Q1 2024 Brookfield Infrastructure Corp Earnings Call

Participants

David Krant; Chief Financial Officer; Brookfield Infrastructure Partners LP

Sam Pollock; Chief Executive Officer; Brookfield Infrastructure Partners LP

Benjamin Vaughan; Chief Operating Officer; Brookfield Infrastructure Partners LP

Cherilyn Radbourne; Analyst; TD Cowen

Devin Dodge; Analyst; BMO Capital Markets

Robert Kwan; Analyst; RBC Capital Markets

Robert Hope; Analyst; Scotiabank

Robert Catellier; Analyst; CIBC Capital Markets

Presentation

Operator

Hello and welcome to the Brookfield Infrastructure Partners first-quarter 2024 results conference call and webcast. (Operator Instructions) Please be advised that today's conference call is being recorded.
It is now my pleasure to introduce Chief Financial Officer, David Krant.

David Krant

Thank you, operator, and good morning, everyone. Welcome to Brookfield Infrastructure Partners' first-quarter 2024 earnings conference call. As introduced, my name is David Krant, and I am the Chief Financial Officer of Brookfield Infrastructure. I'm joined today by our Chief Executive Officer, Sam Pollock; and our Chief Operating Officer, Ben Vaughan. I'll begin the call today with a discussion of our first-quarter 2024 financial and operating results followed by some brief remarks on our strong financial position. I'll then turn the call over to Sam who will provide an update on our strategic initiatives before concluding with the outlook for the business.
At this time, I would like to remind you that in our remarks today, 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.
Brookfield Infrastructure's business recorded an excellent start to the year. During the first quarter of 2024, we generated funds from operations or FFO of $615 million, representing an 11% increase over the prior-year period. This increase reflects organic growth of 7%, as well as contributions associated with over $2 billion of capital deployed in the second half of last year.
We've been pleased with the performance of our new investments, notably our data at our newest data center platforms in North America and Europe. While it is early, the momentum building in each of these businesses positions us to exceed our initial return expectations taking a closer look at our results by segment, our utilities generated FFO of 190 million compared to 208 million in the same period last year. The lower reported result is primarily attributable to capital recycling initiatives completed over the last 12 months, most notably the sale of our interest in the Australian regulated utilities. After adjusting for asset sales and financings completed organic growth for the segment was 8%. This growth is primarily attributable to inflation indexation and the commissioning of over 450 million of capital into the rate base during the last 12 months.
Moving to our transport segment, FFO was $302 million, representing a 57% increase over the same period last year. The step change is largely attributable to the acquisition of Triton, which is performing well above our plan. Geopolitical events in the Middle East have resulted in lengthening of certain shipping trade routes, thereby increasing global demand for containers. As a result, Titan's fleet utilization has increased to over 98%, while also securing attractive rates on recently contracted long-duration leases.
This is in contrast to the reduction in utilization we had conservatively underwritten in anticipation of reduced global economic activity. The balance of our transfer operations grew by 10%, driven by inflationary tariff increases and higher volumes. Our rail networks and toll roads realized average rate increases of 9% and 7%, respectively, over the same period last year. Highlighting the benefits of inflation. Indexation traffic levels on our roads increased by 4%, and our diversified terminals recorded 7% higher volumes.
Our midstream segment generated FFO of $170 million, which is comparable to the prior year after excluding the impact of capital recycling initiatives. Although our direct commodity exposure is limited, the prevailing environment has been very favorable for customer activity levels and demand for our critical midstream assets. This demand has been most robust across our North American gas storage operations, where the fundamentals for the business continue to improve growth in North American LNG export capacity, the necessity of gas as a backup for intermittent generation sources and extreme weather based events to continue to support storage rates and contract durations as a result, we have successfully increased FFO at a compound annual growth rate of over 20% in the past five years. As we have highlighted before last year, we sold our interest in two non-core US gas storage assets to strategic buyers. Through these sales and the dividends received during our ownership, we have returned more than our original invested capital and still own one of the largest independent gas storage businesses in North America that today generates over 240 million of EBITDA annually.
Lastly, FFO from our data segment was $68 million, which is comparable to the same period last year. Results for the quarter benefited from a full contribution from our German telecom tower operations, two hyperscale data center platform acquisitions and the purchase purchase of 40 retail colocation data centers out of bankruptcy. These acquisitions were largely offset by the sale of our interest in a New Zealand integrated data distribution business, which closed in June of last year.
Focusing on our global data center platform, we continue to see significant activity from the major hyperscale customers. As a result, we have been able to commercialize significant capacity on favorable contract terms that are long-duration and underpinned by highly creditworthy counterparties. Today, we have approximately 670 megawatts of booked, but not built capacity that we expect to come online over the next three years. In the last 12 months, we have commissioned approximately 40 megawatts, which is expected to contribute roughly 45 million of run rate EBITDA on a 100% basis.
In addition to the strong financial operational start to the year, we have had we have an excellent financial position while macro debates on the pace and size of interest rate cuts by central banks has been recently influencing market behavior. We believe that investors will return to their focus on the micro factors that are key to differentiating businesses over the long term. Today, despite higher interest rates, our business is the strongest it has ever been. This is evidenced by our current revenue profile and sector tailwinds driving our organic growth outlook.
In terms of our revenue profile, approximately 90% of these cash flows are regulated or contracted and also inflation protected. This provides tremendous resiliency in this environment. Our sector leading organic growth is highly correlated to the two most significant trends of this decade, namely decarbonization and digitalization. The investments we are currently making in our transmission, residential, decarbonization, semiconductor and data center businesses will fuel our growth for many years to come.
Lastly, I wanted to touch on the strength of our balance sheet and the depth of debt capital markets. Credit markets have performed exceptionally well thus far in 2024. Investment grade index spreads remain only modestly higher than post-financial crisis lows, despite nearly half a trillion of supply in the first quarter. This environment has provided a constructive backdrop to opportunistically derisk and optimize capital structures of many of our businesses while taking advantage of record low spreads following an active quarter of refinancings.
Today, over 90% of our capital structure is fixed rate with an average term of seven years, only 4% of our asset level debt is maturing over the next 12 months, and we have no corporate maturities until 2027 based on where interest rates are today and recently completed or well-progressed financings, we expect less than 600 million of asset level maturities in 2024 to have higher borrowing costs than those in place today. Moreover, our corporate liquidity at the end of the first quarter remained strong with over $2 billion available to support our growth initiatives.
That concludes my remarks for this morning, and I'll now turn the call over to Sam.

