Brookfield Infrastructure Partners L P : Q1 2021 Transcript

Brookfield Infrastructure Partners L.P.

Q1 2021 Results Conference Call & Webcast

May 6, 2021

Corporate Speakers:

• David Krant; Brookfield Infrastructure Partners Limited; Chief Financial Officer & Managing Director of Infrastructure
• Sam Pollock; Brookfield Infrastructure Partners Limited; Chief Financial Officer
• Gabriele Montesi; Brookfield Infrastructure Partners Limited; Managing Director of Infrastructure
• Ben Vaughan; Brookfield Infrastructure Partners Limited; Chief Operating Officer

Participants:

• Rupert Merer; National Bank Financial, Inc.; MD & Research Analyst
• Robert Kwan; RBC Capital Markets; MD & Energy Infrastructure Analyst
• Andrew Kuske; Credit Suisse AG; MD, Head of Canadian Equity Research and Global Coordinator for Infrastructure Research

PRESENTATION

Operator: Ladies and gentlemen, thank you for standing by, and welcome to Brookfield Infrastructure Partners First Quarter 2021 Results Conference Call and Webcast . (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions). It is now my pleasure to introduce CFO, David Krant.

David Krant: Thank you, operator, and good morning, everyone . Thank you all for joining us for Brookfield Infrastructure Partners' First Quarter Earnings Conference Call for 2021. My name is David Krant, and I am the Chief Financial Officer of Brookfield Infrastructure Partners.

Joining me today is Sam Pollock, our Chief Executive Officer; and our guest speaker this quarter, Gabriele Montesi, Managing Director based in our London office. Following our remarks, we look forward to taking your questions.

At this time, I'd like to remind you that in responding to questions, as well as talking about growth initiatives and our financial and operating performance, we may make forward-looking statements. These statements are subject to known and unknown risks, and future results may differ materially. For further information on known risk factors, I would encourage you to review our annual report on Form 20-F, which is available on our website.

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We are pleased to report that Brookfield Infrastructure had a strong first quarter and that 2021 looks like it will be an excellent year. Coming off an extremely resilient 2020, th e business generated first quarter Funds from Operations, or FFO, of $431 million or $0.93 per unit, up 20% compared to the prior year. This solid start reflects the benefit of inflationary revenue escalators, as well as new contracts and capital expansion projects completed in the last year. Taking into account the 5% distribution increase announced in February, our payout ratio for the quarter was 70% of FFO.

Many of our businesses are benefiting from higher volumes associated with robust demand for various industrial and agricultural commodities. Performance for the balance of the year will be further aided by GDP and consumer-related volume growth, which has not yet meaningfully contributed to results. The vaccine rollout remains in the early days in many countries. However, in the U.S. and U.K., where solid progress has been made, we are seeing immediate improvement in economic growth and consumer activity. These positive early indicators give us optimism that this trend will continue, and our busi ness will benefit as more regions participate in this recovery.

Now moving on to our strong results for the quarter. FFO grew organically by 8% due to inflationary tariff increases, modestly higher volumes associated with the early stages of economic recovery, and the completion of $800 million worth of capital projects commissioned in the last 12 months.

Results for the quarter were further supplemented by favorable market dynamics produced by weather events that led to exceptional performance in our midstream segment. These positive factors were partially offset by the impact of foreign exchange in a number of our segments and a higher management fee relative to the prior year.

The utility segment generated FFO of $166 million, up 7% over the prior year on a constant currency basis. All businesses within the segment are performing well, with results benefiting from inflation indexation and the commissioning of almost $400 million of capital into rate base over the last year. These contributions were partially offset by the sale of two mature businesses in 2020.

New connection activity at our U.K. regulated distribution operations exceeded plan by approximately 15% during the quarter. These results reflect good levels of construction activity that has been unaffected by government-imposed restrictions as well as positive momentum in the housing sector. The business also recorded strong connection sales with several large multi-utility projects secured during the quarter. We believe this momentum will persist, supported by advanced vaccination rollout and economic restrictions having largely been lifted.

Within our utility operations in Brazil, results at our regulated gas transmission business increased 21% in local currency terms, compared to the prior year. This increase is primarily attributable to an annual inflationary tariff adjustment that was confirmed at the end of 2020. Following the quarter, a new law was enacted to promote continued

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investment in growth in Brazil's energy sector. The law removes the expiration date of pipeline authorizations, thereby, converting this asset base to a perpetual franchise.

We have also advanced the build-out of our electricity transmission operations in the country, with the completion of approximately 600 kilometers of transmission lines during the quarter. The platform now has approximately 2,600 kilometers of operating transmission lines, which distribute electricity that is primarily generated from renewable energy sources. We are on track to complete the balance of the projects, which represent a further 2,700 kilometers over the next 18 months.

FFO from our transport segment was $162 million, an increase of 17% over the prior year. The gradual reopening of economies has contributed to volume growth at our rail and ports businesses. Supported by robust demand for commodities in Australia and Brazil, volumes on our rail networks increased almost 10%. Volumes on our container terminals increased by almost 20%, compared to the prior year, driven primarily by consumer-led activity in the United States and Australia. Results also benefited from the contribution of our U.S. LNG export terminal that was acquired in September. These positive factors were partially offset by asset sales as a result of our capital recycling initiatives and foreign exchange.

During the quarter, the regulator of our Australian bulk export terminal provided a f inal decision confirming the transition to a light-handed regulatory framework. Under this model, we will directly negotiate pricing with the users of the terminal, instead of operating under a single regulated tariff . The new framework will become effective in July and will allow the company to establish rates that better reflect the economic value of the facility to customers. Contracts with customers will retain the f avorable f eatures that existed under previous frameworks, such as our availability -based revenues and the socialization of customer obligations.

