Earnings Call Transcript - BIPC Q2 2024

Operator, Operator

Good day, and thank you for joining us. Welcome to the Brookfield Infrastructure Partners Second Quarter 2024 Results Conference Call. Please note that today's conference is being recorded. I will now pass the call to David Krant, Chief Financial Officer. Please go ahead.

David Krant, CFO

Thank you, Liz, and good morning, everyone. Welcome to Brookfield Infrastructure Partners Second Quarter 2024 earnings conference call. As introduced, my name is David Krant, and I'm the Chief Financial Officer of Brookfield Infrastructure. I'm joined today by our Chief Executive Officer, Sam Pollock, and our Chief Operating Officer, Ben Vaughn. I'll begin the call today with a summary of our second quarter 2024 financial and operating results, followed by a discussion of our recent capital markets activities. I'll then turn the call over to Sam, who will provide an update on our strategic initiatives before concluding with our 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 and unknown risk factors, I would encourage you to review our annual report on Form 20-F, which is available on our website. During the second quarter, Brookfield Infrastructure generated strong financial and operating results while also advancing our strategic initiatives. For the three months ended June 30, 2024, we generated funds from operations or FFO of $608 million, an increase of 10% over the prior year period. The current quarter benefited from organic growth that was at the midpoint of our target range as well as recent acquisitions that significantly contributed to results. This included a continuation of a strong performance at our global intermodal logistics operation, higher contributions from our increased stake in a Brazilian integrated rail and logistics provider, and three data center platform investments. These positive drivers were partially offset by the impact of capital recycling, higher interest costs, and the impact of foreign exchange. Looking at results by operating segments. Starting with utilities, we generated FFO of $180 million compared to $224 million in the same period last year. The decline is due to capital recycling activity, including the sale of our interest in an Australian regulated utility business and additional interest costs associated with the financing completed at our Brazilian regulated gas transmission business during the first quarter. After removing these impacts, the base business grew organically as a result of inflation indexation and the contribution associated with $450 million of capital commissioned into the rate base over the last 12 months. Moving to our transport segment, FFO was $319 million, representing a 60% increase over the same period in the prior year. The increase was primarily attributable to our acquisition of a global intermodal logistics operation, which continues to perform ahead of expectations, as well as the incremental stake in our Brazilian integrated rail and logistics operation that delivered strong performance this quarter with tariffs increased by more than 15%. The remaining businesses also performed well, achieving organic growth of 9%, which is primarily driven by inflationary tariff increases across the portfolio. Our midstream segment generated FFO of $143 million, which is ahead of the prior year after excluding the impact of capital recycling. Strong demand and customer activity levels continued to benefit results, most prevalent at our North American gas storage business, where we continue to add contract duration at higher rates compared to prior years. The unprecedented growth in North American power demand has created further opportunities for our critical midstream assets. During the quarter, our businesses capitalized on this favorable market environment by securing several accretive commercial agreements and bolt-on capital projects to meet growing customer demand. Lastly, FFO from our data segment was $78 million, representing an 8% increase over the same period last year. This result reflects the contribution from recently completed acquisitions, including the purchase of 40 retail co-location sites and two marquee hyperscale data center platforms. Across our global data center platform, we continue to see strong momentum in leasing activity on the tail of artificial intelligence investment and our customers' need for more processing and storage capacity. Moving on from our financial and operating performance, I would now like to highlight some of our recent capital markets activity. In addition to replenishing our investment pipeline and progressing our asset sale plans, which Sam will speak to soon, our primary focus this quarter was capitalizing on very attractive debt capital markets to further de-risk our asset-level balance sheets. Within our businesses, we completed approximately $5 billion of non-recourse financings during the quarter, and our activity can be broadly bucketed into three categories. The first category is rightsizing capital structures. As our businesses grow their underlying cash flows, we can raise additional debt while preserving the existing capital structure. In the last nine months, we have generated approximately $1.4 billion of proceeds, of which $1.1 billion reflects capital recycling activity. This is in specific instances where we are within 24 months of an expected sale and the new capital structure allows us to reduce the equity required by a future buyer and pull forward future sale proceeds. The second category is maturity extensions. We have proactively refinanced $3.4 billion in maturities occurring over the next several years. Across these transactions, the combined average rate increase was only 50 basis points. The benefit of pushing out maturities greatly outweighs the modest increase in financing costs, which is also more than offset by the inflationary revenue increases we've experienced over the last several years. A great example of where we were able to achieve a term extension and attractive price was at our Western Canadian natural gas gathering and processing operations. In July, we completed a $720 million eight-year bond issuance with proceeds used to repay a 2026 maturity. The newly issued bonds allowed us to fully de-risk the maturity profile and extend the average duration of debt outstanding by two years. In addition, the new bonds are priced very competitively at a coupon in line with the debt being refinanced. The third and final category is opportunistic repricings. We took advantage of the strong spread environment and completed approximately $1 billion of loan repricings across three of our businesses during the second quarter. These activities reduced our cost of financing by over $7 million annually net to bid. These repricing transactions are a unique feature for the floating rate loan market and allow the issuer to reduce the credit spread of previously issued loans while keeping the existing capital structure in place. Our balance sheet position was strong to begin the year and has been further bolstered by this activity. Over the next 12 months, only 1% of our asset-level debt has matured, and we have no corporate maturities until 2027. In addition, we maintain significant corporate liquidity of $1.9 billion and remain well positioned to support growth initiatives. That concludes my remarks for this morning. I will now turn the call over to Sam.

