Business Context and Reporting Period
Company: Brookfield Infrastructure Partners L.P. (BIP)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2007.
Context: BIP is a Bermuda exempted limited partnership formed in May 2007 and commenced operations on November 27, 2007, following a spin-off from Brookfield Asset Management. The filing covers the period from inception (Nov 27, 2007) to year-end, alongside historical data for the predecessor "infrastructure division" (Jan 1, 2007 – Nov 26, 2007) to provide a full-year view. The partnership's sole material asset is a 60% limited partnership interest in Brookfield Infrastructure L.P., which holds the operating assets.
Key Financial Metrics
Revenue and Profit (Predecessor Infrastructure Division - Full Year 2007):
- Revenue: $537.1 million (Jan 1 – Nov 26, 2007).
- Net Loss: $(64.3) million (Jan 1 – Nov 26, 2007).
- Adjusted Net Operating Income (Non-GAAP): $15.6 million (Jan 1 – Nov 26, 2007).
- Total Assets: $7,521.3 million.
- Divisional Equity: $1,527.1 million.
- Non-recourse Borrowings: $1,933.2 million.
- Total Assets: $932.4 million.
- Partnership Equity: $907.8 million.
- Net Income: $1.1 million (Nov 27 – Dec 31, 2007).
- Cash Flow from Operating Activities: $80.6 million.
- Debt Balance: Approximately $680 million on a proportionate basis as of Dec 31, 2007, with annual debt service of ~$41 million.
- Credit Facility: Entered into a $450 million senior secured credit facility on June 13, 2008.
- Equity Commitment: Brookfield provided a $200 million equity commitment.
Material Changes vs. Prior Period
Revenue Growth: Revenue for the period Jan 1 – Nov 26, 2007 ($537.1M) increased significantly compared to the full year 2006 ($307.8M). This was driven by the acquisition of U.S. timber operations (Longview) in April 2007, a full period of results for Chilean transmission operations (Transelec), and improved performance in Canadian timber operations.
Net Loss Expansion: Despite revenue growth, the Net Loss widened to $(64.3) million in 2007 from $(4.9) million in 2006. This was primarily due to high levels of depletion and depreciation following the application of purchase accounting for the Longview acquisition and a performance fee accrual related to Canadian timber operations.
Asset Base: Total assets grew from $4,627.8 million in 2006 to $7,521.3 million in 2007, reflecting the acquisition of the U.S. timber operations and Chilean transmission assets.
Guidance, Outlook, and Risks
Outlook and Strategy:
- Target Return: Management targets a long-term total return of 11% to 15% per annum.
- Distribution Policy: Initial quarterly cash distribution of $0.265 per unit, targeting a payout of 60% to 70% of Adjusted Net Operating Income.
- Growth: Focus on acquiring high-quality, long-life infrastructure assets (electricity transmission and timberlands) and deploying an operations-oriented approach to create value.
- Related Party Dependence: Significant reliance on Brookfield Asset Management for management services, acquisition sourcing, and capital. Brookfield does not owe fiduciary duties to unitholders.
- Leverage: Assets are highly leveraged; the partnership may incur additional indebtedness, increasing sensitivity to interest rates and economic downturns.
- Regulatory and Tax: Risks related to changes in tax laws (specifically U.S. "Qualifying Income" exception for publicly traded partnerships) and regulatory frameworks in Chile, Brazil, and Canada.
- Operational Risks: Exposure to foreign currency fluctuations, uninsurable losses (e.g., earthquakes in Chile, fires in timber operations), and labor disruptions.
- Performance Fee: A significant non-cash charge in 2006 and 2007 related to the increased appraised value of Canadian timber and HBU lands, payable to Brookfield.
- Spin-off Costs: The filing notes that historical financial statements do not reflect the significant legal, accounting, and public company costs the partnership will incur prospectively.
Investor Verification Checklist
- Ownership Structure: Verify the 60% interest held by BIP in Brookfield Infrastructure and the remaining 40% held by Brookfield Asset Management, including the "Redemption-Exchange Mechanism" that could increase Brookfield's ownership in BIP.
- Non-GAAP Reconciliation: Review the reconciliation of Net Loss to Adjusted Net Operating Income to understand the impact of depreciation, depletion, and the Brookfield performance fee.
- Debt Covenants: Examine the restrictive covenants in the $450 million credit facility, specifically the minimum interest coverage ratios required to maintain distribution eligibility.
- Related Party Transactions: Scrutinize the Master Services Agreement terms, including the 1.25% annual management fee and the lack of fiduciary duties owed by Brookfield.
- Asset Valuation: Assess the valuation assumptions for timberlands and transmission assets, particularly regarding sustainable harvest rates and regulatory rate bases.
- Tax Status: Confirm the partnership's status as a publicly traded partnership and the risks associated with failing the "Qualifying Income" exception, which could result in corporate taxation.