Sam Pollock

Thank you, David, and good morning, everyone. As Dave mentioned at the outset of the call, I'm going to provide an update on our strategic initiatives and conclude with an outlook for the year ahead. As we have advanced through 2024, market conditions have continued to improve activity levels for M&A processes have increased and as a result, the environment for transacting should be more balanced this year as compared to the prior year.
We made significant progress in our capital recycling plan, securing 1.2 billion in proceeds of which $1.1 billion has been closed to date. This success sets us up well to achieve our 2 billion annual capital recycling target regardless of transaction activity in the sector in April, we signed binding documentation to sell the fiber platform within our French telecom infrastructure business. The transaction has an enterprise value of over EUR1 billion is expected to result in an IRR of 17% and a multiple capital of approximately 1.9 times. We create this greenfield fiber development segment in 2017 and quickly scaled the business to become a leading wholesale fiber to the home network in the region, we expect to generate up to 100 million of proceeds when the transaction closes later this year. The balance of our capital recycling initiatives were completed through opportunistic asset level financings to rightsize capital structures and pull forward future sale proceeds. During the quarter, we completed a $1.6 billion financing in our Brazilian regulated gas transmission business that resulted in approximately 500 million of proceeds. This recapitalization takes advantage of the strong demand for high-quality issuers in Brazil and low leverage levels at the company when combined with two preset can be completed brief refinancings, we have generated over 1 billion for the partnership and successfully reduced the equity required from future future buyers.
Moving to acquisitions, the investment pipeline remains quite full, but we are being very selective in pursuing only those opportunities with high risk-adjusted returns. There are significant number of organic and tuck-in opportunities that our primary focus at the moment since these are typically our highest returning investments, our largest investment in the quarter was the low risk follow on investments we acquired an incremental 10% stake in our Brazilian integrated rail and logistic provider from an existing shareholder for approximately 365 million purchase increased our ownership in a high-performance business with strong fundamentals at an approximately 20% discount to our view of their fair value. And the other initiative we are advancing is the following one acquisition of a portfolio of telecom towers in India, which is expected to close in the fourth quarter. The total equity consideration is 1 billion, with our share expected to be approximately 150 million. We are also screening a large pipeline of early-stage M&A opportunities that we believe could achieve returns in excess of our targets. These opportunities range from asset carve-outs, which strategic partnerships and are concentrated in OECD countries in Asia Pacific, North America and Europe.
As we look ahead, the longer-term outlook for the global economy remains positive. However, our expectation is that we may experience several additional quarters of volatility as we settle into a flat to lower interest rate environment and geopolitical situations in Europe and the Middle East remain unresolved. Nonetheless, in this environment. Infrastructure assets should continue to attract significant interest from institutional investors worldwide as a source of stability for the portfolio's. This interest in this sector is best exemplified by new allocations to the asset class, which we have seen accelerate over the past six months. In addition, we are also witnessing significant excitement about the growth in the data sector driven by the tailwinds created from digitalization, including advancements in AI and the build-out of fiber and telecom networks to support the growth in data consumption.
Overall, we believe our strong business performance and strategic outlook outweighs. Any factors relates to the near term interest rate environment. Over the long run, interest rates will stabilize, but there are a few infrastructure businesses like ours that are globally diversified across sectors and geographies that can offer investors a stable and growing distribution, which over time will easily overtake any interest rate increase. This global footprint continues to be a competitive advantage and enables us to arbitrage various economic conditions to buy and sell attractive assets at valuations in the same markets, same environment.
This concludes my remarks, and I will now pass over to the operator for Q&A.

