Brookfield Infrastructure Partners LP

First quarter 2022 results conference call and webcast. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. As a reminder, today's program may be recorded. And now I'd like to introduce your host for today's program, David Krantz, Chief Financial Officer. Please go ahead, sir.

Thank you, Operator, and good morning, everyone. Welcome to Brookfield Infrastructure. My name is David Crank, and I'm the Chief Financial Officer of Brookfield Infrastructure Partners. Joining me today is Sam Pollack, our Chief Executive Officer, and Scott Peek, our Chief Investment Officer for North America. Following our prepared remarks, Ben Vaughn, our Chief Operating Officer, will join us to take your questions. At this time, I would like to remind you that in our remarks today, we may make forward-looking statements. These statements are subject to no For further information on known risk factors, I would encourage you to review our annual report on Form 20F, which is available on our website. I'd like to begin with a few comments around the current macroeconomic environment. Top of mind for investors today are the elevated inflation levels, rising interest rates, and decelerating global growth that creates headwinds for many industries. During these periods, the infrastructure sector generally outperforms. The growth and resiliency operating costs to customers. Exposure to rising interest rates is mitigated by long-term capital structures, largely on a fixed rate basis given the highly predictable cash flows these assets produce. From a valuation perspective, the established frameworks employed across revenue, expense, and debt financing protect or expand margins through revenue compounding, offsetting increases in our capital costs. to start the year. We are pleased to report funds for operations, or FFO, of $493 million, a 14% increase year over year. This was the highest in our partnership's history. FFO per unit of $96 capital projects over the last 12 months. Our base business continues to perform well, benefiting from outperformance in utility and transport segments. Additionally, results from our North American midstream operations have benefited from IPL's first full quarter contribution, as well as outsized cash flow due to higher asset utilization and notable increase in commodity sensitive revenues. Taking a closer look at our Our UK regulated distribution business continues to experience strong sales activity, ending the quarter with over 100,000 new connections sold, a 32% increase quarter over quarter. This is the second highest quarterly result on record, largely attributable to water connection sales. At our Brazilian regulated gas transmission operation, Overall, our annualized rate increase across our portfolio is approximately 6% for the year, with potential for room to further increase. FFO from our diversified terminals increased by 40% compared to the first quarter of 2021. Our port operations maximized ancillary revenue by providing short-term storage solutions to our customers, offsetting lower volumes from shipping delays and transportation availability. Our US LNG export terminals In our midstream segment, we generated FFO of With IPL, we are experiencing increased customer demand and benefit from an over-billed strategy employed on the long-haul pipelines. During the quarter, we executed long-term transportation service agreements that combined will add approximately $50 million of Canadian annual run rate EBITDA by 2025. North American polypropylene continues to be robust, with end-use customers excited about the introduction of our ESG-friendly product and geographic diversity of supply. FFO from our data segment was in line with the prior year at $58 million. Underlying growth from additional points of presence and inflationary tariff escalators were offset by lower revenues at our U.S. data center operation that were repositioning for hyperscale growth, as well as the impact of foreign exchange. We continue to focus advancing customer demand continues to grow globally. Today, we have active developments at seven data centers in five different countries. Once complete, we expect to add 25 megawatts of additional capacity to our portfolio. I'd now like to touch on the strength of our balance sheet. In recent years, we have spent considerable effort proactively managing our corporate and In April, we further enhanced our corporate balance sheet and supplemented our liquidity through a Canadian $600 million note issuance. The offering was oversubscribed and well-received and split between a 12-year and 30-year tranche, with an average coupon of approximately 5.5%. Following a note offering, corporate liquidity totalled nearly $3 billion, which we plan on enhancing through our advanced capital recycling initiatives currently underway. Following the strong relative performance of our shares and units over the last few years, we think that this split will ensure that our public securities remain accessible to individual holders and improve the liquidity of our units and shares. It is important to note that this split will not dilute our existing investors and will not be taxable in Canada or the United States.

