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, 2010
Accounting Basis: International Financial Reporting Standards (IFRS)
Business Overview: The partnership owns and operates high-quality, long-life infrastructure assets globally, categorized into three platforms: Utilities (electricity transmission, energy distribution, coal terminals), Transport and Energy (gas transmission, railroads, ports), and Timber (freehold timberlands). A significant event in 2010 was the completion of the "Merger Transaction" on December 8, 2010, acquiring 100% ownership of Prime Infrastructure (formerly Babcock & Brown Infrastructure), significantly expanding the asset base.

Key Financial Metrics

Per Unit Data (2010): Net Income of $4.25; FFO of $1.79.
Debt Profile: Consolidated debt-to-capitalization ratio of 48%. Average debt term is six years. Net debt-to-capitalization ratio on a proportionate basis was 59%.

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 119% to $634 million, driven by the full-year contribution of assets acquired in the Prime recapitalization (November 2009) and the Merger Transaction (December 2010).
• Net Income Surge: Net income jumped from $25 million to $467 million. This increase is primarily attributable to a $433 million non-cash revaluation gain recognized upon the completion of the Merger Transaction, where the consideration paid was less than the net fair value of assets acquired.
• FFO Expansion: FFO increased 302% to $197 million (excluding the 2009 gain on sale of TBE), reflecting the expanded asset base.
• Balance Sheet Expansion: Total assets more than doubled to $13.1 billion due to the acquisition of Prime. Non-recourse borrowings increased to $4.575 billion to finance the expanded operations.
• Segment Performance:
  • Utilities: FFO increased to $144 million (from $61 million excluding 2009 one-time gain), driven by Australian coal terminal and South American electricity transmission operations.
  • Transport and Energy: FFO increased to $91 million (from $13 million), though North American gas transmission results were below expectations due to rate settlements and soft market conditions.
  • Timber: FFO improved to $11 million (from a loss of $3 million) due to higher realized log prices and increased harvest volumes, though returns remain below normalized levels.

Guidance, Outlook, and Risks

Outlook and Guidance:

• Return Objective: Targeting a long-term total return of 12% to 15% on infrastructure assets.
• Distribution Policy: Targeting a payout ratio of 60% to 70% of FFO. In February 2011, the quarterly distribution was increased by 13% to $0.31 per unit (annualized $1.24), targeting 3% to 7% annual distribution growth.
• Capital Expenditures: Maintenance capital expenditures expected to range between $90 million and $100 million in 2011. Significant growth capital projects are planned for Australian railroad operations ($600 million over several years) and UK port expansions.

Key Risks and Contingencies:

• Merger Integration: Risks associated with managing the significantly increased scale and scope of operations following the Prime merger.
• Leverage: Assets are highly leveraged; restrictive covenants on credit facilities could limit distributions or activities.
• Foreign Currency: Significant exposure to AUD, GBP, and Chilean Peso; hedging strategies are in place but may not fully offset risks.
• Regulatory and Political: Operations are subject to government policy changes, including nationalization risks, tax changes, and regulatory rate reviews (e.g., in Chile, Australia, and the UK).
• Commodity Exposure: Timber operations are sensitive to housing market conditions and log prices; coal terminal operations depend on global coal demand.
• Related Party Conflicts: Brookfield Asset Management (the Manager) has significant influence and may have conflicts of interest regarding acquisition opportunities and fee structures.

Investor Verification Checklist

• Non-Cash Gains: Verify the impact of the $433 million non-cash revaluation gain on Net Income to understand the underlying operating cash flow (FFO/AFFO) versus reported earnings.
• Debt Maturity Profile: Review the schedule of principal repayments, noting that $659 million of non-recourse debt is due in 2011 (though $470 million was refinanced subsequent to year-end).
• Timber Recovery: Assess the sustainability of the timber segment's recovery, as it remains dependent on a sustained recovery in U.S. housing starts and log prices to reach normalized AFFO yields.
• Related Party Fees: Confirm the base management fee (1.25% annually of market value) and potential incentive distributions payable to Brookfield, which impact distributable cash flow.
• Prime Integration: Monitor the integration progress of Prime Infrastructure assets, particularly the North American gas transmission and Australian railroad operations, which faced operational headwinds in 2010.