Question and Answer Session

Operator

Thank you. (Operator Instructions) Cherilyn Radbourne, TD Cowen.

Cherilyn Radbourne

Thanks very much and good morning and with regards to the leverage that that business has to decarbonization and digitalization, is there a way that you can help us frame how much of the current FFO is levered to those trends or more importantly, where you see that going over the next five years based on the orientation of your CapEx project backlog and the M&A pipeline as Cheryl and maybe I'll start for a second there to give Dave a few minutes to do some stuff on the calculator to saving answer some of those questions.
But I'm at a high level what I would say is that from an M&A perspective today, probably I'm going to estimate 80%, 75, 80% of our new investment opportunities probably relate to data and at the data and decarbonization sectors or at least the trend. And I would expect that to continue at least for the foreseeable future. And that's been the case. I think other than Trident. That's been the case in the last probably year or two in relation to our backlog. And the vast majority of it relates to the utility sector, which is obviously focused on decarbonization initiatives as well as our data centers and semiconductor investments, though, you can definitely see that in our backlog.

David Krant

But maybe I can give you some numbers to frame that with and to help fill that. And I think if we look at our business today, Charles and I won't surprise you, if you look at our residential decarbonization platform and our data sector, we have about 30% of our FFO from those two segments or subsegments. And but in contrast, if you look at our backlog today, 80% of our capital projects are in those two areas. So you'd to your point, you will certainly see the proportion of cash flows grow for those subsegments, disproportionately them something like our midstream, our transport business is it just makes us much less of our of our backlog and growth CapEx.

Cherilyn Radbourne

Great. That's really helpful. Even though I sort of sprung that on you. The letter also comments that the credit markets have provided a very supportive backdrop to derisk and optimize the capital structure across a variety of your businesses. And just given the relatively long average duration of your debt, are there still opportunities to take advantage of that backdrop? Or do you think you're largely complete on that front for the year?

David Krant

The short answer is I think we've done a lot, which we're really happy about the ability to execute in the start of 2004, but there's still some to do if markets continue to remain favorable. I think there's a few that we're looking at in the near term on Intel's one where we have project finance that we'd love to take out of spreads at these levels. And so that's one we'll monitor closely over the next and a few weeks. And then over the balance of the year, if there are opportunities to derisk maturities that are coming due at 2024, but certainly 2025 maturities in 2026, even that we'll look to if we can de-risk those and extend like we've seen at North River at G&W where we're pushing out maturities five, six, seven years. That's something we're more than happy to do, even though it costs us a few basis points or incremental interest in the short term because again, there's nothing you can't put a price on having that strength and duration of our capital structure.

Operator

Devin Dodge, BMO Capital Markets.

Devin Dodge

Aren't that good morning. So I wanted to start with a question on Inter Pipeline. So this might be for Ben, but it seems like there may have been some additional challenges there with the PDH start-up at Heartland. Can you provide some color on the nature of those issues and when we should be expecting the facility to ramp up to full production?
Yes.

Cherilyn Radbourne

Thanks, Devin.