Thank you, David, and good morning, everyone. I'm pleased to be joining today's call to discuss natural gas as a reliable transition fuel and a path to energy security. We are operating in a market environment of disrupted supply chains and rising commodity prices. The impact of recent geopolitical events has raised commodity prices to levels not seen in years and reinforced the importance of energy security. Natural gas, and more specifically LNG, will continue to be a leading transition fuel in the move towards net zero. It is also expected to play a key role in providing global energy security. These elements highlight the valuable role our critically located infrastructure plays in the processing, transportation, and distribution of natural gas. Our North American midstream businesses are well positioned in the key markets currently benefiting from high utilization rates and increasing commodity prices. These businesses typically reserve a small portion of operational capacity as uncontracted to provide operating flexibility. Under the backdrop of the current market, this available capacity has generated incremental revenue that has contributed to our strong financial performance. An indirect benefit of a constructive commodity environment is its impact on our energy customers who are currently experiencing strong cash flow and strengthening balance sheets. These tailwinds to our customers' financial profile, coupled with improving market sentiment, is expected to incent reinvestment into their operations. After several years of more limited production growth, we anticipate a renewed interest in customer-initiated infrastructure expansion projects to increase capacity and throughput across our asset base. Today, we own three businesses that are expected to benefit from increased demand for LNG. There is significant interest in securing capacity at USC, LNG export terminals. Customers on our U.S. natural gas pipeline are discussing the contracting options for a third phase of our Gulf Coast egress. And lastly, our Canadian midstream business is well situated to process and support gas deliveries to West Coast LNG export terminals currently under construction. In addition to traditional energy businesses, our utility operations play a vital role in the transportation and distribution of natural gas to residential and industrial customers. In each of the countries we operate, energy regulators are advocating for energy security and diversification of supply that includes natural gas as a transition fuel and reliable source of base load generation. The more limited investment in traditional energy supply and the intermittency of renewable power have created more scarcity value for our assets. As we continue to expand our footprint and recontract our assets on attractive terms, we are well positioned to deliver strong returns on both our in-place businesses and our capital recycling initiatives in the years to come. That concludes my remarks for today. I will now pass the call over to Sam.

Thank you, Scott, and good morning, everyone. On today's call, I'm going to discuss some of the strategic initiatives we have underway, and then I'll conclude with an outlook for the businesses. Overall, as David has discussed, we've had a strong start to the year. On top of our operational achievements and strong financial performance, we've secured nearly $1 billion of investment opportunities, leading us to believe that 2022 is shaping up to be an excellent year. We continue to see opportunities to execute our full cycle investment strategy across all segments and geographies in which we operate. we successfully invested approximately $750 million into two utility investments, including the take private of an Australian regulated utility business called AusNet and the acquisition of an Australian smart metering business called Nutella Hub. Subsequent to quarter end, we announced an agreement to acquire Unity Group in an Australian $3.7 billion take private transaction through a 50-50 joint venture partnership with another infrastructure investor. Total portfolio equity for the investment is estimated to be approximately $850 million, with BIP's share at approximately $200 million. Unity provides wholesale and retail telecommunication services to customers and businesses in Australia. Strategically, this investment provides exposure to the country's largest pure-play greenfield fiber-to-the-home wholesale operator with a stable and predictable recurring revenue stream and a significant backlog. This business has similarities to our fiber-to-the-home product that we sell in our UK Last Mile Connections business, and this is what attracted us to acquire it. The investment is expected to close in the third quarter of 2022. In total, BIMP has deployed or secured nearly $1 billion in equity thus far in 2022, and this represents over 60% of our estimated $1.5 billion in annual deployment that we look to target. We have a high degree of confidence in our ability to exceed the balance of our target based on the robust pipeline of advanced opportunities that our global investment teams are pursuing. Our access to capital, local presence, and active operating approach are expected to continue to differentiate us from others. We also continue to be active on the capital recycling front, and expect to generate up to $2 billion over the next year or so. Most advanced are the sales processes for our Indian toll road business and our 2,400 kilometers of newly constructed electricity transmission lines in Brazil. Both processes are anticipated to result in binding commitments in the coming weeks and be concluded in 2022. Generally, our cap recycling program continues to attract lower cost of capital buyers searching for de-risked and mature core infrastructure assets. In addition to sales, our current corporate equity stands at nearly $3 billion, which positions us well to fund a growing pipeline of accreting new investments. I'll now conclude my remarks with a few comments regarding our outlook for the business, which is very positive. From a macro perspective, we continue to see the significant capital needed globally to to build out data infrastructure networks, de-bottleneck supply chains, and decarbonize the energy and transportation sectors. On top of this, geopolitical challenges have led countries to emphasize the onshoring of critical supply chains and industries. This phenomenon has been referred to as deglobalization and has increased in urgency because of the current conflict in Europe. We expect this re-onshoring activity and deglobalization trend to continue to accelerate which could create hundreds of billions of dollars of new potential investment opportunities. Given the scale and global nature of our business, we are uniquely positioned to be a leader in this potentially massive investment opportunity set. At the micro level, the outlook for our business is equally as strong. Our expectation for 2022 is that we will deliver organic growth at the high end of our target annual range. The business is expected to benefit from the following factors. including favorable operating conditions resulting in higher tariffs from elevated inflation levels and higher utilization of our midstream assets. We have higher embedded organic growth as we continue our asset rotation strategy, and we have incremental cash flows as we progress the commissioning of several meaningful growth projects into full operation. In addition, our business is insulated from rising interest rates, and we anticipate being able to continue to achieve a 12% to 15% return on invested capital. We have strong visibility on capital deployment with over 60% of this year's estimated target for new investments already secured, and the operating opportunity pipeline is probably as strong as it's ever been. Now that concludes my remarks for today. I'll pass it back to the operator, and we'd be happy to take some questions.

