Special Situations December 22, 2011 Toronto, Ontario Bert Powell, CFA BMO Nesbitt Burns Inc. (416) 359-5301 [email protected]Associate: Luigi Di Pede (416) 359-6442 [email protected]This report was prepared by an analyst(s) employed by BMO Nesbitt Burns Inc., and who is (are) not registered as a research analyst(s) under FINRA rules. For disclosure statements, including the Analyst’s Certification, please refer to pages 50 to 53. Brookfield Infrastructure (BIP – NYSE) Stock Rating: Outperform Global Infrastructure Play; Organic and Acquisition Growth to Drive Cash Flow; Initiating Coverage at Outperform Price (21 – Dec) $26.37 52-Week High $28.00 Target Price $31.00 52-Week Low $20.56 (FY – Dec.) 2010A 2011E 2012E FFO/Unit $1.79 $2.37 $2.07 P/FFO 11.1x 12.7x CDPU $1.10 $1.32 $1.42 Payout Ratio 62% 56% 69% Dividend $1.40 Yield 5.4% Book Value $16.94 Price/Book 1.5x Shares O/S (mm) 185.1 Mkt. Cap ($mm) $4,881 Float O/S (mm) 129.6 Float Cap ($mm) $3,418 Notes: All values in US$ Highlights • BIP’s portfolio consists of globally diversified high quality infrastructure assets that provide essential products and services for the global economy. The assets tend to be long-life assets that require minimal maintenance capital expenditures. Currently approximately 80% of the cash flow is generated from long term contracts or regulated businesses, which are supported by take-or-pay contracts. • BIP continues to grow its portfolio and currently has approximately $1 billion in capital projects to drive future cash flow growth along with a pipeline of future growth opportunities including acquisitions. Almost all of the planned capital projects are supported by regulated returns or take-or-pay contracts. • We forecast FFO/unit to grow at a CAGR of 3% between 2011 and 2013, while the distribution/unit is expected to grow at a CAGR of 8% over the same time period as the payout ratio, currently 56%, moves to the bottom end of management’s target range of 60-70% in 2013. Management believes that long-term distribution increases will be near the top of its 3-7% annual range supported by both organic growth and acquisition growth. • Our one year target price of $31 is based on a cash flow yield methodology. BIP is currently yielding 5.3%, based on annual distribution of $1.40/ unit and 5.8% based on our 2013 forecast distribution of $1.54/unit. In order to support our valuation, we complement our analysis using a sum-of-parts analysis and historical P/FFO multiples. Our target price represents a total potential return of 23% including an annual distribution of $1.40/unit. • We are initiating coverage of BIP with an Outperform rating and a target price of $31. 5 10 15 20 25 30 5 10 15 20 25 30 Brookfield Infrastructure Partners (BIP) Price: High,Low,Close(US$) 0 10 20 0 10 20 Volume (mln) 2008 2009 2010 2011 80 100 120 140 160 80 100 120 140 160 BIP Relative to S&P 500
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This report was prepared by an analyst(s) employed by BMO Nesbitt Burns Inc., and who is (are) not registered as a research analyst(s) under FINRA rules. For disclosure statements, including the Analyst’s Certification, please refer to pages 50 to 53.
Brookfield Infrastructure(BIP – NYSE)
Stock Rating: Outperform
Global Infrastructure Play; Organic and Acquisition Growth to Drive Cash Flow; Initiating Coverage at Outperform Price (21 – Dec) $26.37 52-Week High $28.00
• BIP’s portfolio consists of globally diversified high qualityinfrastructureassetsthatprovideessentialproductsandservicesfortheglobaleconomy.Theassetstendtobelong-lifeassetsthatrequireminimalmaintenancecapitalexpenditures.Currentlyapproximately80%ofthecashflowisgeneratedfromlongtermcontractsorregulatedbusinesses,whicharesupportedbytake-or-paycontracts.
BIPwasspunoutofBAMinJanuary2008.TheinitialassetswereelectricitytransmissionassetsinChile,NorthAmerica,andBrazil,alongwithstandingtimberassetsinWesternCanadaandWesternUnitedStates.InLate2009BIPparticipatedintherecapitalizationofPrimeInfrastructure(formerlyBabcock&Brown)acquiringa40%interestinPrime’sassets,whichadded theDalrympleBayCoalTerminal (DBCT)asset to theUtilitiessegmentandseededthecreationoftheTransport&Energysegment.Inlate2010,BIPmergedwithPrime.Thetablebelowprovidesachronologicalreviewoftheeventsthathavetranspiredsinceinception.Therecentmergerhashadasignificantimpactoncashflowsandmakesusingpriorperiodcomparisonsforanalysisirrelevant.
Figure 1: Segment Development Timeline
Source: Brookfield Infrastructure Partners, BMO Capital Markets
Transportation &Utilities Energy Timber Social Infrastructure
11% Interest in Transelec (Chilean transmission assets)
38% interest in Canadian timberlands
100% interest in North American Transmission assets
30% interest in U.S. timberlands
7% to 18% Interest in TBE (Transmissoras Brasileiras de Energia)
12-May-2008 Acquired PPP social infrastructure assets
Acquired a hospital in the U.K. and Prison Hospitals in Australia for $12 million
Acquired Melbourne Show Grounds for $3 million
30-Jun-2009Sell interest in TBE for $275 million resulting in after-tax gain of $68 million
0% Interest in TBE
20-Nov-2009
Acquire 40% Interest in Prime Infrastructure, formerly Babcock & Brown for $941 million as part of $1.6 billion Prime recapitalization.
