Brookfield Infastructure An Interesting Play On Long-Term Assets

By Stephen D. Simpson, CFA | May 28, 2012 AAA

A few weeks ago, I ran through some of the merits of Brookfield Asset Management (NYSE:BAM) - a relatively unusual investment vehicle that gives investors exposure to a wide range of investment assets, such as commercial real estate and infrastructure assets. Now it's time to consider one of the major holdings of BAM - Brookfield Infrastructure Partners (NYSE:BIP).

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Long-Term Assets with Steadier Demand
Brookfield Infrastructure Partners, or BIP, is built around assets that provide protected cash flows for long stretches of time. Much of BIP is built around electricity transmission and distribution, ports and gas transmission, but the company also holds timberlands and is looking to grow in markets like coal terminals, rail and petroleum gathering/processing.

A little over 40% of BIP's cash flow comes from long-term contracts, while nearly another 40% comes from regulated operations. That gives the company's management a lot of visibility on its cash flow streams and liquidity; allowing it to not only make long-range capital allocation decisions with more confidence, but also offer a sustainable dividend.

It's also worth noting that BIP's core assets don't require a large amount of ongoing spending. While ports, rails and toll roads do require maintenance, but once an electricity grid, railroad or port is built, most of the hard work is done and the company can look to enjoy decades of steady usage and cash flow.

Although BIP runs a balanced business in many respects, the company is definitely overweight to Australia in terms of where its capital is allocated. Large coal terminals, ports and rail assets are all located in Australia, and nearly half of the company's assets are here. While BIP's port business is oriented towards Europe, the company has relatively few other assets there.

A Different Kind of Partnership
As the name indicates, BIP is structured as a partnership, but it's not managed and run like most master limited partnerships (MLPs). BAM owns about 30% BIP and actively manages the assets, occasionally acquiring assets at the BAM level and transferring them down to BIP. While American BIP investors do have to contend with a K-1 and some added complications to their tax returns, BIP management avoids the unrelated business taxable income (UBTI) and ECI that so often makes partnership ownership complex or confusing.

A Strong Australian Asset Base Levered to Chinese Growth
BIP has substantial assets in Australia, including coal terminals with 85 metric tons of handing capacity and over 5,000 kilometers of railroad track. These assets are built around bringing the coal and iron mined by companies like Rio Tinto (NYSE:RIO), BHP Billiton (NYSE:BHP), and Peabody Energy (NYSE:BTU) in Western Australia to the ships that will carry it to markets like China.

At this point, BIP is the sole rail network in southwestern Australia and the company handles about 20% of the world's seaborne metallurgical coal. BIP is looking to get even bigger though, investing hundreds of millions of dollars in additional capacity - much of which will be covered under take-or-pay contracts that guarantee a certain level of cash flow.

Plenty of Opportunity to Grow
No brief article can really do justice to BIP's assets, but they are significant. The partnership controls nearly 9,000 kilometers of electricity transmission and distribution assets and typically earns healthy (high single digit to low teens) rates of return. BIP also owns hundreds of thousands of acres of timberland, and unlike Plum Creek (NYSE:PCL), most of this is prime coastal property that can serve Asian demand. Elsewhere, the company operates 30 port terminals and over 15,000 kilometers of natural gas transmission lines - including assets that serve more than half of Chicago's natural gas needs.

The Bottom Line
Companies like BIP are not the easiest for retail investors to value, as these stocks routinely trade based on net asset value, and independent calculations of NAV requires access to information that is often only available with expensive subscriptions. That said, dividend yield is not a bad proxy and at nearly 5%, BIP's valuation is reasonable for investors seeking a long-term position.

For those with the access and willingness to go a little further afield, there are numerous infrastructure companies around the world that operate assets such as ports, transmission networks and airports. In terms of convenience, income potential and asset quality, though, BIP is well worth a look by investors who want some exposure to cash-generating long-term assets.

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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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