Certainly. Ladies and gentlemen, if you have a question at this time, please press star then 1. If your question has been answered and you'd like to move yourself from the queue, please press the pound key. Our first question comes from the line of Cheryl from TD Securities. Your question please.

Thanks very much and good morning. In terms of the residential infrastructure business, it looks like you've been making some interesting acquisitions to add adjacent products and services kind of following. the playbook of the UK residential distribution business to some degree. So I was hoping you could give us a bit of color on that and also talk at a high level about whether there are any relevant differences in how you would expect consumer-oriented infrastructure to perform in this type of environment versus infrastructure that's more oriented to industrial counterparties.

Hi, Sherilyn. Maybe I'll start, and if Scott has anything to add to my comments, then I'll leave for him to add to them. So I guess your first question is just regarding the residential infrastructure business and our strategy of adding new distribution and products to grow the business. This is a playbook, as you pointed out, that we were very successful in employing in our UK business. Where we've had great success is when we've had businesses that have that great operational leverage where we have access into a customer's home or to a developer who has multiple needs. And the Entercare franchise, which is where our residential business resides in North America, has great access to the home. And we think that as the trend towards decarbonization takes hold and many new, more expensive homes components are introduced to consumers to facilitate the reduction or the conversion from conventional fuels that customers will need some assistance in the form of rental products or other types of means to invest in those new products and services. And so we're well positioned to do that. And by adding the solar product to Enercare, we think that, again, is something that's very unique. Adding the generation capability through that partnership we think is very unique. So we'll continue to do that, and I think that is the most accretive way we can grow that franchise. The other question I guess you had, which is – a follow-on to that and I think what you're alluding to is there are noises around the potential for recessions in various markets around the world and that might impact the ability for the consumer to invest. We think that our businesses, our residential infrastructure businesses are largely recession-proof. I hate to use that word because it's maybe too strong a word. But because they are critical, people need heating or plumbing or water products. These are not things people can do without. And many of the things that we do are replacement products. We believe that the demand for what we provide... will be sustained and the fact that we're providing a payment mechanism and a peace of mind for this product that it could in fact do very well in a recessionary environment. The one area where we might see some softness is to the extent that we're providing a product to home builders for new home sales well, then it's possible we could see some weakness in that regard. But for the most part, I think our businesses are very well positioned for any economic environment.

That's great. Scott, did you want to add anything?