Added a direct interest in Australian Dalrymple Bay Coal Terminal (DBCT), European Energy distribution (GTC), and the Australian Energy distribution distibution business (Powerco)
Added a direct interest in PD Ports. Through Prime added North American Gas Transmission assets NGPL, Australian Rail Road, and European Ports (Euroports)
Projects in B.C. and Ontario. $3 million in vestment
20-Nov-2009
Issued 40.7 million shares at a price of C$15.55 (~US$14.60 ) for proceeds of C$632 million. Also issued 28.1 million redeemable units to BAM at a price of US$13.71 for proceeds of $385 million allowing BAM to maintain 41% interest in BIP.
8-Dec-2010
BIP Merges with Prime increasing ownership from 40% to 100%. 50.7 million shares were issued. On a fully diluted basis BAM's interest in BIP falls to 30%.
Issues 19.4 million units at a price of $24.75 for proceeds of $479 million. Issues 8.3 million redeemable shares to BAM at the same price, net of underwritting fees, enabling BAM to maintain it's 30% interest
4-Apr-2008Transelec purchase price adjustment following resolution of 2006 rate proceeding
30% interest in U.S. timberlands maintained
11% interest in WETT. $750 million project expected to be completed by beginning of 2013
BAM contributes its interest in Wind Energy Texas Transmission (WETT) to a BAM sponsored partnership.
Interest in Transelec increased to 18%
Q3/09
2-Mar-2009 Acquired an addition social infrastructure asset
11-Apr-2008Invested $103 million in U.S. timber assets to maintain ownership interest post
BIP spun out from Brookfield Asset Management with the following interests in each of the assets
Figure 7: 2010 Utilities EBITDA and FFO by Segment
Source: Brookfield Infrastructure Partners L.P., BMO Capital MarketsNote: Outer circle represents Earnings Before Interest expense, Taxes, and Depreciation & Amortization (EBITDA), while inner circle represents Funds From Operations (FFO), which is EBITDA less interest expense and cash taxes
2010 EBITDA and FFO by Segment
27%
12%
10%
10%
22%
12%
10%
13%
41%43%
Australasia (DBCT)South America (Transelec)North America (Ontario and Texas Transmission)Europe - GTC "last mile"Australasia - PowerCo - New Zealand
2010 EBITDA and FFO by Segment
27%
12%
10%
10%
22%
12%
10%
13%
41%43%
Australasia (DBCT)South America (Transelec)North America (Ontario and Texas Transmission)Europe - GTC "last mile"Australasia - PowerCo - New Zealand
Page 8 Brookfield Infrastructure Partners, L.P.
Table 2: Utilities Portfolio
Source: Brookfield Infrastructure Partners L.P., BMO Capital Markets
InChile,amajorityof electricity is suppliedbyhydrogeneration frommountainousregionsinthecentral-southareaofthecountry,whichiscarriedbytransmissionlinestopopulationcenterslocatedincentralandcoastalChile.TranselecisChile’slargestelectrictransmissioncompany.Itsnetworkstretchesover8,200kmfromthenorthtothesouthofChile,andisequippedwith52substationsanddeliverspowertoapproximately98%oftheChileanpopulation.ElectricgenerationcompaniesareTranselec’smaincustomers.Theyutilizethegridtotransportelectricitygeneratedtodistributioncompanieswhothendelivertheenergytoendcustomers.AsofDecember2010,threecustomersaccountedfor84%ofTranselec’srevenues,thelargestofwhichisEndsea,theprincipalelectricitygeneratorinChile,whichoperates35%ofthecountry’sinstalledcapacity.
Utilities Ownership Key Barriers to Entry Revenue DriversTranselec 18% Backbone transmission company in Chile serving Regulated monopoly
98% of populationDBCT 71% Coal export terminal that accounts for 8% of global Regulated monopoly
seaborne coal and 21% of global seaborne metallurgical coalPowerco 42% 2nd largest energy distribution company in New Regulated monopoly
ZealandGTC 100% 2nd largest independent connection company in UK; Long-term
contracts/soleprovider of service
Ontario Transmission 100% Electric transmission company in Northwestern Regulated monopolyOntario
Cross Sound Cable 23%
24 mile (39km) long submarine cable buried in Long Island Sound that connects the electric transmission grids of New England and Long Island, NY.
Merchant Transmission Facility offering Transmission Services in
accordance with the NEPOOL Open Access Transmission Tariff
ScheduleTexas Transmission 11% Electric transmission company in Texas Regulated monopoly
Brookfield Infrastructure Partners, L.P. Page 9
Figure 8: Revenue per Customer
Source: Transelec, BMO Capital Markets
8%
6%
5%11%
70%
Endesa & related Colbun Gener & related GasAtacama Others
Figure 11: Annual Electricity Demand Growth in Chile
Source: Transelec, CDEC, Banco Mundial, BMO Capital Markets
Annual Electricity Demand Growth
8%
6%
8%
3%3%
8%
11%
8%
10%
8%9%
6%
8%
6%
4%
6%
8%
-1%-2%
4%4%4%
6%7%7%
-
5
10
15
20
25
30
35
40
45
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
Gw
H
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
%
Superior Regulatory Environment
Inordertoaddresstotheinfrastructurerequirementstomeetthisdemandgrowth,newsupportiveregulatoryregimeshavebeenestablished.Mostrecently,theoriginalregula-tory framework,whichunbundledand laterprivatized the electrical system inChile,wasamended(ShortLawI)tointroduceanewtransmissionpricingstructureandtrunksystemexpansionprocedurewithadisputesmechanismarbitratedbyanimpartialEx-pertsPanel.
