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Author: TMFTheSnake Big red star, 1000 posts Global Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 207  
Subject: Q4 earnings and CC Date: 2/11/2012 9:25 AM
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It was a strong year for BIP and Q4 generally kept up the trend.

My discussion on the year ran on a bit, so I'll do a recap. Utilities continued to do well and a new acquisition in 2012 will help this grow a bit faster than it otherwise would have. Transport will see better conditions in Australia, but the US and UK are likely to drag a bit. Timber will have to wait and see if China's housing demand recovers, but the US is showing signs of life, so this year will probably be flatish to slightly up.

The shares have run up this year as the dividend was dramatically raised. Management raised it another 7% in the coming quarter, but I don' think we'll see much outside the target 3-7% range in the near future (but probably more towards 7%).

At $28, the shares are a borderline Buy/Hold for me. We don't have any great growth catalysts (the Australian railroad has already been factored in), so I don't think my $30-$33 estimate of value is outdated at this point.

For more rambling continue on.

Utilities
Not a whole lot happening here as you might expect from the headline. Dalrymple saw cash flow up 15% for the year, but that was because of a regulatory rate hike that went into effect last January and won't be repeated this year.

Chile keeps on keepin' on. Cash flow was up as BIP continued to invest in grid expansion and thanks to inflation adjustments.

The regulated distribution segment finished the year strong as well, thanks mostly to strong housing development in the UK. While part of the revenue from this is utility-like there is an upfront payment made by developers to link up houses initially. So, this part will be more volatile and depend on how much building activity is going on. UK housebuilders have been seeing their shares rise in recent months so it would seem some people are optimistic on the sector, though house price trends haven't been all that spectacular. We'll have to see how this holds up next year.

The big news for the utility section came after the year-end when BIP bought 17% of a Colombian power distribution utility.

This sounds like a good addition to the portfolio and we've seen some decent returns from the transmission assets in Chile. One benefit of these assets is that due to a regulatory loophole, BIP (and Brookfield) will be able to build off this asset and potentially move into power generation and transmission at some point down the road (apparently there are some more assets that are expected to be privatized within the next few years).

Interestingly, it looks like one of BAM's private funds, Brookfield Colombia Infrastructure Fund, bought the whole company (well, 99.4%) in December for $421.4m, beating out one other bidder at $339m and far exceeding the minimum bid of $282m.

Looking at what BIP paid for its small stake - $54m for 17%, implying a value of $318m (ignoring any control premium) - this raises a few questions in my mind. They have been asked before (who is BAM dealing for? will BIP unitholders get a fair shake?) and it doesn't look like we're getting shafted here, but the situation is interesting.

This new addition to the portfolio should provide some boost to the declining pipeline of organic growth projects in BIP's utility division and help keep cash flow growth in the division above inflation (assuming BIP pays correctly for the growth).

Transport and Energy
Less rosy here, but Q4 provided some good news. The bad news comes mainly from the North American gas transmission assets where the new regulatory pricing combined with a terrible gas market has crushed cash flow (down 37%). In the call, CEO Sam Pollock admitted the company was looking at ways to get out of this, but said they will wait until they can get a fairer value.

The Australian rail division has suffered this year due to the drought that dropped grain harvests 40%. However, improving harvest conditions led to higher gain shipments in Q4 (and expectations are shipments will be 140% of normal this year). Also helping were two of the expansion projects coming on line. These will ramp up over time and be joined by three more completed projects next year. We should see a good portion of the $150m in incremental EBITDA from this investment in 2013.

The UK ports were average in Q4, but management commentary has changed from mentioning that margins were being hurt because they were running at capacity to relying on minimum volume guarantees. This seems a bad omen for the UK and European economies (as if we needed more) or evidence for those that aren't sure things are that bad.

On the bright side, a new deal with Indian (formerly British) steel giant Corus will be ramping up next year, so that should help bolster cash flow at the ports a bit next year.

During the call, Pollock also talked about new rail expansion and port opportunities in western Australia. These are still three or more years down the road, and would require more greenfield investment so the returns would be slightly lower, but it would help further expand BIP's rail footprint and port position.

Timber
It looks like Chinese housing is truly slowing as BIP said China is still trying to work through the timber inventory its received this year. For the year, exports (mainly to China, Korea, and Japan) made up nearly half of BIP's timber sales. In Q4 it dropped to 37%.

That said, it wasn't all bad news in timber in Q4 as there seems to life in US housing again. Prices remained solid (down only slightly from Q3) and BIP increased production to 91% of its long-term average to take advantage. The company isn't expecting a rapid turn in US housing but they are planning to increase production to 120% of long-term average when Asia and the US start to show sustainable signs.

Finance
Management's language also changed a bit here. They've been working to, um, re-work debt for the past year at least to take advantage of the great rates available. However, it seems they hit a ceiling early this year as covenants made it uneconomical to proceed further. It now appears that troublesome debt comes due in 2012 (and is related to the troublesome US natural gas assets), so this year the company will be working to refi $300m by issuing BIP debt.

While liquidity stands at $1.5 billion with $700m in an untapped credit facility for BIP, that is offset by nearly $700m in debt maturing in 2012, $950m maturing in 2013, and $700m maturing in 2014. Brookfield has shown an amazing ability to play financial markets, so I'm not overly concerned, but it will be something to watch if we see Europe flame up into a Lehman-like capital market freeze (sorry for the mixed metaphor).

BIP remains hedged, with most of the emphasis seeming to lie on an uncertainty about the strength of the Australian dollar and anticipating further US dollar strength.

This seems to clash with management's optimism about Australia and South America remaining strong as demand for commodities in China and India grows, but I think this is only a timeframe mismatch. The hedge is for a year, the investments are for decades. In the shareholder letter, Pollock did mention some concerns about India and China in the short term.

Anyway, things are moving as they do with BIP. We saw a lot of activity in the past year and we probably will see more acquisition-type developments going forward, but I think the surprise bumps in the dividend will be fewer and farther between as most cash flow changes should be more gradual unless we see a major acqusition - which would likely require another equity raise.
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