No, look, I thought that was great, Sam. I'd just highlight that we emphasize investments in platforms. We seek accretive growth wherever it resides, so it will not be uncommon for us to pursue adjacent synergistic growth where actionable across our asset portfolio. So these types of bolt-ons and opportunistic acquisitions are going to be commonplace for us across our assets.

That's great detail, and since that was really two questions in one, I'll pass it on. Thanks.

Thank you, Cheryl.

Thank you. Our next question comes from the line of Robert Kwan from RBC Capital Markets. Your question, please.

Great. Good morning. I'm wondering just as you think about new investments and obviously you're just targeting trying to get strong IRRs in total, but there's been some instances here of where you've had high return, maybe lower multiple, but high cash-on-cash returns like InterPipe, and then you've had lower going-in cash-on-cash returns like Unity and AusNet, now obviously some lower risk or volatility, and in the case of Unity, higher growth. But when you take a step back and you think about kind of combining the investments and where you want FFO to be, like how much of a consideration is that? And maybe just overall, where are you seeing the best opportunities right now? Is it a higher cash on cash returns or the lower ones with growth profiles?

Hi, Robert. I'll start there again if any of my colleagues want to jump in. I'll let them do that. So I would say that the first thing is we don't make acquisitions based on whether or not they have high FFO accretion or low FFO accretion. We are IRR investors and multiple capital investors. what counts and so you are correct in pointing out that sometimes it may be that we buy businesses that have high FFO yields out of the gate and sometimes the profile is reversed. I think the overriding consideration and I think you're your question is when we buy businesses that have lower FFO yield out of the gate, what considerations do we take into account for that versus the reverse? Because it would imply higher risk, I guess. And really, what we're taking into account is the longevity and risk profile around the growth in that business. And factors we'll take into account are how much of that growth is contracted and how visible that growth is. And in addition to that, we'll also look at what Scott referred to as the potential platform effect that we could leverage. Because in many of the businesses that we buy, often we're buying entities where someone is only exploiting a small piece of the opportunity and because of our experience in running many different businesses globally we have a view that we can expand that growth to a much greater extent so all those things those are the things that make us successful in buying entities versus others and we always look to you know, add on ancillary services and products to businesses to enhance that operating leverage. Does that answer your question?

Yeah, no, that's great, Sam. The second question here is just around inflation. And you talked about 10% organic growth in Q1. I apologize if you broke it out. But how much of that was specifically inflation? And as we look forward, How much more shows up in the future quarters of this year, whether that's contractually or regulatory-wise?

I think Dave's going to answer that.

Morning, Robert. environment persists.

And just on the capital side, in terms of what you're spending, do the regulatory constructs and or the contractual side of things, are you protected on cost increases for capital? And in fact, do you benefit just from the higher spending levels? Okay. That's great. Thank you very much.

Thank you. Our next question comes from the line of Robert Cotiglia from CIBC Capital Markets. Your question, please.

Hi. Good morning, everyone. Could you provide some context around the U.S. data center operations? Why the lower revenue and how is the business being repositioned? And in light of that, have the dynamics changed at all in terms of how BIP is investing in that particular component of the segment?

Hi, Robert. Thanks for that question. And I think we'll ask Ben Vaughn, who's our Chief Operating Officer, to address that question.

Yeah. Hey, Robert. Yeah, so in that U.S. data center business, we've basically been migrating client base away from traditional retail colo product towards a hyperscale and edge computing product. And so as we've been engaging in that shift, we now have about seven megawatts of new contracts from hyperscalers to take up our space, whereas to put in perspective, a few years ago we would have had none of those types of contracts. So the business is migrating away from a traditional retail colo offering and towards a hyperscale and edge computer offering. So that is the process that we're undertaking, and we've got a good pipeline of hyperscale opportunities that we're pursuing and a proven track record now of contracting with hyperscale clients for that service. So I don't know if that's responsive to your question, but that's the, I guess, the strategic shift that's going on within that asset at this point.

Yeah, Ben, that's exactly what I was looking for. I was curious as to the impact of competition versus a deliberate strategic change there.