DBCTservesmanyof the largeminingcompanies thatoperate in theBowenBasin,includingPeabodyEnergy,ValeandRioTinto.TheBowenBasinislocatedincentralQueenslandandcontainsoneofthelowestcostsourcesofcoalintheworld.Capacityiscurrently100%contractedto2014throughlong-termtake-or-paycontracts,whichhavenoforcemajeureprovisions,sointhecaseofanaturaldisasterthereisnoimpactonrevenues.Customershavetogivefiveyearsnoticetoreducetheannualcontractedtonnageshippedandarecommittedtothetake-or-paytermsforfiveyearsfromnotice.Theagree-mentsaresuchthatif noreplacementvolumeisfoundafterthefiveyearsnoticethenthecostsaresocializedovertheremainingcustomers.Thesecontractshavetwocomponents:acapacitychargeandahandlingcharge.ThecapacitychargeisbasedonthepercentageofcapacityallocatedandisregulatedbytheQueenslandCompetitionAuthority,QCA,whichusesareturnonregulatedassetbasedmethodology.Thehandlingcharge(bothfixedandvariable),whichisassociatedwithoperatingandmaintainingthefacilityisdirectlypassedthroughtocustomers.ThecapacitychargeisdeterminedeveryfiveyearsbytheQCAwiththemostrecentundertakingoccurringin2010,whichapprovedaweightedaveragecostofcapital(WACC)increaseof100bpsto9.9%commencingJanuary1,2011.Asaresult,overthenextfiveandahalf years,thischangeisexpectedtoresultinanad-ditionalA$70millioninincrementalEBITDAattheBIPlevel.EssentiallythestructurereplicatesanindexedbondforBIP.
Allowed Return Formula Likely to be Maintained; Upside to WACC Supported by Recent Financings
Figure 13: Dalrymple Bay Coal Terminal Source: http://www.farrell-associates.com.au/Papers/DBCT%20Case%20Study.pdf
Structure Replicates and Indexed Bond DBCT serves many of the large mining companies that operate in the Bowen Basin, including Peabody Energy, Vale and Rio Tinto. The Bowen Basin is located in central Queensland and contains one of the lowest cost sources of coal in the world. Capacity is currently 100% contracted to 2014 through long-term take-or-pay contracts, which have no force majeure provisions, so in the case of a natural disaster there is no impact on revenues. Customers have to give five years notice to reduce the annual contracted tonnage shipped and are committed to the take-or-pay terms for five years from notice. The agreements are such that if no replacement volume is found after the five years notice then the costs are socialized over the remaining customers. These contracts have two components: a capacity charge and a handling charge. The capacity charge is based on the percentage of capacity allocated and is regulated by the Queensland Competition Authority, QCA, which uses a return on regulated asset based methodology. The handling charge (both fixed and variable), which is associated with operating and maintaining the facility is directly passed through to customers. The capacity charge is determined every five years by the QCA with the most recent undertaking occurring in 2010, which approved a weighted average cost of capital (WACC) increase of 100 bps to 9.9% commencing January 1, 2011. As a result, over the next five and a half years, this change is expected to result in an additional A$70 million in incremental EBITDA at the BIP level. Essentially the structure replicates an indexed bond for BIP.
Webelieve the re-contracting risk is lowgiven the cost advantageof the coal in theregionserved,andthereplacementcostoftheport.AveragemetcoalpricescurrentlyaveragearoundUS$250-$US300/tonneandproductioncostsareaboutA$80/tonneandtheBowenbasinisrecognizedasoneofthelowestcostcoalminingregionsintheworld.Currentlytotalterminalchargesareabout$5/tonneandareabouthalf ofwhattheywouldbecomparedtonewcapacity.Webelievethedynamicsoftheregionsup-portcontinuedvolumes,however,under thecurrentcontracts,volumesareonly fullycontractedto2018.
Capital Requests Managed by DBCT and not Undertaken Unless Factored in Rate Base
Figure 14: New Demand Growth for Coal from 2010 Source: Alpha Natural Resources, EIA, IEA There are other access points for coal from the Bowen Basin, namely the adjacent Hay Point Coal Terminal (HPCT), but this terminal is owned by BHP Billiton and Mitsubishi, and services only their export requirements. DBCT and HPCT have a capacity of 130 Mtpa between them. Given the growing industry demand for coal, there is a projected need to have export capacity increase to 250-300 Mtpa over the next 5-10 years. Figure 15: Coal Exports from Port of Hay Point Source: Queensland State Government, BMO Capital Markets
PowercoisNewZealand’ssecondlargestelectricityandgasdistributioncompanyandoneof twodual-energydistributors in thecountry.Powerco’sdistributionnetwork isspreadacrosstheupper-central,centralandlowerareasofNewZealand’sNorthIsland.Powercohasapproximately420,000customersrepresent46%ofgasconnectionsand16%ofelectricityconnectionsinNewZealand.Powerco’selectricitybusinessoperatesunderregulationadministeredbytheNewZealandCommerceCommission(NZCC),whichdeterminestheannualincreaseinpricesthatcanbeappliedandthequalitythresholdsthatmustbeachieved(i.e.,responsetimeafteranemergency).Powerco’sAuthorizationexpiresonJuly1,2012,atwhichtimethegasdistributionbusinesswillbecomesubjecttoanewpricingregime.ThereiscurrentlysomeregulatorydynamicsthatcouldforaperiodoftimeprovidesomeuncertaintywithrespecttoFFO.However,basedonregulatoryoptionstheFFOislikelytobeatorabovepriorlevelsbyJuly2014.Revenueismainlybasedonregulatedtariffs,withasignificantportionbeingfromstate-ownedbusinesses(i.e.,66%oftheelectricand49%ofthegasenergyretailersarestate-owned).Electric-ityrevenuesrepresent80%ofthecompany’ssalesandhavegrownata4.1%compoundannualrateoverthepastfiveyears.Electricityandgascustomersarelargelyresidentialandaregenerallycontractedviaretailenergycompanies.
