Brookfield Infrastructure Partners delivered good news on Wednesday morning in the form of solid quarterly earnings and a 13 per cent distribution increase. Liking the new numbers, investors sent the stock 6 per cent higher.
Yet they also reacted to the company's new long-term strategy for its Australian railroad. In its filing, Brookfield acknowledged that its transport division has been hindering profits, largely because WestNet Rail doesn't have much grain to move around following a massive drought. To change things up, the company has revamped the railroad.
Rather than continue to centre its railroad around grain, Brookfield has signed new contracts to move iron ore starting next year. That's a big change for the business that was acquired in Brookfield's acquisition of Prime Infrastructure in 2010 (formerly Babcock & Brown Infrastructure, which Brookfield recapitalized a year earlier).
Not only has the company changed its railway focus, it has also signed long-term transportation take-or-pay contracts, which means Brookfield will be paid a minimum amount each year, regardless how much iron ore it transports. If the company transports more than the minimum volume, it will get paid an extra amount.
Brookfield is touting the new contracts because they offer stable cash flows that investors can count on. That enables the firm to go out to the market and issue new debt, because it knows it will be able to meet interest payments.
The new contracts also leave current investors with something to look forward to. After announcing the distribution increase, chief executive officer Sam Pollock said that the infrastructure group currently has a payout ratio of 50 per cent of its funds from operation. That's still below his desired 60 to 70 per cent target. Although Mr. Pollock wouldn't commit to an increase, it's fairly easy to read between the lines and see that he would like to pay more out to shareholders when he revisits the distribution next year.
Tim Kiladze