Samuel Pollock, CEO

Thank you, David, and good morning, everyone. From my remarks today, I'm going to provide an update on our strategic initiatives, and then I'll conclude with the business outlook. In relation to our strategic initiatives, both public and private infrastructure deal flow has been a slower start to the year. However, one of the benefits of our business is that we have many avenues to deploy capital. In periods where large-scale M&A activity is lower, we focus heavily on tuck-in and organic growth opportunities embedded in our portfolio. In 2024 alone, we secured or completed seven follow-on acquisitions, comprising nearly $4 billion of enterprise value. Most significantly, we were able to complete the acquisition of 40 data center sites due to a previous owner's mismanaging their capital structure and ending up in bankruptcy. The quarter also included the following acquisition of a 10% stake in our Brazilian integrated rail and ports logistic business. And earlier in the year, we signed the bolt-on acquisition of a tower portfolio in India, which remains on track to close early in the fourth quarter or sooner. We also maintain a large project backlog, which has increased by 15% from this time last year to approximately $7.7 billion. In the midstream sector, we are supporting increased producer activity through contracted facility and pipeline expansions. In total, these projects represent almost $800 million in capital, which will generate over $140 million in EBITDA and will fully contribute to results over the next two years. In our data segment, we are commercializing our existing land bank and investing over $1 billion in near-term growth capital to build data centers for our hyperscale customers. In addition, we are supporting our growth ambitions through strategic land acquisitions in Athens, Chicago, Frankfurt, Milan, and Phoenix. With respect to new investments, market conditions are trending positively. As a result, we expect the back half of 2024 to be active for M&A. Much of this is driven by the improved interest rate environment as the Bank of Canada and the European Central Bank are leading the way with the loosening of their monetary policies. Additionally, the large industry tailwinds such as AI are creating opportunities for well-capitalized businesses like ours, where we're an obvious partner of choice for technology companies that are seeking alternative access to private capital. Our novel transaction with Intel several years ago is providing the blueprint for similar large-scale opportunities, which are gaining momentum. In relation to capital recycling, we are extremely active and have three advanced processes in a number of areas. We have six further asset sales progressing that are expected to generate almost $2.5 billion in proceeds, combined with our three advanced processes. This quarter, we monetized assets totaling approximately $210 million, bringing our total cap recycling for the year to about $1.4 billion. In terms of our business outlook, recent market developments provide an encouraging backdrop. Equity indices have reached historic highs. As I previously mentioned, G7 nations have initiated monetary easing measures that should reinvigorate large-scale M&A activity. Our strong alignment with the global megatrends offers an exciting and underappreciated growth opportunity for our business. Several years ago, we coined the term the 3D's, which namely digitalization, decarbonization, and globalization to describe these themes. While our business spans all three, we are particularly significantly levered towards digitalization and decarbonization. We are in active discussions with several blue-chip technology companies that are interested in leveraging virtual infrastructures, market-leading scale, and expertise. The tailwinds created from AI adoption support exponential growth in our global data center platforms that service the large hyperscalers as well as our electric utilities and natural gas infrastructure. Although we've been very active pursuing growth through bolt-on acquisitions and organic capital projects during the past few quarters, we are experiencing significant improvement in our business to achieve our 2024 capital recycling and deployment targets. Strict adherence to our financial guardrails has resulted in a strong balance sheet and liquidity position with tremendous access to large-scale capital. This combined with our connectivity into global transaction activity and our ability to move quickly should continue to create attractive investment opportunities for our business. This concludes my remarks, and I'll now pass it over to Liz for some Q&A.