Figure 16: Trends in Housing Starts and Completions, England, 12 month Rolling Totals
Source: UK Government
16
In July 2010, DBCT was appointed as one of two preferred development proponents (the other being Adani, an Indian conglomerate who won the right to develop the Abbott Point terminal in the region) for the Dudgeon Point Coal Terminal (DPCT). DPCT is located in the port of Hay Point, which is located four kilometres north of DBCT and will have an export capacity of 120-150 Mtpa. We understand that BIP has received access requests (i.e., soft commitments) from potential customers for 130 Mtpa. On December 13, 2011 the state of Queensland, Australia announced that it allocated land to Brookfield and Adani Group for two coal terminals at Dudgeon Point with each getting 190 hectares (50% each). The two proposed terminals at Dudgeon Point will provide export capacity up to 180 Mtpa. The construction of the terminals is expected to begin in 2013 and cost ~A$10 billion (we believe Brookfield’s share A$3-4 billion), and be ready by the end of 2016.
Energy Distribution
GTC - UK Distribution Business This is a last-mile business for connecting gas and electricity services in the U.K residential housing market. called GTC. GTC is the second largest independent connections business in the U.K. with approximately 450,000 natural gas connections and 25,000 electricity connections. This is a regulated price business. However the regulated prices are insufficient to attract capital, and require developers to subsidize the connections with up front fees. The revenue in this business is comprised of developer fees and on going customer revenue based on the regulated price. The developer fee portion, while theoretically intended to levelized the return over the life of the connection, is recognized in BIP’s revenue upon receipt. Including the developers fee the IRR’s for a dual fuel connection, which most are today, is in the mid-teen. The industry dynamics are such that the independents are more responsive than the incumbents and tend to garner a larger portion to the new business. The number and timing of new connections are a function of housing starts and completions in the U.K. It is anticipated at the current level of completions that BIP should generate about $9 million a quarter in developer connection fees, which assumes about 12,000 dual fuel connections a quarter. BIP currently enjoys a 25% market share on new connections in the industry. Figure 16: Trends in Housing Starts and Completions, England, 12 month Rolling Totals Source: UK Government
Coal Terminal Electricity Transmission Energy Distribution AFFO Yield %
TTM FFO by Segment (%)
18%7%
22%
16%
37%
Coal Terminal Operations Electricity Transmission - South AmericaElectricity Transmission - North America Energy Distribution - EuropeEnergy Distribution - Australasia
Figure 20: 2010 Transport & Energy EBITDA and FFO by Segment
Source: Brookfield Infrastructure Partners L.P., BMO Capital MarketsNote: Outer circle represents Earnings Before Interest expense, Taxes, and Depreciation & Amortization (EBITDA), while inner circle represents Funds From Operations (FFO), which is EBITDA less interest expense and cash taxes
Table 3: Transport & Energy Portfolio
Source: Brookfield Infrastructure Partners L.P., BMO Capital Markets
2010 EBITDA and FFO by Segment
39%
5%
18%
10%
37%
4%
19%
15%
28%
25%
Australasia (Brookfield Rail)North America - NGPLOther - IEG (Channel Islands/Isle of Man)UK - PD PortsEuroports
Transportation &Energy Infrastructure Ownership Key Barriers to Entry Revenue DriversBrookfield Rail 100% Sole rail provider for minerals and grain in Western AUS Long-term
contracts/regulatedPD Ports 59% Landlord port that is 4th largest port in UK by volume; harbour Status as harbour
authority for River Tees authority/long-termcontracts
Euroports 40% Seven ports with key strategic locations throughout Europe Strategic locationand China, handling over 70 Mtpa.
NGPL 26% One of the largest natural gas transportation companies Strategicin US; serves 61% of Chicago/N Indiana market; location/regulatedaccounts for 7% of storage capacity in US
IEG-other 100% Sole LPG provider in Channel Islands/Isle of Man Long-term contracts/sole
provider of serviceTasGas 100% Sole natural gas distribution company in Tasmania Sole provider of
Service
Page 22 Brookfield Infrastructure Partners, L.P.
