Brookfield Infrastructure Partners L.P.

Moat: 4/5

Understandability: 3/5

Balance Sheet Health: 3/5

Brookfield Infrastructure Partners L.P. is a global infrastructure company that owns and operates high-quality, essential, long-life assets in the utilities, transport, midstream, and data sectors.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Brookfield Infrastructure Partners (BIP) operates across multiple segments:

  • Utilities: This segment focuses on the ownership and operation of regulated utilities, primarily in developed markets, with a presence in North and South America, Europe, Australia, and Asia, and includes electrical transmission and distribution systems. Also includes natural gas transportation and distribution.
  • Transport: This segment includes a global network of rail lines, toll roads, and port terminals, all of which have relatively long-term contracts.
  • Midstream: This segment’s primary revenue comes from natural gas gathering, processing, and transmission pipelines primarily in North America.
  • Data: This segment is responsible for providing data transmission, data storage, and cellular towers worldwide, including the US, Europe, and Asia.

Key to BIP’s revenue model is its long-term contracts, often with regulated or fixed-rate structures.

Moat Analysis

BIP exhibits strong characteristics of a company with a wide economic moat, which provides considerable protection from competition. Here’s a detailed analysis:

  • Barriers to Entry: The infrastructure assets owned and operated by BIP, such as rail lines, toll roads, pipelines, and transmission lines, are extremely capital intensive to replicate. These assets are also heavily regulated, making it difficult for new entrants to secure the necessary approvals and licenses to compete.
  • Scale and Cost Advantage: Many of BIP’s infrastructure assets, such as ports, pipelines, and power transmission, are best exploited at a large scale. Companies operating at scale benefit from lower per-unit costs by spreading overhead and fixed costs over larger volumes of sales and transactions.
  • Essential Services: The assets in BIP’s portfolio are deemed critical infrastructure that provides essential services, such as energy, transportation, and data connectivity, all of which have high economic barriers to substitute or new entry. Moreover, the customers for these assets tend to be large utilities or governments with long-term stable contracts, making the cash flows from them more predictable and recurring.
  • High Switching Costs: Many of BIP’s customers find it costly to switch suppliers because infrastructure such as a pipeline or a port are costly to replace or relocate.
> Switching costs provide pricing power, which can translate into increased returns on capital for the company.

The combination of high barriers to entry, scale advantages, and essential, difficult-to-replace assets make BIP’s moat strong and sustainable over the long term.

  • Rating: 4/5 - A wide moat due to scale and the difficulty in replacing the infrastructure assets combined with essentiality of its services.

Risks to the Moat and Business Resilience

While BIP demonstrates strong fundamentals, it isn’t immune to various risks, including:

  • Regulatory Risk: A significant portion of BIP’s revenue is regulated or derived from assets with regulatory or government oversight. Changes in legislation, trade policies, and regulatory decisions, or even rate structure modifications by government authorities, could have a substantial effect on BIP’s financial standing and ability to obtain expected profits in a given market.
  • Macroeconomic Factors: A recession or economic turmoil will affect demand for the use of BIP’s infrastructure and could affect the viability of some companies it does business with. Inflation will make long term contracts based on fixed rates less profitable unless BIP can renegotiate them.
  • Operational Disruptions: BIP operates some complicated systems that are exposed to technological obsolescence and can suffer from mechanical failures or human error.
  • Debt and Financial Risk: To grow and diversify, BIP relies heavily on debt, a great deal of which could be tied to variable interest rate loans. Also, because they operate in different international markets, foreign currency risk may impact financial results. The risk of its debt in some cases could also lead to higher costs or inability to raise needed cash.
  • Integration Risk: Acquisitions can require significant costs in order to ensure profitability and long term value creation through management’s strategic capabilities.

Despite these risks, the scale of BIP’s assets, geographic diversification, and its strong track record in generating consistent returns give some confidence in its resilience and capacity to withstand or mitigate many adverse effects

Financial Analysis

  • Revenue Growth: BIP has demonstrated a solid track record of revenue growth over the years. As an infrastructure business, revenues are steady due to the long term contracts and limited pricing fluctuations from its regulated business. However, new and ongoing capital projects in varied regions has allowed for revenue to grow over time.
  • Profitability and Margins: Margins can vary from year to year, mainly owing to inflation and the acquisitions and sales of businesses. Gross margins for transport, midstream, and data tend to be a bit higher than those seen for utilities. The company usually tries to maintain stable profit margins.
  • Free Cash Flow: The nature of the business requires heavy investments that then generate profits, so free cash flow will vary over time, even in relation to net profit. BIP has shown ability to generate strong free cash flow over the long term.
> BIP aims to generate a consistent 12%-15% return on invested capital, which signals good business management and ability to create long term value
  • Capital Structure: The company typically has significant debt and long-term financial obligations, a normal thing for this type of infrastructure business. However, the debt to enterprise value appears to be decreasing. The company has also shown an ability to service their existing loans even in times of high interest rates.
> BIP management aims to maintain a debt to enterprise value of 50% or less.

 While the use of debt gives it higher returns, it also carries more financial risk.
  • Recent Performance: BIP’s recent performance in 2023 appears to be mixed. They are experiencing good results in the transport and midstream areas, with strength in operating earnings in both those business segments.

The biggest issue they have mentioned in recent earnings calls is related to the global macroeconomic uncertainty and the associated credit issues that have led to higher borrowing costs. Management is focused on maintaining financial liquidity and reducing costs, and they expect a strong performance over 2023 despite headwinds.

Understandability Rating

  • Rating: 3 / 5 - Although its overall structure and operating model is easy enough to comprehend, it takes time and effort to analyze the company deeply. Also, many of the details of the partnerships and subsidiaries, along with its involvement in various projects in different markets with different accounting rules is challenging to fully understand.

Balance Sheet Health Rating

  • Rating: 3/5 - BIP has very large debt, a standard characteristic for a capital-intensive company, such as itself. Even though debt levels have been going down, they are still a significant part of the capital structure. A large portion of its liabilities have a long maturity and appear well-structured. However, the sheer scale of the debt exposes it to potential problems down the line. The business also doesn’t produce a lot of cash, with a lot of cash diverted towards debt servicing and new expansion projects.