Operator, Operator

Our first question will come from Cherilyn Radbourne with TD Cowen.

Cherilyn Radbourne, Analyst

Thanks very much, and good morning. I wanted to pick up on the comments in the letter regarding capital deployment opportunities tied to AI across data, utility, and midstream. I think the opportunities in data are fairly self-explanatory, but maybe you could spend some time to add color on where you're seeing leverage in the utilities and natural gas vectors?

Samuel Pollock, CEO

Yes, thank you, Cherilyn. I want to highlight that the upcoming focus will be on AI infrastructure, which encompasses the entire ecosystem for large-scale AI data centers. This includes not only the data centers but also the internal equipment and the necessary power and transmission systems that support these facilities. The power requirements will primarily be met by companies like Beth, which already have established relationships with hyperscalers. Additionally, building a power facility also necessitates connecting it to the grid and constructing transformers, linking many of our operations to this activity. It's important to note that the current pace of renewable energy development may not suffice to meet the substantial power demands of these giant data centers. Therefore, we believe that in the short term, natural gas, and potentially nuclear energy will play essential roles in supplying power. This situation presents us with opportunities to invest throughout our natural gas operations to enhance the transportation and storage of gas for the entire ecosystem. While entering this market may involve complexities, all our natural gas operations are actively engaging in discussions with several hyperscalers.

Cherilyn Radbourne, Analyst

Okay. That's helpful. And then on the opportunities that are progressing based on the Intel blueprint, can you talk about how much capital you have the appetite and capacity to deploy to those opportunities? And just what some of the guardrails are in negotiating that type of deal?

Samuel Pollock, CEO

Sure. So as far as amount of capital, I'd say, given the interest we have from our global LP base to participate in those types of deals, I think it's unlimited. I think we could source tens of billions of dollars for similar type transactions, whether it's for chip facilities or to provide the capital to go inside, as I mentioned, a lot of these, yes, future AI data centers. As far as I think structure-wise or what some of the limiting factors, probably the most important one will be the counterparty that we need to have stand behind a lot of the commercial elements of the transaction. So Intel was obviously a very strong credit for that particular situation. I think any of the hyperscalers or some of the other large chip manufacturers would be great counterparties as well. In some cases, it may be governments as governments are now stepping into this area. So I think the opportunity set is huge, and we expect to be a leader in this area.

Cherilyn Radbourne, Analyst

And if I could tack on one quick follow-on. Are all of those technologies in the technology space or is there anything that would be analogous outside of that?