Brookfield Rail
Essential Infrastructure Asset with Stable Revenue Stream from Blue-Chip Customer Base
Figure 21: Brookfield Rail Infrastructure Figure 21b: Brookfield Rail Mix of Business (2009)
Source: Brookfield Rail Source: Brookfield Rail
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Brookfield Rail
Essential Infrastructure Asset with Stable Revenue Stream from Blue-Chip Customer Base Brookfield Rail controls approximately 5,100 km of railway track throughout the southern half of Western Australia (WA) through a 40 year lease with the WA Government. Brookfield’s rail infrastructure is located near a large number of iron ore, bauxite and other types of mineral deposits in the area, and is also responsible for much of the goods transported from the eastern part of the country. Brookfield Rail handles approximately 50 Mtpa of cargo, and in many cases, is the only economic means to get commodities in this region to government ports on the coast for export. Accordingly, customers tend to sign long-term agreements with Brookfield in order to ensure adequate access to the rail network. The access charges are regulated by the WA government, but our understanding is that current contracts are below the current cieling. In addition, rail transport represents a small yet essential component of the overall cost of the commodities transported, which tends to provide very stable revenue streams. Brookfield’s top 9 customers contribute 90% of its revenues with contract expiration dates ranging from 2011 to 2026. Revenues are approximately A200 - A$300 million annually. Figure 21: a. Brookfield Rail Infrastructure b. Brookfield Rail Mix of Business (2009) Source: Brookfield Rail
Brookfield Infrastructure Partners, L.P. Page 23
Well Positioned For Significant Volume Growth; Focus Shifts to Take-or-Pay Contracts
Project Commercial Status Projected Volume Expected Start DateExtension Hill iron one project Signed CTAA 3.0 mtpa Late 2011KML iron ore project Signed CTAA 10.0 mtpa 2012Worsley aluminum expansion Signed CTAA 2.0 mtpa 2012Koolyanobbing iron ore mine expansion Agreed terms 2.2 mtpa 2012Yilgarn iron ore project Signed CTAA 4.4 mtpa Late 2011Collie urea project Signed CTAA 2.0 mtpa 2014
Description: PDP owns and operates the Port of Tees and Hartlepool (“Teesport”) which is the UK’s 3rd largest port by tonnage. PDP’s business also includes the operation of
Asset Description
Port (SHA)a number of other ports (including a container terminal at Hull) and a logistics business in support of the port operations.
Location: Middlesbrough, England (near Teesport)
ProposedOwnership:
Brookfield: 100%
Container terminals
Logistics operations
Port operator
Ownership:
CustomerBase:
Range of long-term contracts with strong, established counterparties including large multi-nationals.
Principal Operations
TeesportTeesport: PDP is the statutory harbour authority for Teesport and is
Hull
Immingham
TeesportTeesport: PDP is the statutory harbour authority for Teesport and isresponsible for the navigation of 11 nautical miles of the River Tees. Over 50% of PDP’s income is earned from conservancy fees (i.e. tolls) related to the movement of cargo on vessels using the river. Teesport also operates a wide range of facilitiesTeesport also operates a wide range of facilitiesincluding transports, bulk handling, cars, steel, forest imports and two container terminals with aggregate 215,000 TEU’s of capacity.Teesport’s freehold land base of 1,558 acres provides an additional source of income to PDP.
C f
| Brookfield Asset Management Inc.16
Hull: Container terminal operator with 300,000 TEU’s ofcapacity.
Immingham: Warehousing, loading and general cargo handling services.
As imports in theU.K.grow,webelieveTeesport’salternativegateway into theU.K.marketleaveitwellpositionedtoprovideadditionalportcapacityandlogisticalcapabili-tiesforcargotraffic.In2010,Teesportcontainervolumesincreased40%,butthisvolumegrowthwassomewhatoffsetbylowermarginsduetooperatinginefficienciesasaresultofoperatingatfullycapacity.BIPisintheprocessofexpandingthecontainerterminal’scapacityfrom235,000TEUs(TwentyFootEquivalentUnits)to450,000TEUs,whichisexpectedtorestoremarginstohistoricallevels.
Irreplaceable Strategic Asset with Exposure to Fast Growing Shale Plays
NGPLisamongthelargestnaturalgaspipelineandstoragesystemsintheU.S.Thepipe-linesystem,whichtraverses10statesintheMidwesternandSouthernU.S.,extendsover15,500kmanddeliversapproximately2.2trillioncubicfeetofnaturalgasperannum.NGPLalsohassevenstoragefacilitieswithacombinedworkinggascapacityof270bil-lioncubicfeet,whichrepresentsapproximately7%oftotalnaturalgasstoragecapacityintheU.S.NGPLsuppliesapproximately60%ofthenaturalgasusedintheChicagoandNorthernIndianamarketsandisgeographicallypositionedincloseproximitytoseveralmajorconventionalnaturalgassupplybasinsintheU.S.,aswellasfastgrowingunconventional gasplays including theWoodford,Fayetteville, andHaynesville.BIPownsa26%interestinNGPLalongwithotherinventors,includingKinderMorganInc.(KMI),whichowns20%andoperatesthesystemonbehalf ofthepartners.
Figure 23: NGPL Natural Gas transmission and Storage Network
Source: http://steelriverpartners.com/ngpl.html
Diverse Group of Customers with Investment Grade Ratings
NGPLhasadiversegroupofcustomersthatincludesinvestmentgradelocalgasdistri-butioncompanies,gas-firedpowerplantsandotherinterstatepipelines.NGPL’stop10customersaccountforover60%ofthetransmissionandstoragerevenueswithaveragecontract termsof 2.8 years for transport and3.5 years for storage customers.GivenNGPL’sstrongmarketpositionanddiversesourcesofgas,thecompanyhasahistoryofrollingovercustomercontracts.
