progressing well. Through these initiatives, we're targeting to raise approximately $700 million of after-tax proceeds in the next six months, with a further $1 to $1.5 billion generated by the end of 2020. And so with that, I thank you for your time this morning, and I'll now turn the call over to Sam.

Thank you, Bahir, and good morning, everyone. For my remarks today, I'll discuss some of our recent strategic investment initiatives, and then I'll conclude the call with an outlook for the business. Let me begin by saying that we've been very pleasantly surprised at our ability this year to convert a number of the opportunities in our pipeline into secured investments. This week, we closed on a $200 million investment in a New Zealand data distribution business, and we expect to invest a further $1.2 billion net to BIP in other initiatives by the end of the year. These investments will meaningfully expand our presence in the North America and Asia-Pacific markets. Starting with the New Zealand transaction, we, along with a strategic partner, acquired an integrated telecommunications provider in New Zealand for $2.3 billion. This is a market-leading business that provides utility-like broadband and wireless services to 2.5 million customers. With its acquisition, we own and operate a countrywide wireless and fiber infrastructure network, including 1,600 cell sites and 10,000 kilometers of fiber optic cable, providing wireless coverage to over 98% of the population. Brookville Infrastructure and its institutional partners, contributed $700 million of equity for our 50% stake in this business, with BIP's share being approximately $200 million. Next, we recently announced the $8.4 billion take-private acquisition of Janssen & Wyoming, or what I'll refer to as G&W. This is a high-quality rail business based primarily in the United States, but it also has operations in Canada, the U.K., and Australia. We will be acquiring the business alongside institutional partners, with BIP's share of this equity being approximately $500 million. While the original transaction included G&W's 51% interest in the Australian business, we recently agreed to sell this stake to a consortium led by the existing 49% owner. G&W represents a great addition to our existing rail platforms. This is a rare opportunity to acquire a rail infrastructure network of scale, particularly in North America, for good risk-adjusted returns. GNW owns 120 short-line railroads and 26,000 kilometers of track. It is a key provider of critical last-mile transport services to customers and Class I rail operators. Its cash flows are resilient, as the business is well-diversified across a number of goods it moves across its networks, and the over 3,000 plus customers it serves. Backed by our deep expertise as an owner and operator of rail and other transport assets, we feel we're well positioned to drive value through our operational approach. Our areas of focus will be to maximize commercial opportunities and expand through strategic tuck-ins and also improve margins over time. We anticipate the close of the acquisition, and the sale of the Australian operation to occur concurrently in the fourth quarter of 2019, and this will take place once customary regulatory approvals have been received. Upon completion of the acquisition, combined with our existing businesses, we will own a large-scale, world-class rail operation on four continents, The next thing I want to touch on is expanding our geographic footprint by investing in a natural gas pipeline business, which carries natural gas from Texas to Mexico. A number of you will know that we opened an office in Mexico in 2015 with the intention of establishing a local presence in the country consistent with the approach we've done in many other places. Up until now, we've not seen opportunities to acquire assets at appropriate risk-adjusted returns. We went to Mexico as we view it as a very business-friendly country with good market fundamentals, and we see the value of investing in the country over the long term. Now, recently, institutional investor interest has moderated somewhat, and this created an opportunity for us to enter the market and and acquire a low-risk, high-quality asset within our target return range. The pipelines that we acquired were built in 2016 and represent critical infrastructure, supplying Mexico's growing central and western gas demand regions with low-cost natural gas in Texas. The business is very attractive as the pipelines generate stable and predictable cash flows without volume or commodity price risk. Revenues are fully contracted under a long-term taker pay arrangement through 2041 with an investment-grade off-taker. In addition, foreign exchange risk is minimized as revenues are dollarized and they also have an inflation-linked escalator. These assets will continue to be operated under a fixed price arrangement by existing co-owners in the business who have a well-established track record as energy infrastructure owners and operators in Mexico and abroad. We will be investing alongside our institutional partners, and BIP will be deploying approximately $150 million of equity. We anticipate completing this acquisition in the fourth quarter of this year and obviously subject to customary closing conditions. And then lastly, you also may be aware that we've been monitoring opportunities in the telecom market in India for the past several years. The market has stabilized following a consolidation of the mobile network operators, leaving three players, and this includes Reliance Geo. As the competitive landscape settles, MNOs are focused on creating liquidity to invest in their networks and view the divestment of their tower portfolios as an easy way to raise funds rather than through the capital markets. Leveraging our existing relationship with Reliance Industries, who you may recall are the counterparty to our Indian pipeline investment, we recently secured an exclusive agreement to acquire a portfolio of 130,000 telecom towers in India from Reliance Geo. These are recently constructed towers with low maintenance requirements and over 30 years of useful remaining life. The towers are unlike most India telecom towers as they are largely connected by fiber backhaul which gives us a unique platform to capitalize on a rollout of 5G. This is a high-quality business that has similarities to our existing tower business in France. It generates stable and predictable cash flows that will benefit from expected increases in data usage. In India, the growth in data consumption has been robust, to say the least, with per capita usage having increased tenfold in the last two years alone, and this is a trend we expect to continue. We believe that this investment will provide good downside protection with meaningful upside through introducing co-location to the other MNOs on the towers, which to date have only carried GEO. There will also be further growth as we execute a tower build-up program with Reliance GEO, who have committed to partially fund the expansion. Overall, we see this as a great opportunity to penetrate a high-growth market at our target returns. Briefly, infrastructure... is expected to invest approximately $400 million upon completion of the transaction. Now, looking ahead, the outlook for our business for the remainder of 2019 is strong. In fact, we've probably not seen a bigger disconnect between the organic activity level going on around our businesses and the uncertainty and weariness that you read about in the media. we are seeing tremendous activity levels around our GDP-sensitive businesses, particularly our rail and ports. As a result, we expect FFO to benefit from continued organic growth, as well as the contributions from acquisitions that have or are expected to close in the third quarter. And this includes the second phase of our Western Canadian midstream business, as well as the New Zealand data distribution business that we just acquired. We expect the exit run rate in 2019 for our FFO per unit to be over 20% higher than it was at the time we sold our Chilean electricity business, which was over a year ago. The pace of new investment activity this year has surpassed our expectations, as I mentioned at the outset, and we anticipate this momentum to continue in the foreseeable future. We are operating in a global economy that continues to experience solid growth, with a growing need for additional capital to fund large-scale infrastructure investments in both developed and emerging markets around the world. We are currently monitoring several very interesting situations in the energy and data infrastructure segments in North America and Europe, where we expect to bear our competitive advantages of size, operating capabilities, and access to capital. Now, with that, this concludes our remarks for today's call. But I'll pass it back to the operator, and we'd be pleased to take some questions.