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, 2015
Accounting Basis: International Financial Reporting Standards (IFRS)
Overview: Brookfield Infrastructure owns and operates a globally diversified portfolio of high-quality infrastructure assets across four primary segments: Utilities, Transport, Energy, and Communications Infrastructure. The partnership is managed by Brookfield Asset Management (the "Service Provider") under a Master Services Agreement. As of December 31, 2015, there were 162,163,205 Limited Partnership Units outstanding.

Key Financial Metrics

Per Unit Data (2015): Net Income of $1.04; FFO of $3.59; Distributions of $2.12.
Payout Ratio: 68% of FFO (within the 60-70% target range).

Material Changes vs. Prior Period

• Revenue Decline: Revenue decreased 4% to $1,855 million. This was primarily due to a $244 million negative impact from foreign exchange (strengthening U.S. dollar), which offset growth from acquisitions (U.S. district energy, gas storage) and organic initiatives.
• Profitability Growth: Net income attributable to the partnership increased 62% to $298 million, driven by higher earnings from investments in associates (including the European telecommunications acquisition) and mark-to-market gains on hedging items ($83 million vs. $38 million in 2014).
• Debt Structure: Corporate borrowings increased significantly by $792 million to $1,380 million, driven by medium-term note issuances and draws on credit facilities to fund acquisitions. Non-recourse borrowings decreased by $369 million, largely due to foreign exchange impacts.
• Segment Performance:
  • Utilities: Adjusted EBITDA remained stable at $524 million; FFO increased to $387 million.
  • Transport: Adjusted EBITDA decreased to $555 million (from $599 million) due to foreign exchange impacts on toll roads, though rail and ports showed growth.
  • Energy: Adjusted EBITDA increased to $166 million, driven by higher volumes in natural gas transmission and growth in district energy.
  • Communications: New segment contributing $66 million in Adjusted EBITDA following the March 2015 acquisition of a European telecommunications operation.

Guidance, Outlook, and Risks

Management Commentary & Outlook:

• Distribution Policy: The Board approved a 7.5% increase in the quarterly distribution to $0.57 per unit (starting March 2016). The company targets 5% to 9% annual distribution growth.
• Acquisition Strategy: The company continues to target acquisitions in utilities, transport, energy, and communications infrastructure. Notable pending or recent activities include the Gammon Acquisition (India toll roads) and the Asciano takeover bid (which lapsed in February 2016, triggering an $88 million payment).
• Capital Allocation: The company maintains a target payout ratio of 60-70% of FFO and aims for a total return of 12-15% per annum on assets.

Key Risks & Contingencies:

• Foreign Exchange: Significant exposure to currency fluctuations, particularly the strengthening U.S. dollar, which materially reduced reported revenue and asset values in 2015.
• Regulatory & Political: Operations are subject to economic regulation in multiple jurisdictions (e.g., Chile, Brazil, UK, Australia). Changes in government policy, nationalization, or regulatory resets could impact returns.
• Brookfield Relationship: The partnership relies on Brookfield Asset Management for management services. Brookfield holds approximately 29.3% of the economic interest and controls the General Partner. Conflicts of interest may arise regarding acquisition opportunities and fee structures.
• Leverage: The company utilizes significant leverage at both the corporate and project levels. High debt levels increase sensitivity to interest rate changes and economic downturns.

Investor Verification Checklist

• Foreign Exchange Impact: Verify the extent to which reported revenue and earnings growth were masked by the strengthening U.S. dollar; review local currency performance for key segments (Chilean toll roads, Australian rail).
• Acquisition Pipeline: Confirm the status of the Gammon Acquisition (India) and the outcome of the failed Asciano bid, including the impact of the $88 million breakup fee on liquidity.
• Debt Maturity Profile: Review the schedule of principal repayments, noting that approximately 25% of debt is floating rate (though largely hedged), and assess refinancing risks.
• FFO vs. Net Income: Analyze the reconciliation between Net Income ($298M) and FFO ($808M) to understand the impact of non-cash items like depreciation and valuation adjustments.
• Related Party Fees: Review the Master Services Agreement terms, specifically the 1.25% annual base management fee and incentive distribution rights held by Brookfield.