25
Natural Gas Pipeline of America (NGPL)
Irreplaceable Strategic Asset with Exposure to Fast Growing Shale Plays NGPL is among the largest natural gas pipeline and storage systems in the U.S. The pipeline system, which traverses 10 states in the Midwestern and Southern U.S., extends over 15,500 km and delivers approximately 2.2 trillion cubic feet of natural gas per annum. NGPL also has seven storage facilities with a combined working gas capacity of 270 billion cubic feet, which represents approximately 7% of total natural gas storage capacity in the U.S. NGPL supplies approximately 60% of the natural gas used in the Chicago and Northern Indiana markets and is geographically positioned in close proximity to several major conventional natural gas supply basins in the U.S., as well as fast growing unconventional gas plays including the Woodford, Fayetteville, and Haynesville. BIP owns a 26% interest in NGPL along with other inventors, including Kinder Morgan Inc. (KMI), which owns 20% and operates the system on behalf of the partners. Figure 23: NGPL Natural Gas transmission and Storage Network Source: http://steelriverpartners.com/ngpl.html
Diverse Group of Customers with Investment Grade Ratings NGPL has a diverse group of customers that includes investment grade local gas distribution companies, gas-fired power plants and other interstate pipelines. NGPL’s top 10 customers account for over 60% of the transmission and storage revenues with average contract terms of 2.8 years for transport and 3.5 years for storage customers. Given NGPL’s strong market position and diverse sources of gas, the company has a history of rolling over customer contracts.
Brookfield Infrastructure Partners, L.P. Page 27
Stable Cash Flow Profile with Leverage to Rising Natural Gas Prices
Onaproportionatebasis,BIPactivelymanagesinexcessof419,000acresofhigh-quality,freeholdand12,300acresofhigherandbetteruse (HBU)timberlands located inthecoastalregionsofBritishColumbia,CanadaandthePacificNorthwestregionoftheUnitedStates,whichprovidesreadyaccesstoexportmarkets.Combined,BIPhasanestimated29.1millioncubicmetersofmerchantableinventorythatitcanharvest,whichincludesadeferredharvestvolumeof2.8millioncubicmeters(i.e.,surplusinventory).Reflectingannualtimbergrowthwithinitsforests,itisestimatedBIPcancutatalong-runsustainableyield(LRSY)of1.6millioncubicmetersoftimberperyear(forever).Tomonetizethedeferredharvestvolume(oncepricesrecover),BIPcouldcuttreesat120%ofitsLRSYforapproximately9years.
Table 5: Timber Portfolio
* Higher and Better Use opportuniteisSource: Brookfield Infrastructure Partners L.P., BMO Capital Markets
Figure 26: North American Supply and Demand - Lumber
Note: BBF is billion board feet Source: Woodbridge Associates, Canfor, USDA Capacity growth rate estimated at 2.2% based on historic figures
ExpectationsarethattheU.S.lumbermarketwillrecoverasthelabourmarketslowlyimproves,butwedonot expect that tooccur, at least inameaningfulway,until theinventoryofunsoldhomesnormalizesandpricesofexistinghomesintheUSstopsfall-ing.Foreclosuresareatrecordhighs,whichaddstotheoverhangofunsoldhomesanddistressedsalesbylendersputsadditionaldownwardpressureonresalevalues.Together,thesefactorscurtailtheconstructionofnewhomes.Forwhatit’sworth,industryfore-castssuggesta21%increaseinnewhousingstartsintheU.S.in2012to725,000,whichisbelowthelong-termaverageforsinglefamilyhousingstartsintheU.S.of1.5millionannually.
29
Figure 26: North American Supply and Demand - Lumber Note: BBF is billion board feet Source: Woodbridge Associates, Canfor, USDA Capacity growth rate estimated at 2.2% based on historic figures Expectations are that the U.S. lumber market will recover as the labour market slowly improves, but we do not expect that to occur, at least in a meaningful way, until the inventory of unsold homes normalizes and prices of existing homes in the US stops falling. Foreclosures are at record highs, which adds to the overhang of unsold homes and distressed sales by lenders puts additional downward pressure on resale values. Together, these factors curtail the construction of new homes. For what it’s worth, industry forecasts suggest a 21% increase in new housing starts in the U.S. in 2012 to 725,000, which is below the long-term average for single family housing starts in the U.S. of 1.5 million annually.
Increasing Demand for Logs from China as Wood Use Moves up the Value Chain While North American demand remains week, demand from Asia, predominately China continues to grow. China’s economic growth was 10% in 2010 and is expected to be approximately 8% in 2012 (down from ~9% in 2011). While much of the current demand from China is for low-grade lumber (utility grade) used for building concrete forms, the expectation is that as the Chinese become more accustomed to using wood in home construction, not to mention for its green attributes, that demand for more valuable lumber (i.e., used in building roof trusses and floor beams) will improve as well.
