In his recent State of the Union address, President Barack Obama renewed his call for major upgrades to the nation's aging infrastructure. Obama's proposed "Fix It First" program would allocate $40 billion for urgently needed upgrades to highways, bridges and airports and set another $10 billion aside to create a national infrastructure bank.
Politicians may argue, but everyone agrees there is a critical need to start repairing the crumbling infrastructure in the United States.
Today, nearly 70,000 U.S. bridges are already considered "structurally deficient," while the country's patchwork electric grid is incapable of handling current loads, much less rising demand. This is why the president is pushing for the billions of dollars of required investments to happen sooner rather than later.
Regardless of when it happens, there will need to be about $2.2 trillion spent to completely upgrade the country's crumbling infrastructure over the long run, according to the American Society of Civil Engineers.
The good news for investors who want to profit from this is that I've found a master limited partnership (MLP) whose main business is in infrastructure -- Brookfield Infrastructure Partners (NYSE: BIP).
Given this company has operations in many infrastructure segments, the need to upgrade America's infrastructure will create profitable growth opportunities for this stock, which yields 4%.
Most MLPs own pipelines or other energy assets that may suffer if oil and gas prices plummet. But Brookfield owns an internationally-diverse portfolio of utility, transportation, energy and timberland assets that mitigates commodity risk. In addition, the company owns or has joint ventures in long-lived assets such as roads, terminals and transmission grids that provide essential services to a global economy.
Many business segments = diverse revenue sources
Brookfield's utilities operations contribute roughly 60% of cash flow. This business generates stable returns under long-term contracts and enjoys good economies of scale due to its size. The MLP also owns one of the world's-largest coal export terminals, which has an annual capacity of 85 million tons and is 100% contracted through 2018. Brookfield has $3.5 billion of expansions projects planned for this high-throughput terminal to boot.
The MLP has electrical-transmission lines in Canada, the United States and Chile stretching more than 5,000 miles. Besides operating most of Chile's transmission grid, the limited partnership is expanding this operation to meet local demand. It has also invested $750 million in a transmission system in Texas that's expected to come online mid-2013. In addition, the MLP's natural gas and electricity distribution operations in the U.K., Australia and South America provide income from long-term contracts indexed to inflation.
Not to mention, Brookfield's transportation and energy assets account for about 35% of cash flow. Its shipping ports are among the world's largest by volume and are benefiting from Asia's growing appetite for oil and coal. Other assets include shipping ports in the U.K. and Europe, as well as major toll roads in Chile and Brazil. The Chilean toll road is under contract until 2033, allowing for toll increases of 3.5% a year, plus inflation and traffic has been growing at high single-digit annual rates.
Brookfield also owns about 343,000 acres of timberland in the British Columbia region of Canada and the U.S. Pacific Northwest. This segment has performed poorly in recent years, but is poised for a gradual recovery due to increased housing starts and ongoing demand from Asian markets.
Funds from operations (FFO) growth
Brookfield's earnings suffered during the financial crisis, but the company has rebounded nicely since then, while growth in the regulated parts of its business provides a buffer against future downturns. In the past four years, the MLP has made prudent acquisitions and investments that fuel FFO gains, creating a backlog of up to $5.5 billion of new projects for organic growth in the future.
Brookfield's FFO per unit, a key financial metric for MLPs, has more than doubled in the past three years to $2.41 in 2012. FFO rose 18% in 2012 to $462 million, but FFO per unit was flat, as the company issued additional units to fund several growth projects. These projects, which include the new transmission system in Texas and expansion of Australian rail and South American toll road operations, will begin contributing to cash flow this year, according to management.
The MLP's balance sheet is reasonable balance sheet for such an asset-intensive business. The company raised $900 million through debt and equity financings in 2012 and has access to another $900 million on its bank line of credit. Total net debt was $7.7 billion last year; assets totaled $12.7 billion.
In the past five years, distributions have grown more than 12% a year to a current annualized rate of $1.72 yielding 4.3%. Management targets annual distribution growth at between 3-7% and paying out 60-70% of FFO. Payout in 2012 was at 62%, which is at the low end of the targeted range.
Returns were impressive at 33% in 2012 and have been averaging 20% in each of the past five years. Management aims to deliver total returns of at least 12-15% on an ongoing basis.
Risks to Consider: Like other MLPs, Brookfield relies on debt and equity financing to grow the business. As a result, there is financial leverage and risk from dilution. Brookfield's timber and transportation businesses rely on continued growth in emerging-market economies. A major slowdown in Asia, for instance, could adversely affect demand for Brookfield's products and services.
Action to take --> Brookfield Infrastructure combines the safety of a utility business with the higher-growth opportunities associated with the billions that will need to be spent on infrastructure in the coming years. The fact that this high-yielding MLP has a backlog of growth projects and a steadily-rising distribution should be enticing enough for investors, but President Obama's plan to inject $40 billion into the infrastructure sector right now would be the cherry on top, if it passes.