BIPH

Business Context and Reporting Period

Company: Brookfield Infrastructure Partners L.P.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2011
Accounting Basis: International Financial Reporting Standards (IFRS)
Outstanding Units: 132,352,111 Limited Partnership Units as of December 31, 2011.

Brookfield Infrastructure is a Bermuda exempted limited partnership that owns and operates high-quality, long-life infrastructure assets globally. Its operations are organized into three platforms: Utilities, Transport and Energy, and Timber. The partnership is managed by Brookfield Asset Management (Brookfield) under a Master Services Agreement. Brookfield holds an approximate 30% interest in the partnership.

Key Financial Metrics

Liquidity: Group-wide liquidity was approximately $1.55 billion as of December 31, 2011, comprised of uncommitted cash, a $700 million committed corporate credit facility (undrawn), and subsidiary credit facilities.

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 158% to $1.636 billion, driven primarily by the full-year contribution of assets acquired in the Prime Infrastructure merger completed in December 2010.
• Net Income Volatility: Net income decreased to $187 million from $430 million in 2010. The 2010 figure included a one-time $396 million fair value gain and revaluation gain related to the Prime merger completion. Excluding these non-recurring items, underlying operational performance improved.
• FFO Growth: FFO increased 99% to $392 million ($2.41 per unit), reflecting accretion from the Prime merger and strong results from Utilities and Timber platforms, partially offset by below-average performance in Transport and Energy.
• Capital Structure: Corporate borrowings were reduced to zero following a $660 million equity issuance in October 2011. Non-recourse borrowings increased to $4.885 billion to fund growth capital expenditures and acquisitions.
• Acquisitions: Significant investments included a $160 million acquisition of Chilean toll road assets and continued funding of the Australian railroad expansion program.

Guidance, Outlook, and Risks

Management Commentary & Outlook:

• Targets: The partnership targets a total return of 12% to 15% per annum and an AFFO yield of 10% (achieved in 2011). Distribution growth is targeted at 3% to 7% annually.
• Distributions: In February 2012, the quarterly distribution was increased by 7% to $0.375 per unit ($1.50 annualized).
• Capital Allocation: The company intends to fund recurring growth capital expenditures with operating cash flow and debt, while using equity for large-scale acquisitions. A $700 million revolving credit facility remains available.

Key Risks & Contingencies:

• Relationship with Brookfield: Significant conflicts of interest exist as Brookfield manages the partnership, controls the general partner, and may compete for acquisition opportunities. Brookfield owes no fiduciary duties to unitholders.
• Leverage: Assets are highly leveraged with significant non-recourse debt. Covenants restrict distributions and activities.
• Regulatory & Political: Operations are subject to economic regulation, government policy changes, and potential nationalization in various jurisdictions (e.g., Chile, Australia, UK).
• Commodity & Weather: Timber operations are sensitive to housing starts and weather; Transport and Energy operations face commodity price volatility and weather-related disruptions (e.g., grain harvests affecting rail volumes).
• Foreign Currency: Significant exposure to AUD, GBP, CLP, and CAD. Approximately 17% of net equity investment in foreign currencies was hedged as of year-end.

Investor Verification Checklist

• Prime Merger Accretion: Verify the sustainability of FFO growth driven by the Prime Infrastructure merger, distinguishing between one-time fair value gains and recurring operational cash flows.
• Transport & Energy Performance: Review the specific drivers of the "below average performance" in the Transport and Energy platform, particularly the impact of the FERC rate settlement on North American gas transmission and grain harvest volumes on Australian rail.
• Debt Maturity Profile: Assess the schedule of principal repayments for the $4.885 billion in non-recourse borrowings and the refinancing strategy for the Australian railroad construction financing maturing in 2014.
• Brookfield Fee Structure: Confirm the impact of the 1.25% annual base management fee on FFO and the potential for Brookfield to increase its ownership stake via the Redemption-Exchange Mechanism.
• Timber Valuation: Scrutinize the $93 million positive fair value adjustment recorded for timberlands, as this is a non-cash item dependent on external valuations and market assumptions.