Samuel Pollock, CEO

So that's a very good question. Yes. I think the structure that we have come up with elements of it are being used in areas that relate to hydrogen and other decarbonization-type facilities that are large. Some of those will be done by our sister company, but some also touch us to an extent that it relates to industrial gases. So I would say the type of approach that we use for Intel does have many opportunities outside of just the AI technology, but batteries being another area where I guess we've had lots of conversations.

Cherilyn Radbourne, Analyst

That's all for me. Thank you.

Samuel Pollock, CEO

Okay. Thank you.

Operator, Operator

Our next question will come from the line of Robert Kwan with RBC Capital Markets.

Robert Kwan, Analyst

Thank you. Good morning. If I can just kind of follow on start with the comments around similar deals like the Intel deal and what you're seeing out of your private investors and that demand. Can you just talk about having gone through the Intel and getting the feedback from kind of the publicly the investors and the public funds? Just the thoughts on whether you think that the de-risking you've done on something like that is being appreciated versus the relatively low return out of that deal? And then especially just the multiyear or just the lag between capital out the door before it shows up in cash flow and just how you would expect to participate in any of these types of deals going forward.

David Krant, CFO

Hi Robert. So look, I think that could be a long conversation because you touched on a lot of elements there. So I'll try to keep it somewhat brief. But obviously, there is a different level of patience for lack of a better expression between private investors and public investors who are maybe a bit more quarter-to-quarter. And so it's easier for us to do those types of transactions, those long lead development-type deals in private funds, and obviously, that's a little bit the rationale behind the private equity industry. However, I think the benefit of Brookfield Infrastructure is the fact that we are a large diversified business. And so we have many businesses at all stages of maturity. And so we have lots of businesses that are generating a significant amount of cash flow. And then we have these platform businesses that we talked about in the past that generate high IRRs over the long run, but maybe a little less cash flow in the short run. And so our investors, for instance, get the benefit of a suite of assets. And I think that's very attractive. I appreciate it would be great if everything we could buy would be generating cash flow day one. But then again, I think our returns would be lower, and I think to get the higher returns that people want, we need to have some of these businesses that have a bit of a growth wedge to them. I think in the Intel transaction in the end, we're going to find that's going to be very high returning opportunity. The situation today, though, is that we still have a couple of years to wait before we truly see the benefits of that. But I think hopefully you'll have in the long history that we do, our shareholders are generally patient and they like the dividend growth that we have and will have the same sort of patience that many of our private fund investors do. So I realize that's a long-winded answer. I apologize for it, but it was a little bit tough to tackle all things you mentioned.

Robert Kwan, Analyst

Yes. So I appreciate the colors and the multifaceted question. Just if I can turn to your comment in the letter, just around the M&A market heating up and there's both sides of it. So I tried to touch on both. Just some thoughts on how the up to $2.5 billion of asset sale proceeds you might intend to use that would you expect that fully back into acquisitions, would you look to maybe create some dry powder by paying down some of the holdco lines or even on the other side, would you expect acquisition activity to exceed the $2.5 billion figure?

David Krant, CFO

Again, to look into the crystal ball as to exactly what the proceeds could be. I think today we feel confident about $2.5 billion, but it could be more in relation to some of the holdco facilities. Obviously, to the extent that they relate to those asset sales, most of them are, they would just be paid off when we go with the asset. We don't have too many other holdco facilities in the structure, I'd say, and the intention, as always, is to redeploy that into higher-earning investments. So I think to continue the cycle of buying high-quality assets with returns in the plus or minus 15% range. We've done a little better the last couple of years, but maybe that trend will back down a little bit as rates come down, but in that range historically. And then yes, add value, invest in them, fix them up and then sell them at returns, probably closer to 10% to 11%. So we'll continue to do that.

Robert Kwan, Analyst

And if I could just finish, like what geographies and infra subclasses are you seeing as having the strongest valuations for the divestiture side and just where are you seeing the more attractive valuations on the acquisition side?