Yeah, and I guess, Robert, sorry, just to highlight, maybe to reinforce the strategic nature of it, we are reinvesting some capital into the facilities today. in order to reconfigure them, because the needs of the hyperscalers are different than just the rack-by-rack retail colo setup. So it is a very deliberate strategy with a physical repositioning of the assets that complements the new product offering, essentially. So I hope that's helpful.

Yeah, that definitely helps. And then I'm just curious on the impact of rising interest rates on the utility ROEs. Are you... Generally expecting increases in ROEs to be commensurate with rising rates, you know, allowing for the regular, the normal regulatory lag. Or do you expect some compression to ROEs because they didn't necessarily chase rates down to the bottom? And obviously, you know, to mitigate the pressure on customer bills.

Hi, Robert. It's Sam here. The short answer to your question is it will depend on jurisdictions. In Australia and the UK, we expect, subject to the lag, as you pointed out, that the rates will adjust in the normal regulatory environment. In the US, where we don't really have utility operations per se, but that would be a jurisdiction where there may be some delay in response to higher rates because they didn't go down as much. But for most of our businesses, whether it's South America or Australia and the UK, I would expect rates to move up pretty quickly with rising rates.

Okay, and just finally, I'm curious if you're noticing any change in the permitting environment in any of your operating jurisdictions in light of the need for energy security. Is the permitting environment changing to accommodate that?

Maybe I'll ask Scott to address that one.

Look, it's evolving, and it's a continuing discussion with local regulators. I can't say we're seeing a quantum shift, but I think some of the recent geopolitical events have, you know, reemphasized the need for energy security, and we're hopeful we'll, you know, get everyone aligned to, you know, to get permits needed for, you know, projects to achieve that energy security. But I can't say we're seeing a quantum shift, but definitely a constructive tailwind.

Okay. Thank you very much. Thanks, Robert.

Thank you. Our next question comes in the line of Rob Hope from Scotiabank. Your question, please.

Good morning, everyone. Just a follow-up question for me. I appreciate the commentary on organic growth being towards the upper end of the range in 2022. But just as we look out to 2023, shouldn't we see kind of equally strong organic growth just given the quantum capital being put into place, as well as the fact that you will see kind of inflation being feathered into tariffs throughout the year? So just taking a look at 2023, shouldn't the factors that we're seeing benefit 2022 equally benefit 2023 as well?

Hey, Robert. David here. I can take that one. I think your assumption is correct. I think one of the things that is important

Appreciate the color. Thank you. Thank you. Our next question comes in line of Andrew from Credit Suisse. Your question, please.

Thanks. Good morning. I think the question's for Sam. And it really relates to just the partnerships and ventures you've used over the years and how they've evolved, maybe a little bit of how and why they've evolved. And maybe just some examples. You had a partner on the Vodafone New Zealand deal. You aligned yourself with DLR in a couple jurisdictions. I guess just maybe context on how this has changed or evolved over time. Is it easier for exit? Helps with risk management? Just some color would be great.

Hi, Andrew. Look, I guess I would start off by saying one of our critical success factors um, is to be a, a partner of choice. And so, you know, that's something that when we go out and, uh, meet potential, uh, strategics or even some of our peers, you know, we, uh, we pride ourselves on the fact that we've got a long history going way back, you know, into the, uh, you know, the old Brascan days and we had the mining companies and we, We have many partnerships on projects all the way through today and 40 years later where we continue to build upon partnerships. The investments can be large and often others are looking for someone to come in to help them. They're not necessarily looking to sell in every case or in some cases someone else might have secured the deal ahead of us and need someone to help them achieve the business plan. So we are always looking to partners with others where it makes sense. Sometimes we choose to do things on our own because we feel it may make sense for us to have the full discretion over the business plan in order to achieve it. And sometimes maybe the business opportunity isn't big enough to entail a partner. But I would say given the scale of the opportunities today, we see being a good partner and finding good partners as a critical component to the strategy.

Thank you. That's helpful. And then maybe a different kind of partnership. just when one looks internally at the broader group and we think about the data business, you know, part of that is real estate-oriented, part of it is power-oriented, and part of it is sort of telecom and infrastructure-oriented. Has the thought process changed internally at Brookfield on how you think about allocating capital to that? Is it a divide and conquer at times, or is it just solely within BIP?

