Brookfield Infrastructure Is Benefitting From an Inflation-Driven Boost

Surging inflation has been a key storyline this year, driving up the costs of most items. While rising inflation is a headwind for many companies, it's a tailwind for Brookfield Infrastructure (BIPC 1.39%) (BIP 2.21%) because most of its contracts have inflation escalation clauses. That helped fuel strong first-quarter results for the global infrastructure operator.

Inflating cash flow

Data source: Brookfield Infrastructure. FFO = funds from operations. YOY = year-over-year.  

Brookfield Infrastructure delivered record funds from operations (FFO), which surged 14% compared to the prior-year period. While FFO was only up 3% on a per-unit basis, that's mainly due to timing. The infrastructure company issued shares to fund its Inter Pipeline transaction and completed an equity offering last November to support future growth.

Those results were even stronger when adjusting for the positive weather-related impact on its gas storage business last year. After stripping away this one-time gain, FFO was up 35% overall and 22% per unit. The company is benefiting from acquisitions and strong organic growth of 10%.

The two main growth drivers were the company's transport and midstream businesses:

Data source: Brookfield Infrastructure. Chart by the author.

FFO in the utilities segment was up 8% on a same-store basis, driven by higher than historical inflation-indexed rate increases and the completion of $450 million of expansion projects over the past year. This segment also received a partial benefit from acquiring an Australian regulated utility, which helped offset the lost income from the sale of its U.K. smart meter portfolio and North American district energy platform.

Transport FFO jumped 14% due to strong customer demand and activity levels and inflation-driven rate increases. Overall, rates rose 6% and could move higher later this year if inflation keeps rising.

The midstream segment's FFO more than doubled from the prior-year level after stripping out the outperformance from its gas storage business last year. The primary fuel source was the Inter Pipeline acquisition. Brookfield also benefited from stronger commodity prices and higher utilization of its existing infrastructure, driving organic growth above its target range.

Finally, FFO in the data segment was roughly in line with last year's level. The company benefited from additional infrastructure and inflation-driven rate increases. That helped offset lower results at its U.S. data center operations, which it's in the process of repositioning to drive future growth.

Image source: Getty Images.

A look at what Brookfield sees ahead

Despite all the headlines surrounding inflation, interest rates, and supply chain issues, Brookfield's outlook is very positive. It believes that the environment for infrastructure investment has only grown stronger, driven by supply chain issues and Russia's invasion of Ukraine. These catalysts are causing "deglobalization," leading countries to accelerate investments, especially in the energy and data sectors. 

The company expects to deliver organic growth at the high end of its 6% to 9% annual target range, driven by:

• Inflation-driven rate increases.
• Higher utilization of its assets due to strong commodity prices.
• Incremental cash flows from large expansion projects starting up in the coming months.
• Higher organic growth rates of recently acquired assets.

Brookfield also expects to deploy $1.5 billion into new investments this year. It's off to a strong start, investing $750 million into two utility investments in the quarter. The company took an Australian regulated utility business private (AusNet) and acquired an Australian smart metering business (Intellihub)

Meanwhile, the company recently agreed to partner with another infrastructure investor to take Uniti Group private. Uniti is a provider of wholesale and retail telecommunications services in Australia. Brookfield is investing $200 million into the deal, which should close in the third quarter.

With these investments, Brookfield has secured 60% of its 2022 capital deployment target. The company is highly confident it can exceed that goal, given the significant pipeline of opportunities it's currently pursuing.  

The company is concurrently running a sales process to monetize up to $2 billion of assets over the next year to recycle this capital into higher-returning opportunities. It's currently marketing its Indian toll road business and some newly constructed electricity transmission lines in Brazil. It expects to close these deals later this year.

Growing tailwinds should continue benefiting Brookfield

Brookfield Infrastructure got 2022 off to an excellent start. It's benefiting from inflation-driven rate increases, strong conditions in the energy market, and a steady stream of new investments. These tailwinds should remain strong in the coming quarters, setting the company up for an excellent year. That makes Brookfield a superb opportunity for those looking to invest in growing global infrastructure demand.