Brookfield Infrastructure Partners (BIP 1.90%) owns assets that are critical to support the flow of energy, water, goods, people, and data. It does this by operating toll roads, power lines, pipelines, railways, ports, and communications towers -- getting paid a fee as customers use capacity on these assets. That fee-based structure generates stable cash flow for the company, the bulk of which it distributes to investors each quarter.

That said, while the company owns 35 businesses across four different infrastructure groups, its biggest moneymaker is its utilities segment, which currently generates 47% of its funds from operations (FFO). Here's a closer look at this segment and how it makes money, as well as a glimpse of what's up ahead for the company's profit center.

The sun setting behind electric transmission lines.

Image source: Getty Images.

Generating a steady stream of cash flow

Within Brookfield Infrastructure Partners' utilities segment are three business groups:

  1. A regulated distribution business consisting of 2.8 million electricity and gas connections as well as 600,000 smart meters that contribute 16% of the company's FFO.
  2. A regulated transmission business comprised of nearly 7,000 miles of electricity transmission lines and about 1,250 miles of natural gas transmission pipelines that generate 26% of its FFO.
  3. A regulated terminal business, which supplies another 5% of its FFO.

The company operates several critical utility assets around the world, including transmitting electricity to 98% of the population of Chile, handling nearly 20% of the seaborne metallurgical coal exports from Australia, and supplying gas to the core industrialized and most populated states of Brazil.

What classifies these businesses as a utility is that they earn a return on the rate base, which is the value of properties used to provide services to customers. Regulatory agencies set that level of return, which in Brookfield's case is an average of 11% on its rate base that currently stands at $5.6 billion.

Because of the regulated nature of these assets, which are supported by long-term contracts, the company generates very stable cash flow. In fact, 90% has no volume risk, which means that customers pay it even if they aren't using their entire allotted capacity. Furthermore, most of the contracts have inflation-linked escalators, which enables it to raise rates alongside inflation. That's worth noting because Brookfield believes that inflationary price increases from its global infrastructure portfolio will boost FFO by 3% to 4% annually, which is roughly half of its 6% to 9% organic growth forecast.

Pipelines over water at sunset.

Image source: Getty Images.

Expanding the base to grow earnings

Brookfield Infrastructure Partners' utilities segment has grown at a rapid pace over the past year. In fact, FFO from the segment last quarter spiked 68% versus the prior year, to $168 million. One of the drivers of that increase was the addition of a Brazilian natural gas transmission business, which it acquired from oil giant Petrobras (PBR 0.97%). That new addition when combined with expansion projects that recently entered service helped it more than overcome a reduction in the allowed return of its Australian regulated terminal due to a regulatory reset last year and the sale of its Canadian electricity transmission business.

While the Petrobras deal pushed Brookfield's utilities segment to new heights last quarter, the company has several organic expansion projects underway that should power earnings growth in the coming years. One of its largest near-term opportunities are concessions to build more than 2,600 miles of electricity transmission lines in Brazil over the next few years. The company has already started building about 1,000 miles of lines and expects to finish half this year and the other half in 2018. Meanwhile, its regulated distribution business in the U.K. was selected as the preferred bidder to acquire up to 2 million smart meters. Overall, it has more than $1.1 billion of planned investments coming down the pipeline in its utilities segment that should generate earnings in line with its current return on the rate base.

There are two other longer-term opportunities on the horizon to grow its utilities segment as well. First, the gas pipeline it bought from Petrobras not only came fully contracted, but it has the potential to expand that system in the future as Brazil's gas market grows. In particular, it expects gas supplies to increase as Petrobras develops the pre-salt offshore oil fields in Southern Brazil, which should drive demand for additional pipeline infrastructure. In addition, Brookfield has expressed a desire to expand its water infrastructure business. The company recently inked a $15 million deal to buy a water utility in Peru and is looking to purchase other regulated water utilities and water-related infrastructure assets that will increase its scale in that sector in a meaningful way over the next few years.

A dividend you can take to the bank

Brookfield Infrastructure Partners' utilities segment generates very predictable cash flow, providing a solid foundation for its quarterly distribution to investors that currently yields around 4%. In the meantime, the company has several initiatives underway to increase its sources of stable income, which helps support its forecast that it can increase the payout by 5% to 9% annually over the long term. That steadily growing income stream has the potential to generate powerful returns for investors who hold for the long haul.