Benjamin Vaughan

Yeah. Thanks, Devin. It's Ben here. IPL is providing updates directly on the Heartland starts. So we don't have much to add to the updates that they're providing you. The facility made a little over GBP170 million last quarter, which was in line with the previous quarter. And I believe in the IPL from recent disclosure, they plan to achieve full run rate by mid this year to bring the plant up online and bring it back to the PGP. side to full run rate. So we don't have much to add over and above what they've disclosed.

Devin Dodge

Okay. And then I was going to ask about Intel. So when we look at the capital backlog for this project, it seems to have moved higher versus a year ago despite I think somewhere in the range of like 4 to 500 million of spending that's occurred over the last 12 months.

David Krant

Can you speak to how this project is proceeding and if you're starting to see some some cost escalations there, or is it additional scope or how we should be thinking about that?
Let me cover the first part, Devin, in terms of the increase in the size of the project for BP, it's really just a function of our flagship infrastructure fund having its final close. So when we were during fundraising, we assumed Brookfield would be 25%. We ultimately ended up at 25.5. So we've updated our capital backlog to reflect our final ownership in the fund. There's nothing I wouldn't read through that to say there's any issues on scope or capital size of the project is still in line with the guidance we had given at the beginning, it's just the net to the figures a little larger.
But to be clear, we haven't made any adjustments because we thought price with an owner and the construction was going higher. So that's not the case. And I'm again, there's only so much we can report on this because Intel provides updates directly and they did provide an update, I think, on April 15th. But I think the main takeaway from our perspective is that from the pace of construction funding and the expectation regarding our economics, they remain very much in line and so far proceeding as we underwrote.

Operator

Robert Kwan, RBC Capital Markets.

Robert Kwan

Good morning. If I can just start with a question on the transaction environment. And you mentioned that you're being very selective. As I said, by calling this out, I presume you're being even more selective than normal. So I'm just wondering what's behind that is that you are seeing valuations move higher. You're kind of treating yourself a little bit here as capital constraints?

David Krant

Hi, Robert. It's Sam here. So I know I don't think it's really either of those things. I would say that and we have we still see a fair amount of and situations that we can pursue, but we wanted to preserve some of our capital for what could be coming down the pike. And so we think that the longer that deal activity remained a low bit slowed or depressed that this could result in situations that people become more stressed and feel that they need to get done and as a result creates a real contrarian opportunity. And so yes, we might be wrong in that, but we've had such great success in the last couple of years in deploying capital, and we still deployed 500 million in the first quarter.

Benjamin Vaughan

So it's not as if we're not deploying capital, but I do think we are sort of holding onto a bit of our powder for potential opportunities we think might be in front of kind of as
you just think about some of these elevated return you hopefully can achieve without changing the 12% to 15% target.
Jeff Tennyson, soft hurdles as to what types of returns you'd be targeting at that based on trying to be more selective?

David Krant

Yes.
Look, I think we are everything has got to be risk-adjusted. But for the last year and a bit, we have kind of definitely targeted opportunities in the 15% to 20% range with ability to even achieve returns in excess of that if certain parts of our business come together. So we're definitely being a bit greedy at the moment to take one of a bucket towards I guess. But we I think that's just the environment that we're in at the moment.
Gotta ask if I can just finish with Tritan here, Dick commented that it's performing well above your plan. I'm just wondering if you can be a little more specific about what aspects of the business have performed and whether you expect that to be ongoing? And then just a second question knows, I think part of the original thesis was what Tritan could do for us, broader synergies and information for your global shipping business. If you can just talk maybe a little bit about what you've seen to date and what you expect to get out of train it may be better, then we'll take the first part and maybe I can touch on that, but not sure, Sam.
Yes.

Benjamin Vaughan

Hey, Robert, it's Ben here. Yes, just in terms of the underlying business, here, it's really been a story of excellent utilization. So our fleet is our utilization is substantially full. It's north of 98% utilized. So with a combination, I would say of the I'll call it the Red Sea dynamics a little while ago and then just good good trade flows more recently, you know, our clients have called on our fleet to be fully utilized. So it's sort of that that simple and rates are solid. So I'd say in general, the early story of trading is just excellent utilization of the assets at good rates and locking in that duration of the fleet and extending that out.

David Krant

And just under the second part of your question, our ability to leverage the information coming out of the trade flows. I'd say we're still in the early days of achieving that. We do interact very closely with the trained management team, and they do have excellent intelligence as to what's taking place. But I wouldn't say today that we've been able to utilize that information for a specific transaction. So our hope is obviously to be able to do that and the, but I don't have a time to report on that.
Okay. Got it.