Brookfield Infrastructure Partners, L.P. Page 31
Increasing Demand for Logs from China as Wood Use Moves up the Value Chain
Source: Brookfield Infrastructure Partners L.P., Canfor, BMO Capital Markets
Source: Canfor
0
2
4
6
8
10
12
14
16
18
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011F
Millions
PAGE 12
ChinaChina
Mmfbm
700
800
900
400
500
600
Long term commitment to China
Building codes are now more d i t d f
200
300
400
conducive to wood frameconstruction (“WFC”)
Establishing 2 x 4 for the emerging WFC housing sector
0
100
2005 2006 2007 2008 2009 2010 2011F
C A N F O R C O R P O R A T I O N
emerging WFC housing sector LowGrade #2 & Better
China: Annual Housing Starts China: Wood Used in Concrete Form-ing and Wood Frame Construction
Mmfbm
30
Figure 27: China – Moving Up the Value Chain Source: Brookfield Infrastructure Partners L.P., Canfor, BMO Capital Markets Figure 28: China Effect Source: Canfor In 2010, BIP sales of sawlogs to China represented 36% of sales (export volumes improved 46% year over year), up from 11% in 2009 in response to attractive pricing. In the short to medium term, we expect the rebuilding phase in Japan will also fuel demand for logs from BIP.
Mmfbm
China: Annual Housing Starts
0
2
4
6
8
10
12
14
16
18
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
F
Mill
ions
China: Wood Used in Concrete Forming and Wood Frame Construction
There is currentlyA$600millionof capital projectsover thenext coupleof years atBrookfieldRail(combinedwithpreviousinvestments),aswementionedpreviously,thatareexpectedtogenerateincrementalEBITDAofA$150-A$200millionperyearin2014.Customershavecurrentlycontractedapproximately24Mtpa(onaminimumbasis)ofvolumegrowth,butthereisalsothepotentialthatexistingcustomerswillrequireadditionalvolumegrowthtomeettheirneeds,andweunderstandcustomersarepotentiallylook-ingtoaddanadditional14to15Mtpaabovethatamount,whichwouldhaveapositiveimpactoncashflow.BIPisalsoinvesting£17millioninPDPorts’handlingcapacityaspartoftheexpansionofthecontainerterminalsasvolumescontinuetogrow.Theplanistoeventuallyexpandportcapacitytoatleast650,000TEUs.
Source: Brookfield Infrastructure Partners L.P., BMO Capital Markets
Investment in utilities rate base $300Rail expansion projects $432UK ports expansion $15
Capital backlog $747Construction work in progress $246
Total capital to be commissioned $993
Brookfield Infrastructure Partners, L.P. Page 35
Table 7: Organic Growth Opportunities
Source: Brookfield Infrastructure Partners L.P., BMO Capital Markets
Transelec Upgrades and expansion of electricity transmission system connect generationthat is miles away from customers to load centers to satisy increased electricitydemand resulting from economic growth
DBCT Increased international demand for steel and electricity should increase customerdemand, allowing for further expansion
Powerco Energy demand and consumption levels; New connections as a result of new housingdevelopment; Regional economic and population growth
GTC New connections in gas and electricity as UK housing market recovers
Ontario Transmission / Upgrades and expansion of electricity transmission system to connect generationTexas Transmission that is miles away from customers to load centers to satisfy increased electricity
demand resulting from economic growth
PD Ports Well positioned to benefit from container business growth and other income streamsresulting from recent and planned development in Teesport area
Brookfield Rail Well positioned to benefit from increased economic activity; Opportunities for growthto support expansions of mining industry and provide access to export markets
Euroports Volume growth from increasing demand for bulk and general commodities in geographic hinterlands; Cross-selling opportunities to develop additional commercialbusinesss with existing customers
NGPL Geographic proximity to emerging shale gas basin provides opportunities to expand pipeline
IEG Load increases with new connections; Co-generation opportunities
Island Timberlands Volume growth from recovery in new home construction in the U.S.; well positionedto benefit from growth in Asia
Longview Timber Volume growth from recovery in new home construction in the U.S.; well positionedto benefit from growth in Asia
Opportunities for Growth
Util
ities
Tran
spor
tan
d En
ergy
Tim
ber
Page 36 Brookfield Infrastructure Partners, L.P.
External Growth Opportunities
BIPisfocusedonexpandingitsinfrastructureplatformbyacquiringbusinessesinandarounditsexistingnetworkswherethereexistsynergiesorcompetitiveadvantages.GiventhesovereigndebtissuesinEurope,thefocushasbeenonbuyingassetsofEuropeancompanies thathave internationaloperationswhoarebeing forcedby theirbanks todelevertheirbalancesheetsandaresheddingassets.Aswell,Europeancompaniesarelookingforpartnerswhocaninvestalongsidetheminordertocontinueinvestinginnewprojects.Europeangovernmentsareputtingupforsaleinfrastructureassetsaswell,butthese sales are generally auction situationswhere the competitive advantage is solelybasedoncostofcapital.
Source: Brookfield Infrastructure Partners L.P., BMO Capital Markets
AtendoftheQ3/11,BrookfieldInfrastructurehad$388millionofcorporateliquidityundera$700millioncreditfacility,inadditionto$200millionofcashretainedwithinthebusinesstofundworkingcapitalanditscapitalgrowthprojects.InOctober,BIPraisedapproximately$657millionofcapital,including$200millionfromBAMtoacquirein-terestsinthetwoChileantollroads($150million),aswellastofundthegrowthcapitalexpendituresatBrookfieldRail ($150million),and to repay theamountoutstandingunderthecreditfacility.
