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Is Brookfield Infrastructure Partners L.P. the Perfect MLP?

By Matthew DiLallo - Sep 30, 2015 at 11:15AM

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Comparing Brookfield Infrastructure Partners L.P. to a perfect but hypothetical master limited partnership.

Brookfield Infrastructure Partners L.P. (BIP 0.58%) is a pretty compelling income stock as it's currently yielding 5.7%. However, as tempting as that yield is, it's no good if it's not safe. That's why I've developed a list of characteristics that one would find in a hypothetical perfect master limited partnership, which goes a long way to ensure the long-term stability of that high yield. Here's how Brookfield Infrastructure Partners stacks up.

1. An MLP should have a bounty of fee-based assets
Given that income stability is the name of the game, the perfect MLP should be loaded with fee-based assets. While generating 100% of its cash flow from fee-based assets would be ideal, I'm looking for anything over 75% of its cash flow being highly secured.

This is an area of strength for Brookfield as 90% of its cash flow is either regulated or contracted. Moreover, 70% is indexed to inflation and 60% has no volume risk. In other words, the company has a very solid foundation of stable cash flow that supports its generous distribution.

2. A solid balance sheet
Another key factor in an MLP's ability to continue paying its distribution is having a solid balance sheet. Ideally, we're looking for an investment grade credit rating and/or a debt-to-EBITDA ratio of 4.0 times or less. 

Here, Brookfield is borderline as it does have a solid investment grade credit rating of BBB+. However, its debt-to-EBITDA ratio is 5.5 times, which is a bit high. That being said, the company is comfortable with that leverage ratio largely because it is mainly at the asset level and not the corporate level as just 9% of its debt is corporate debt. Furthermore, given the fact that the majority of its cash flow is regulated or contracted, it is more comfortable with a higher leverage ratio as it's not worried about its cash flow dropping.

3. A strong distribution coverage ratio
Again, with income security as our goal, we want an MLP that isn't paying out all of its income to investors as we'd like some margin for error. Here, we are looking for a distribution coverage ratio of between 1.05 and 1.10 as that suggests the company is only paying out 90%-95% of its available cash flow.

This is an area where Brookfield really shines as the company only pays out 67% of its cash flow in distributions. That works out to a very robust 1.7 times coverage ratio.

4. A history of distribution growth
The perfect MLP investment would have a long history of growing its distribution as that shows that the company knows how to create value for its investors. We can see that Brookfield Infrastructure has done a solid job of growing its payout since going public.

BIP Chart

BIP data by YCharts.

5. A visible growth project backlog
We'd also like to see signs on the horizon that the company can keep that growth coming. Ideally, this would come by way of a strong organic project backlog. That's something that Brookfield Infrastructure has -- its total project backlog currently stands at $1.3 billion. That growth is fairly well balanced as the company expects to commission half a billion dollars in utility projects over the next two years with another $650 million being spent over the next two to three years on transportation projects across its portfolio.

In addition to organic growth, Brookfield also expects to derive incremental growth by continuing to be active in acquiring infrastructure assets. As the slide below notes, the company expects that 20% of its long-term cash flow growth will come from new investments.

Source: Brookfield Infrastructure Partners L.P. investor presentation.

The company currently has a number of deals in its pipeline that it expects to close over the next year or so, including its participation in a very large acquisition of an Australia port and rail company. In addition, it sees a robust opportunity set beyond its previously announced deals as it expects governments and businesses to be active sellers of infrastructure assets in order to reduce their leverage.

Investor takeaway
When we add everything up, Brookfield Infrastructure Partners really is a shining example of what a perfect MLP would look like. While its leverage ratio is a bit on the higher side, most of its leverage is on the asset level, which helps to insulate the company. Meanwhile, its cash flow is largely covered by stable assets, its payout ratio is low, and it has very visible growth. Suffice it to say, this is a company that income investors should have on their radar.

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