No. of Recommendations: 11
It was another nice quarter at BIP – not as nice as the second quarter, but still nice.

In the utilities division, funds from operations (FFO) was up $11m from the previous quarter (I’ll be comparing the numbers to the previous quarter because the Prime transaction at the end of last year makes year ago numbers less relevant).

A good deal of this increase was related to some catch-up payments that were made in the quarter and it doesn’t appear we’ll see this cash flow level sustained. This quarter’s numbers were also helped by continued strong housing development in the UK which provided nice business for the company’s gas and electricity distribution operations there.

During the quarter, BIP bought a 23% stake in a subsea power line that runs from Connecticut to Long Island for $9m. It also closed a $585m loan for the construction of the Texas power line project. So the transmission side of the business is growing outside of Chile.

In the transport and energy division, the new tariff regime in the US continues to hurt and even softer markets didn’t help. The Australian rail operations added striking locomotive drivers to the list of current woes. Add in seasonal maintenance and the quarter was a little weaker than the previous one. The strike also disrupted BIP’s network expansion projects, but management said they’d still be done on time and on budget.

Good news here is that the weather seems to have changed and farmers are expecting a harvest double the size of last year’s, so that should help boost cash flow over the next few quarters. Also, BIP completed two more contracts related to its rail network expansion. Now they’ve got 93% of the expected revenue signed on. When this is all up and running, grain transport will only affect 10% of rail revenue, and 60% of revenue will be driven by take-or-pay mining contracts, so seasonal fluctuations will be much less a worry.

The timber business slowed a bit because home building in China has slowed and there is apparently quite a bit of timber inventory sitting on the docks. Prices remained solid, however, and the harvest was up to take advantage. Management expected a slowdown this quarter, but they haven’t seen the improvement they were predicting as we head into Q4, so they think it will be early 2012 before China picks up again.

The big news for the quarter was the $660m equity raise BIP did in order to fund the acquisition of two Chilean toll roads and the rail expansion. For more on the toll roads, check out my earlier post:

Management provided a little more color on the roads. The roads connect the Santiago international airport and the north and west suburbs with the Las Condes commercial district. Currently the roads have and EBITDA of 65% and an adjusted FFO (AFFO) yield of 4%. BIP thinks with increasing traffic, they will see AFFO up to 12% by 2016.

Back to this equity raise. I don’t really like to see a company do this especially at a price ($24.75) which I think is below its fair value (I think the shares are worth at least $30) – and below where I bought them. However, sometimes you have to deal in reality and right now markets are not very stable and debt is hard to come by.

We see this in the fact that BIP settled for a $350m construction loan for the Australian network expansion. Last quarter they were talking about getting a $430m loan. The loan they got has an 8% interest rate and matures in 2014. And in order to get it, they needed a $300m support package from one of the customers that will be using the new rail.

I think BIP used this equity raise as a way to re-stock their balance sheet as they will use about $450m of it to cover costs related to Australia and $150m of it for the Chilean acquisition. This will leave them with an untapped $700m line of credit at the corporate level and around $250m in cash in the various parts of the business.

With the struggles in Europe showing no signs of abating, we could see more announcements like the Chilean toll road one down the road, and BIP should have the liquidity to take advantage without another round of issuance.

As for the dividend, this quarter we were at 56% payout, still below the target of 60%-70%, but we aren’t likely to see another boost to the dividend until the first quarter of 2012 when the regular dividend review takes place.
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