Brookfield Infrastructure Partners (NYSE:BIP) is having an exceptional year. That was evident in the company's second-quarter results as its bold bets to buy assets in Brazil over the past year paid off big-time. That said, one thing the company's management team made clear on the accompanying conference call is that it still has plenty of growth left in the tank. Here are five things they wanted investors to know about their recent success and what's coming down the pipeline.
Dual growth drivers fueled results last quarter
CFO Bahir Manios led off the call by pointing out:
Brookfield Infrastructure had a very good second quarter, building on the strong momentum from the first three months of the year. During the quarter, we generated funds from operations, or FFO, of $295 million, or $0.80 on a per unit basis. These results were a record for our business, representing year-over-year increases of 28% and 19%, respectively, driven by the initial contribution from the regulated gas transmission investment we recently made in Brazil, and the continued strength of our base business that organically grew its FFO by 10% on a same-store constant currency basis.
As Manios said, the company delivered robust growth last quarter, thanks in large part to its acquisition of a stake in a natural gas transmission business from Brazilian oil giant Petrobras (NYSE:PBR). That was one of the several deals it made in that country over the past year, which also included increasing its stake in a toll-road business and winning concessions to expand its toll roads and build electricity transmission lines in the country. That said, acquisitions were only part of the story since it also delivered double-digit organic growth thanks to the completion of several expansion projects over the past year.
We strengthened our balance sheet
While closing the Petrobras deal was a top strategic priority this year, Manios noted that "on the financing front, one of the most important priorities we had was to reduce leverage at our North American gas transmission business and to refinance its near-term maturities." To achieve that aim, Brookfield and its joint venture partner Kinder Morgan (NYSE:KMI) injected $400 million of capital into that business, which enabled it to repay 9.625% yielding corporate notes that were due to mature in 2019. That redemption, along with the growth trajectory of the business, won it a substantial credit rating upgrade, which led to the successful launch of a new bond offering at just 4.625% that allowed it to refinance an upcoming maturity. "With this refinancing completed, Brookfield Infrastructure has no major debt maturities within the next five years," according to Manios.
Organic growth is becoming a significant growth driver
Next, CEO Sam Pollock took the reins and detailed the growth projects the company has coming down the pipeline. He said:
Overall, we have a growing backlog of capital projects which currently stands at $2.4 billion and has doubled over the past two years. Our operating segments are also pursuing initiatives that have the potential to add a further $1.5 billion to $2 billion to this backlog in the next six to 12 months. These organic growth opportunities generally offer the best risk-adjusted returns and provide us with considerable visibility on our near-term growth outlook.
As Pollock noted, the company expects organic growth to be a significant contributor over the near term due to the size of its backlog and the returns it can earn on these investments. Projects include up to $1 billion in deploying smart meters in the U.K., $300 million of expansions on its gas pipeline joint venture with Kinder Morgan, a $295 million toll road expansion in Brazil, and up to $250 million to deploy a fiber-to-the-home network within its communication business in France.
We have a robust M&A pipeline
That said, the company still expects acquisitions to be a major driver of long-term growth. In fact, Pollock noted that "our M&A pipeline is robust, particularly in the transport and telecommunications infrastructure sectors." The company has already announced a $200 million investment in a portfolio of communications towers in India, which it expects to close by year-end. Meanwhile, it has several others in the beginning stages, including reports that it's one of the final bidders on another tower portfolio in the country that could sell for as much as $600 million.
We see a tremendous opportunity in water
While towers and transportation represent its biggest near-term M&A focus, over the longer term, the company sees a massive opportunity to build and buy water infrastructure. Brookfield carved out a section of its call to update investors on this focus by turning it over to Justin Beber, who is the managing partner for strategic initiatives. Beber noted that the company initially decided to get into the water sector three years ago and it has been a slow process so far. However, it is working on a small $15 million deal in Peru and has several other opportunities underway. That said, Beber pointed out that, "according to the OECD, there is a $6.7 trillion funding gap for capital to be invested globally in water supply and sanitation by 2050. This shortfall should result in the private market financing more water projects, which represents a "significant opportunity for us," according to Beber and is why "growing our water infrastructure presence in a meaningful way is a priority."
Firming up the outlook
Brookfield Infrastructure Partners' second-quarter results were more evidence that the company's long-term growth strategy to acquire and then build out critical infrastructure is working as planned. The company completed several strategic initiatives during the quarter, which makes it increasingly likely that it can achieve its long-term growth plan to increase its distribution to investors by 5% to 9% annually. Combine that with the company's current 4% yield, and investors should earn solid total annual returns over the next several years.
Matt DiLallo owns shares of Brookfield Infrastructure Partners and Kinder Morgan and has the following options: short January 2018 $30 puts on Kinder Morgan, long January 2018 $30 calls on Kinder Morgan, and short December 2017 $19 puts on Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool recommends Brookfield Infrastructure Partners. The Motley Fool has a disclosure policy.
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