David Krant, CFO

It may seem repetitive, but we identify opportunities everywhere. Our pipeline in Asia-Pacific is quite balanced, and earlier in the year, it showed the most advanced deals. Some of these opportunities have been delayed, but we believe they are still on track and will boost our confidence in upcoming activities. Meanwhile, our pipelines in North America and Europe have also seen significant growth, indicating solid opportunities there. We are less active in South America, though we are noticing improved sentiment in Brazil, which may lead to increased activity in that market. On the selling front, the US market remains the strongest, followed by Europe. Unfortunately, I don't have any new insights to share; things are pretty much consistent with what we've seen before.

Robert Kwan, Analyst

Okay. Appreciate it. Thank you very much.

David Krant, CFO

And thank you.

Operator, Operator

Our next question will come from the line of Devin Dodge with BMO Capital Markets.

Devin Dodge, Analyst

Thank you and good morning. There seems to be a bit more M&A activity lately in the midstream sector, you're a well-known contrarian investor. Just wondering if you or we should expect you to be leaning into that increased demand for these types of assets and whether we could see one or more of your mature investments sold in the near term? And maybe just if the answer is yes, just what types of assets within midstream are getting the most potential or most interest from potential buyers.

Samuel Pollock, CEO

I agree that the midstream sector is quite intriguing, with many buyers returning over the past few years. From an operational standpoint, it has been one of our strongest segments, and we expect this trend to continue in the short and medium term. There are numerous opportunities available. We currently operate businesses in various regions, and much of our M&A and deployment activity is occurring through these platforms. We are also seeking new investments, although most of this is taking place at the subsidiary level, where deployment remains robust. Capital recycling is a focus for us across our businesses. One area we've discussed previously that is highly mature and well-positioned is our natural gas storage business. We may consider bringing in partners or divesting parts of it. This business is performing exceptionally well and is recognized as critical in various markets for load balancing, especially concerning LNG. If I had to identify one of our best-positioned assets today, it would definitely be this one.

Devin Dodge, Analyst

Okay. Makes sense. Thanks for that. And then data centers, there were some discussion in the letter about it. Just wondering if you could provide a bit of an update on the development pipeline and when we could start to see that self-funding strategy start to ramp up?

Samuel Pollock, CEO

Okay. On the development side, I think we've given a lot of information earlier on the call, just on new areas we've gone into to add to our land bank and today we're just building out the existing facilities that are contracted. For those relatively few pieces of land where we have power, we're very close to having those under contract as well. They exist in whether it's South America, in Brazil and Chile, in the US, in Phoenix and Chicago, we've got obviously Europe, Germany, France, and Spain, as well as Greece. All of them are active at the moment, and then we've got activities going on in Chennai and Mumbai and in India, and Korea and New Zealand and Australia. So yes, literally I probably missed a few places. So we've got a lot of things going on in all those areas. Every one of those places has construction activity underway. As far as the capital recycling, we are well advanced on a number of situations. I think the goal here is to not only do one-offs, which we will do some one-off transactions. But in addition to that, we want to establish something that's probably more programmatic, where we have a series of investors who will look to, as we have repeatedly, buy completed properties. And so those initiatives are underway. We're quite encouraged. Obviously, we had the benefit of being able to take advantage of our several thousand clients across the world, and the data centers are attractive to many of them today, a lot of whom don't have in their portfolio and are looking to get exposure. So I'd say stay tuned. Hopefully, next quarter we'll have some more updates, and if not next quarter, definitely the quarter after that.

Devin Dodge, Analyst

Okay. Good color appreciated. I'll turn it over.

Operator, Operator

That concludes today's question and answer session. I'd like to turn the call back to Sam Pollock for closing remarks.

Samuel Pollock, CEO

All right. Thank you, Liz, and we appreciate your help, and thank you to everyone for joining the call this morning. We hope everyone's summer has been going well, and we look forward to providing an even more detailed update at our upcoming Annual Investor Day event, which will be held in Toronto on September 24. So thank you again and take care.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.