Brookfield to invest $700m in Brazilian gas business

Brookfield Infrastructure plans to invest at least $700 million into a consortium currently in exclusive talks with Brazil’s Petrobras for the acquisition of a natural gas transmission business, a deal that sources say could be worth $5 billion in equity.

“Obviously I can't comment specifically on the stage where we’re at in negotiations, but it's pretty common knowledge that we've been in discussions with [Petrobras] for probably six months,” chief executive Sam Pollock said during an earnings call on Tuesday. “So these are fairly advanced discussions and I just feel that we have a fairly good level of confidence that we can get across the line.”

Despite Brazil’s political and economic troubles, Brookfield considers it an attractive market, taking a “contrarian view” to other investors’ negative sentiment. The Toronto-based firm is reportedly teaming up with sovereign wealth funds from Singapore and China, as well as a US-based private equity firm, to buy the pipeline network.

In addition to the Petrobras acquisition, Brookfield is also focusing on electricity transmission assets in the South American country “as these are low risk utility businesses underpinned with availability-based revenue frameworks and full inflation indexation,” Pollock stated in a letter to unitholders.

Having recently been awarded a portfolio of greenfield transmission lines in Brazil, Brookfield is also focusing on electricity transmission, a sector in which it has been active twice before. The firm is in discussions with several sellers to acquire operating assets to establish a large-scale business, Pollock said.

After maintaining substantial liquidity over the past year and reporting solid results across all business segments in the second quarter, Brookfield Infrastructure is poised for significant growth, Pollock noted in the letter.

“We are pleased with our year-to-date financial results, and believe that we are on the cusp of further significant growth,” he said. “One contributor to this growth is that we expect to soon commission a large portion of our capital backlog.”

Another recent transaction, which has not yet closed but is expected to do so later this month, is the firm's investment in Asciano. A Brookfield-led consortium is teaming up with a Qube-led group to acquire the Australian port and rail logistics business for A$12 billion ($9.1 billion; €8.2 billion), a deal approved by Australia's competition watchdog last week.

Brookfield will dispose of the Asciano shares it acquired on market in 2015 when it sought to block a competing bid by the then rival Qube-led group, Pollock said, in order to fund its portion of the investment of approximately $350 million.

Pollock also referred to the acquisition of Niska, a company with natural gas storage facilities in the US and Canada. The deal, which closed shortly after the end of the second quarter, enabled Brookfield to double its gas storage capacity to approximately 600 billion cubic feet.

Brookfield’s energy segment was the best-performing of its businesses in the second quarter on a relative basis, generating funds from operations – the firm's preferred performance metric – of $43 million compared to $23 million in the second quarter of 2015. 

Overall, the firm reported net income of $156 million for the quarter compared to $18 million in the prior year. The increase is attributable to higher earnings primarily in the fund manager’s transport and energy operations and a non-recurring gain of approximately $100 million in its toll roads business.

Due to Brookfield’s strong performance in the first half of 2016, its board of directors has approved an 11 percent year-on-year increase in its distribution level. It also approved a three-for-two unit split of Brookfield Infrastructure’s outstanding units.

Going into 2017, Brookfield’s FFO momentum looks strong, Pollock told unitholders, while on the acquisition front, “we have not seen this level of proprietary deal flow in years,” he said.