So as it relates to... you know, data, you know, this is clearly an area that the infrastructure group is focused on. You know, you rightly point out that particularly with data centers, there's elements where that the real estate group can be, you know, extremely helpful, you know, given their land assembly capabilities. We do leverage, you know, those capabilities in markets where it makes sense. And I think one of the great attributes of Brookfield as an asset manager is the fact that the various platforms are able to work seamlessly across opportunities and we don't let the fact that one group may fund the capital you know, reduce the ability to leverage all those capabilities and expertise. So, yes, the short answer, I appreciate this long-winded, but the short answer is we do get help from time to time from the other platforms, but we do fund all the data infrastructure through the infrastructure group. Okay.

That's great. Thank you.

Thank you.

Thank you. As a reminder, if you have a question at this time, please press star then 1. Our next question comes from the line, Dmitry Komelitsky from Veritas. Your question, please.

Hi, and thanks for taking my question. I wonder if you can walk us through how your business benefits from rising interest rates by segment, if possible.

David, do you want to start with that?

we should start to see regulated earnings go up as these regulatory rate resets kick in over whatever period and whatever line that may be on. But I'd say our utilities business stands to benefit from it the most.

Got it. And any potential downsides from rising rates in any of the segments?

I would say, well, you know, David touched on, you know, the balance sheet impacts. Obviously, that's where we see the most impact. You know, I think, you know, where we're able to adjust the business is, you know, to the extent that rates have increased, we reflect that in our acquisition models and adjust our capital allocation, both organically and inorganically. So I feel that as rates move up, we reflect those rising rates in all the capital decisions we make going forward. But other than on a more medium to long-term basis, you know, we don't see too much impact from rising rates.

Awesome. Got it. And the last question is I just wonder if you can confirm that in 2022 you plan to generate $2 billion of proceeds from capital recycling and whether that will come primarily from Brazil and electricity transmission and Indian toll roads.

So we have probably six or so investments that are currently being marketed. The only two that we have, you know, publicly disclosed are the ones you mentioned. Those are the near-term situations that we expect to secure. Those are relatively small in the context. There are several others that are more meaningful and will be signed, hopefully, in the third quarter of this year. And I think the overall timing to receive proceeds will take place over the next 12 to 15 months. I think the ones that are going to be signed shortly, we hope to have... probably Q3, and then the rest that we sign in Q2, Q3, and Q4 will be thereafter. But that is the current amount that's in the pipeline is roughly $2 billion worth.

Right. Okay. Thank you so much.

Okay. Thank you.

Thank you. Our next question comes from the line of Najee Badon from IA Capital Markets. Your question, please.

Hi, good morning. I just wanted to go back to the topic of tailwinds. You talked about inflation and customer demand. I'm just wondering if you can provide any color on FX and any potential impacts there, particularly from the unhedged exposure. Yep.

Happy to, Najee. I think what we've seen, 80% of our business today is from those movements. The one currency where we do have levels that we are currently seeing.

Okay, that's a helpful detail. And I just wanted to ask on the M&A pipeline, it seems like it's very active. You have different types and scale of transactions in the hopper, some of them in the public news. I'm just wondering, do you see more opportunities today to pursue more public, either corporate or asset transactions? just given the volatile market environment, or are you still seeing a lot of scale opportunities on the profit side?

Maybe I'll take that one. It's a mix. So I would say today we probably have a good balance of both private versus public to private. Usually we wouldn't have as much public to private as we have today, that there does appear to be a value discrepancy between public valuations and private valuations, which makes public to private attractive for investors like ourselves. And I think given the increasing volatility and the pullback in the markets, that's likely to persist, you know, going out the balance of the year. And so that will remain a focus. But today, I wouldn't want to give you the impression that all we're focused on is public to private. We have a large number of private opportunities that we are pursuing as well.

Got it. Thank you.

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Sam Pollack, Chief Executive Officer, for any further remarks.

Thank you, Operator, and thank you to everyone for joining the call this morning. We appreciate your ongoing support and look forward to speaking with you again next quarter. Thank you.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.