50-60%
20-30%
20%
Disposals and Equity Retained Cash Project Level Debt
Source: Brookfield Infrastructure Partners L.P., BMO Capital Markets
Table 9: Yield Based Valuation Based on Target Payout Ratio
Source: BMO Capital Markets
TTM Yield %
2%
3%
4%
5%
6%
7%
8%
Apr-
2010
May
-201
0
Jun-
2010
Jul-2
010
Aug-
2010
Sep-
2010
Oct
-201
0
Nov
-201
0
Dec
-201
0
Jan-
2011
Feb-
2011
Mar
-201
1
Apr-
2011
May
-201
1
Jun-
2011
Jul-2
011
Aug-
2011
Sep-
2011
Oct
-201
1
Nov
-201
1
Dec
-201
1
Min: 4.2%Max: 7.1%
Yield Based Valuation High Target LowSustainable Cash Available for Distribution (2013E) $2.52Estimated Target Payout Ratio 70% 61% 60%Potential Distribution $1.76 $1.54 $1.51
Target Yield Based on Sustainable Distribution 4.2% 5.0% 7.1%Yield Based Valuation $41.95 $30.71 $21.27
Current Share Price (December 21, 2011) $26.37 $26.37 $26.37Implied Yield Based on Sustainable Distribution 6.7% 5.8% 5.7%
Source: Brookfield Infrastructure Partners L.P., BMO Capital Markets
2013E NetEBITDA Asset Value($MM) Multiple ($MM)
Utilities: Regulated EBITDA $393 13.0x $5,103 Excludes developr contributions of $9 million per quarter Developer Contibutions $36 6.0x $216 Reflects non recurring nature of developer contributions
$429 12.4x $5,319 Segment Debt -$2,828
Value $2,491
Transport & Energy: Brookfield Rail 227 12.0x 2724 Premium multiple to North American peers North America - NGPL 100 12.0x 1200 Multiple in line with publicly traded North American pipeline and storage peers OTHER - IEG (Island of Man) 24 8.0x 192 Multiple in line with publicly traded Energy distribution peers UK PD Ports 40 13.0x 520 Transaction multiple for PD Ports acquired by BBI Euroports 40 13.0x 520 Premium multiple to publicly traded International Port operators Chilean Toll Road 24 12.0x 288 Reflects recent precedent transactions Segment EBITDA $455 12.0x $5,444
$5,444 Segment Debt -$2,400
Value $3,044
Timber: Partnership Capital $607 Reflects external valuation of Timberlands
Value $607
Total $6,142
Cash $663 2013 Cash retained in the businessCorporate Liabilities -$424 2013 Corporate and subsidary debtManagement Fee -$67 10.0x -$670 2013 Management fee capitalized at 10x
Net Asset Value (NAV) $5,711Shares 185.1NAV / Share $30.85
Source: BMO Capital Markets, Company reportsNote: A portion of DBCT, PD Ports and Texas transmission project are owned through a Brookfield Asset Management sponsored fund. Assumes Toll Road purchase closes.
Timber Infrastructure Island Timberlands …..….37.5% LongviewTimber…............30.0%
Post October 26, 2011 Equity issue, there are 185.1 million units outstanding.
BAM - Owns 53 million redeemable* shares.Public Unit Holders - 132 million units.
*redeemable shares are redemable for cash equal to Partnerships unit market price; however, the Partnership may settle the obligation with Partnership units.
Corporate Structure BIP is a Bermuda based limited partnership structure that holds a 71% interest in a private entity called Brook�eld Infrastructure L.P. (“Holdings”). Brook�eld Asset Management (“BAM”) holds the other 29% through redeemable shares that represent a 28% interest in Holdings plus a 1% General Partnership (GP) interest in Holdings. Figure 37 shows BIP’s corporate structure as well as the economic interests of various stakeholders. Figure 37: Corporate Structure Source: BMO Capital Markets, Company reports Note: A portion of DBCT, PD Ports and Texas tran smission project are owned through a Brook�eld Asset Management sponsored fund. Assumes Toll Road purchase closes. Redeemable shares can be put to Holding’s for cash equal to the Partnership’s unit value; however the Partnership has the right of �rst refusal and at its discretion can elect to settle the obligation with Partnership units. Accordingly, the redeemable shares and units are treated as one- in-the-same. The Partnership has control over Holdings, and Partners presents the consolidated �nancial results. Under IFRS partial interests in assets where there is no control are one-line equity accounted. The �nancial information in this report will present the Partners proportionate interests in cash �ow, liabilities, and assets, which is instructive, but not an IFRS presentation. Unitholders of BIP are limited partners and their rights are subject to a partnership agreement that is contractual in nature and not �duciary. The partnership agreement outlines unit holders’ rights, and
Interest rates and liquidity:BIPusesthedebtmarketsandreliesonaccesstobankfacilitiestomanageandgrowitsbusiness.Events,eitherexogenousorinternalthatleadtolimitedaccesstoliquidityorhigherinterestratescouldmateriallyimpactthebusiness.
Counter Party Risk:BIPreliesonanumberofcounterpartiesinconductingitsbusiness.Insomecasesthereisriskintheformoftake-or-paycontractsforassetsthataregeographi-callylimitedtoservingafewcustomersandBIPisreliantonthosecustomersalone.
Reliance on Brookfield Asset Management (BAM):BIPisreliantonBAMformanage-mentservicesinwhichitpaysafeeforBAMprovidingtheseservices.Further,BAMisthegeneralpartnerandBIPismanagedinthecontextofthepartnershipagreement.BIPunitholdershavevotingrightswithrespecttochangeofcontrolandliquidation,amongstotherrights,buttheagreementwithBAMiscontractualnotfiduciary.
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