FFO from our midstream segment totaled $146 million for the quarter, nearly a twof old increase over the prior year. The strong performance reflects robust customer demand and the completion of an expansion at our U.S. gas pipeline. Results for the quarter also benefited from the operational strength and preparedness of our gas storage business through the extreme weather conditions experienced in the United States.

In March, our U.S. gas pipeline commissioned the second phase of its Gulf Coast expansion. The project will increase transport capacity in the region and was completed on time and below budget. Relative to a $200 million total capital investment, or approximately $75 million, net to BIP, the expansion will generate annual EBITDA of approximately $45 million on a 100% basis, or $17 million, net to BIP. This FFO is under long-term contract with an investment-grade counterparty. Completion of this important project coincided with a partial monetization of the business that Sam will touch on in his remarks.

FFO from the data segment totaled $60 million, an increase over 40% versus the prior year. This reflects the contribution of the Indian telecom tower acquisition completed in

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August, as well as organic growth of 7% across our existing businesses . This organic growth includes inflationary price increases built into our telecom tower and data center customer contracts, as well as the rollout of additional points-of-presence and Fiber -to - the-Home at our French telecom operation.

We advanced two priorities within our data transmission and distribution platform during the quarter. First off, we significantly de-risked the cash flow profile of our French telecom business through the execution of 15-year contract extensions with two mobile network operators, or MNO customers. Secondly, our Indian telecom tower operation finalized a long-term master services agreement and commenced hosting services f or a second leading MNO. We are now focused on the rollout of these services to additional tower locations across our network in India as well as increasing co-location on our tower infrastructure.

Now before turning the call over, I'll briefly touch on our balance sheet, which is in excellent shape due to ample liquidity levels and a well-laddered maturity profile. Credit markets also remain highly supportive for the type of assets we own. With no material asset maturities in 2021, our focus for the year will be on completing opportunistic financings across our portfolio. With revenues largely adjusted for inflation, our focus on financing assets with long-term fixed rate debt will provide further operational leverage in an economic recovery.

We have a healthy pipeline of prospective investment opportunities and substantial available liquidity to support these. Total liquidity currently exceeds $4 billion, of which $2.6 billion is at the corporate level. Secured capital recycling initiatives will add over $1.3 billion to our corporate liquidity in the coming months, and we expect to further enhance our position by $1 billion to $1.5 billion through the monetization of additional mature assets in the next year.

With that, I will now pass the call over to Gabs.

Gabriele Montesi: Thank you, David, and good morning, everyone . I'm pleased to be joining you on today's call to provide a spotlight on our U.K. port operation, PD Ports. We acquired PD Ports in 2010 as part of the recapitalization of Babcock & Brown Infrastructure. Ever since, our management team has worked tirelessly to diversify the port's customer base and reinvent the business. Today, as we shift towards a more sustainable economy, we believe PD Ports is on the brink of yet another transformation . But, before I jump into more detail around its growth potential, let me take a step back and provide a quick overview of the merits of the business.

As with any island country, port infrastructure is vital to the U.K. economy with an estimated 90% of the country's goods traded arriving by sea. Our operations span 13 sites and serve as the gateway to Northern England through critical rail and road linkages. This group of scarce, well-located and connected landlord ports unlock worldwide markets and offer direct transfer links to all corners of the U.K.

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The business today is highly diversified through the following revenue streams. First, our statutory harbor authority status provides the perpetual right to look after a river system and charge customers to pass-through it. These fees contribute over 40% of EBITDA and provide recurring, stable and inflation-linked cash flows.

Second, as a landlord port, we lease land adjacent to the port under long-term agreements with high-quality counterparties. These leases have embedded inflation escalation, extremely high renewal rates given the strategic location of the port and contribute approximately 40% of EBITDA.

Last, our port operation services contribute approximately 20% of EBITDA and involve handling services integral to our customer supply chains. The evolution of the port, however, did not happen overnight. To best position the business and enable it to benefit from attractive regional dynamics, we delivered on several value creation activities over the past decade.

And to mention just a few, we developed a port-centric strategy focused on integr ation with customer supply chains and attracting new volumes to the port. We've reinvested over $120 million of operating cash flows to expand facilities, enhance capacity and modernize our infrastructure. We actively attract the new long-term customers to the region, including the development of the world's largest biomass power station, and we invested in port automation to transition away from carbon-intensive activities and into renewable and sustainably sourced goods and products.

And we refinanced PD Ports' legacy capital structure increasing debt levels in the business commensurate with growing EBITDA. The business has performed extremely well in the last decade, and the next 10 years look to be even better. With the success of its vaccine rollout, the U.K. is poised to experience near-term economic expansion ahead of many other parts of the world. This coincides with emergence from nearly a half- decade of Brexit-induced trade overhang.

Furthermore, to encourage additional investment and promote new trade relationship with the EU, the U.K. government awarded eight coveted freeport status designations, one of which was given to Teesside, PD Ports' main location. This status provides benefits from tax savings, simplify custom procedures, streamline redevelopment processes and government support.

In addition to a favorable macroeconomic backdrop, the business has highly visible near - term growth. First, PD Ports receives annual inflationary tariff increases on 80% of its revenues, which bodes well for near-term inflationary expectations. Second, we anticipate highly captive customers to continue to provide growth opportunities and incremental revenues as legacy conservancy and property charges contractually reset to market rates. Further, we have large-scale expansions underway, including expected new volumes from the development of the world's largest polyhalite mine and an almost twofold increase in our container terminal capacity.

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