Operator

Robert Hope, Scotiabank.

Robert Hope

Morning, everyone. I'm just wondering to continue the commentary on the M&A market, especially given kind of your views maybe thing holding some back and the expectation of better entry points moving forward under that kind of premise as well as the commentary that market conditions continue to improve, how are you looking at your asset monetization goal, we've seen it be more biased towards up financing and refinancing. Now, could we see an acceleration of asset monetizations to give you some further cushion on the capital side?

David Krant

Hi, Robert. So as I said in our remarks and in our letter, we are seeing more activity broadly speaking, but we're coming off a relatively low base in regards to that, but we can continue to see improvement as interest rates start to find a settling point.
As far as what we're doing at the current moment in time, we are focused on monetizing those businesses that are probably more on the smaller side in time. And yes, relatively derisked and just to appeal to the broadest audience possible. And I'd say the other sort of group that we're trying to target in our disposition programs are strategics because I'd say they're still relatively more active in the M&A market than financial financial investors are probably the one group that are a little less active and what we've seen in the past.
Thanks for that.

Robert Hope

And then maybe moving over to the data segment.
Maybe can you provide some additional color on kind of the opportunity set moving forward, just given the significant amount of increase of interest and that segment is seeing across a number of geographies, could we see you pivot more towards the organic side? Are there the backlog there versus M&A?

David Krant

I think it's a combination of everything. So our organic pipeline is very strong. So we have a lot of build-to-suit opportunities with our tower businesses, how we can continue to take on new territories to build out our fiber to the home in the U.S. as well as in other regions. Obviously, the data center sector is just on fire. And so we have a huge backlog there. So I think in relation to the organic side of the business. It's it's as biggest it's ever been. But we also see lots of interesting opportunities from a carve out an M&A perspective, and it has to do sort of with the same dynamic, which is the fact that a lot of parties also have significant organic growth opportunities, but don't have the capital to execute. And so they're looking for partners or they're looking to sell businesses that they can no longer continue to grow. So I think we'll we'll hopefully have a balanced approach to deploying in the data sector, which is both M&A and organic going forward.

Operator

Robert Catellier, CIBC Capital Markets.

Robert Catellier

Hey, good morning.
I just have a couple of follow-up questions here.
First on HPC., I'm curious if you know if there's a line of sight to a technical solution to that screen issue and have visibility to getting that facility producing at that nameplate capacity again?

David Krant

Thanks, Robert.
From what you know, I think what we said last call was that we are working through the full startup of the PGP. facility. And Tom had IPL, as I mentioned a minute ago, disclosed the facility. We've got the backup by mid 2024, and we would fully expect the facility over time to achieve its full nameplate capacity.

Robert Catellier

Okay.
And then given the strength of Tritan, does that impact your investment plans there?
In other words, is there an opportunity to invest in more capacity given how utilized of the fleet is?
Or is there potential for that?
This is a little bit of a bulge if geopolitics calmed down and the utilization settles down a bit?
Yes.

David Krant

So Robert, at the end, the nature of the business is such that Tritan because of its scale is able to get itself into the queue with suppliers of containers and always had sort of a running it source of content because of that. And we make capital allocation decisions at various points in time, too, it take on more inventory or less inventory. And that's really where the management team has been very successful over time is being able to predict when to hold inventory when the U.S., they are fortunate to have inventory on hand when the latest crisis for the shippers took place with the Red Sea.

Sam Pollock

And so that's what pushed what we thought was going to be a relatively soft year in our underwriting to one turned out to be one of the best years to do utilization. We will replenish our inventory over the next couple of months.

David Krant

And so we should very soon have it's a normal level. And then the management team will continuously decide if they increase that or decrease that depending on where they see and current per diems and just whether or not they think it's a good time to invest in inventory or not, but that is what they do really well.

Operator

Thank you. And I'm showing no further questions at this time. So with that, I'll now turn the call back over to CEO, Sam Pollock, for any closing remarks.

Sam Pollock

Okay. Thank you, operator, and thank you, everyone, who joined our call.
We appreciate your interest in the Company, and we look forward to updating you again on our progress for our 2024 objectives on our next call in August.

Operator

Ladies and gentlemen, thank you for participating this does conclude today's program, and you may now disconnect.