Business context and reporting period
Brookfield Infrastructure Partners L.P. filed this Form 20-F annual report for the fiscal year ended December 31, 2018; it is not a standalone fourth-quarter report. The Bermuda partnership owns and operates utility, transport, energy and data infrastructure assets across the Americas, Europe and Asia Pacific. Financial statements are prepared under IFRS in U.S. dollars. The filing reports both IFRS results and non-IFRS measures such as FFO, AFFO and Adjusted EBITDA, which are not standardized or necessarily comparable across issuers.
Financial results and key metrics
Amounts below are U.S. dollars unless noted. Year-over-year comparisons are against 2017.
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $4.652 billion | $3.535 billion | +32% |
| Net income | $806 million | $574 million | +40% |
| Net income attributable to partnership | $410 million | $125 million | +$285 million |
| Net income per limited partnership unit | $0.59 | $(0.04) | Improved |
| FFO | $1.231 billion | $1.170 billion | +5% |
| FFO per unit | $3.11 | $3.11 | Flat |
| AFFO | $982 million | $941 million | +4% |
| Adjusted EBITDA | $1.613 billion | $1.564 billion | +3% |
| Adjusted earnings | $509 million | $569 million | −11% |
| Distributions per unit | $1.88 | $1.74 | +8% |
Net margin was approximately 17.3%, compared with 16.2% in 2017. Segment Adjusted EBITDA margins were 42% for transport, 49% for energy and 55% for data infrastructure. Utilities’ return on rate base was 11%, unchanged from 2017.
- Cash flow: Consolidated operating cash flow was $1.362 billion, down from $1.481 billion. Investing activities used $5.564 billion; financing activities provided $4.418 billion. Operating cash flow was reduced by taxes paid on the Chilean asset sale and foreign-exchange effects.
- Liquidity: Cash and cash equivalents were $540 million at year-end, versus $374 million. Group-wide liquidity, including available facilities and proportionate cash retained in businesses, was $3.377 billion, versus $2.865 billion.
- Debt: Consolidated corporate borrowings were $1.993 billion and non-recourse borrowings were $13.113 billion, totaling $15.106 billion before cash. Proportionate net debt was $10.098 billion; proportionate net debt-to-capitalization was 55%, and average debt term was seven years. The weighted-average cash interest rate was 5.0%, versus 4.6%.
- Distributions: The FFO payout ratio was 75% (68% in 2017); the AFFO payout ratio was 94% (84%). Management said the 2018 ratio reflected timing of reinvestment of Chilean sale proceeds and financing at the Brazilian gas transmission business. Holding foreign currencies constant, management estimated the FFO payout ratio would have been 69%.
Material changes versus prior year
- Revenue growth reflected acquisitions, including Colombian natural gas distribution and a full year of Brazilian gas transmission ownership, plus fourth-quarter acquisitions in residential energy infrastructure and Canadian gas midstream. Foreign exchange reduced reported revenue by $161 million.
- Net income benefited from improved operations, acquisitions and a $338 million reported gain on sale of the Chilean electricity transmission associate; related tax expense was $129 million, and the gain was $209 million net of tax. The asset was sold for approximately $1.3 billion gross and $1.1 billion net proceeds.
- FFO rose, but FFO per unit was flat as average units outstanding increased. Adjusted earnings declined, reflecting the sale and foreign-exchange impacts, among other items.
- Direct operating costs increased by $699 million, including $618 million from acquired businesses. Interest expense rose $127 million to $555 million, mainly due to new borrowing at the Brazilian gas transmission business and acquisitions. Income tax expense increased to $364 million from $173 million.
- Non-recourse debt increased by approximately $5.0 billion, primarily for acquisitions, growth projects and $1.5 billion of five-year senior notes issued by the Brazilian gas transmission business. Total assets rose to $36.580 billion from $29.477 billion.
- Foreign-currency translation reduced partnership capital by $1.551 billion, mainly due to a 15% weakening of the Brazilian real against the U.S. dollar.
Outlook, risks and unusual items
- Management targets long-term annual returns of 12%–15% on invested capital, a distribution payout ratio of 60%–70% of FFO, and annual distribution growth of 5%–9%. In February 2019, the board approved a 7% increase in the annual distribution to $2.01 per unit, or $0.5025 quarterly.
- Management described the outlook as favorable and prioritized advancing its transaction pipeline, integrating recent acquisitions and executing organic growth projects. It cited approximately $1.8 billion of committed project backlog and approximately $2.2 billion of capital expected to be commissioned over the next two to three years. Management also said it expected $1.5–$2.0 billion of net asset-sale proceeds over the following 12–18 months; completion and timing are not assured.
- Capital recycling remains central to funding growth. Management characterized the Chilean transmission sale as exchanging an asset generating a 7% FFO yield for acquired businesses expected to provide an 11% annualized FFO yield; this is an expectation, not a realized result.
- Key risks include leverage and refinancing needs, foreign-exchange exposure, regulatory decisions, construction and acquisition execution, commodity-linked demand, extreme weather and climate-related regulation, and changing market access. A single customer represented a majority of contractual and regulated revenue at the Brazilian gas transmission operation in 2018.
- Brookfield controls the general partner and provides management services. The filing highlights potential conflicts in allocation of investment opportunities, related-party dealings and fees; the annual base management fee is 1.25% of the defined partnership market value. Brookfield’s effective economic interest was approximately 29.5%, assuming exchange of redeemable units.
- Other notable items: 2018 acquisitions’ purchase-price allocations were provisional; IFRS 16 adoption was expected to add an estimated $0.4–$0.6 billion to assets and liabilities before the still-unquantified effect of fourth-quarter acquisitions. Management reported effective disclosure controls and internal control over financial reporting, while excluding six recently acquired entities from its assessment; those entities represented 26% of assets, 29% of partnership capital, 17% of revenue and 3% of net income. The auditor gave unqualified opinions on the financial statements and internal controls.
- The filing states there were no material off-balance-sheet arrangements. Subsidiary letters of credit totaled $47 million; guarantees and letters of credit outstanding to third parties, including those of associates, totaled $195 million. Indemnification exposures are not readily quantifiable; the partnership reported no significant historical payments under such undertakings.
Important facts for investors to verify
- Reconcile reported IFRS net income and cash flow with FFO, AFFO, Adjusted EBITDA and the proportionate segment measures; these non-IFRS measures have limitations.
- Assess the sustainability of distributions given the 75% FFO payout ratio, 94% AFFO payout ratio, debt service and the dependence of the partnership on subsidiary distributions.
- Review debt maturity, interest-rate exposure, refinancing capacity and the increase in non-recourse borrowings, including acquisition-related debt.
- Test the assumptions behind the Chilean sale proceeds’ redeployment returns, management’s asset-sale expectations, committed backlog and commissioning schedule.
- Evaluate customer concentration at the Brazilian gas transmission operation, exposure to foreign currencies and commodity-linked businesses, and regulatory changes affecting the portfolio.
- Examine acquisition integration, provisional valuations and the control-assessment exclusions for businesses acquired late in 2018.
- Consider Brookfield’s governance influence, management fee and incentive distributions, related-party arrangements, and the resulting potential conflicts of interest.