Business Context and Reporting Period
Company: Brookfield Business Partners L.P.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2016
Accounting Basis: International Financial Reporting Standards (IFRS)
Corporate Structure: A Bermuda exempted limited partnership spun off from Brookfield Asset Management on June 20, 2016. The company operates as a holding entity with no employees, relying on Brookfield subsidiaries for management services. It focuses on business services (construction, real estate, facilities management) and industrial operations (energy, mining, manufacturing).
Key Financial Metrics
| Metric (US$ Millions) | 2016 | 2015 |
|---|---|---|
| Revenues | 7,960 | 6,753 |
| Net Income (Loss) | (202) | 269 |
| Net Income Attributable to Unitholders | 3 | — |
| Company EBITDA | 240 | 298 |
| Company FFO | 200 | 264 |
| Cash and Cash Equivalents | 1,050 | 354 |
| Total Assets | 8,193 | 7,635 |
| Total Borrowings | 1,551 | 2,074 |
| Net Debt | 501 | 1,720 |
| Net Debt to Capitalization | 11.0% | 35.8% |
Note: 2015 figures reflect the pre-spin-off business carved out from Brookfield Asset Management. 2016 includes the full year of operations post-spin-off for the partnership structure.
Material Changes vs. Prior Period
- Net Loss vs. Net Income: The company reported a net loss of $202 million in 2016 compared to net income of $269 million in 2015. This reversal was primarily driven by a $166 million increase in impairment expenses and a $212 million decrease in gains on acquisitions/dispositions.
- Impairment Expenses: Total impairment expense rose to $261 million in 2016 from $95 million in 2015. Key drivers included a $121 million charge related to non-core assets in the graphite electrode business and a $137 million charge on an investment security in the energy segment (Vistra Energy Corp.) following its emergence from bankruptcy.
- Revenue Growth: Revenues increased by 18% to $7.96 billion, driven by higher activity in construction services, other business services, and the inclusion of full-year results from acquisitions completed in late 2015 (palladium mining, graphite electrodes).
- Liquidity Improvement: Cash and cash equivalents increased significantly to $1.05 billion from $354 million, aided by a December 2016 equity offering raising approximately $384 million and a reduction in total borrowings of $523 million.
- Segment Performance:
- Construction Services: Revenue increased 14% to $4.39 billion; Company EBITDA decreased to $104 million due to reduced margins on specific contracts and foreign currency impacts.
- Energy: Revenue decreased to $286 million due to lower commodity prices in Canadian operations, though equity-accounted income from Australian operations remained strong.
- Other Industrial Operations: Revenue increased to $1.28 billion, but Company EBITDA dropped to $11 million due to cyclical downturns in the graphite electrode market.
Guidance, Outlook, and Risks
Outlook and Strategy:
- Acquisitions: The company is actively pursuing acquisitions, including a committed 70% stake in Odebrecht Ambiental (Brazil's largest private water company) and an 85% stake in Greenergy (UK road fuels). These are expected to close in 2017.
- Distributions: The Board declared a quarterly distribution of $0.0625 per unit, payable March 31, 2017. The annualized distribution policy targets approximately $0.25 per unit.
- Market Conditions: Management anticipates economic growth in the U.S. and Canada in 2017 but notes risks related to Brexit, political uncertainty in Europe, and commodity price volatility.
Key Risks and Contingencies:
- Commodity Price Volatility: Energy and industrial operations are highly sensitive to oil, gas, and steel prices. While hedging strategies are in place, sustained low prices could impact cash flows.
- Relationship with Brookfield: The company relies entirely on Brookfield for management services and acquisition sourcing. Conflicts of interest may arise regarding the allocation of opportunities between the partnership and other Brookfield vehicles.
- Acquisition Integration: Recent and planned acquisitions (Odebrecht, Greenergy) carry integration risks and exposure to foreign jurisdictions with complex regulatory environments.
- Decommissioning Liabilities: Significant long-term liabilities exist for oil and gas and mining site restoration, estimated at $946 million, which are sensitive to regulatory changes and cost estimates.
Investor Verification Checklist
- Impairment Details: Verify the specific assumptions used for the $121 million graphite electrode impairment and the $137 million energy investment impairment to assess if these are one-time events or indicative of ongoing asset quality issues.
- Acquisition Financing: Confirm the funding sources for the pending Odebrecht and Greenergy acquisitions and the impact on future leverage ratios.
- Commodity Hedging: Review the extent of hedging coverage for 2017 and 2018, particularly for Canadian natural gas and Australian oil/gas, to understand exposure to price fluctuations.
- Related Party Fees: Monitor the management fee paid to Brookfield (1.25% annually of market value) and its impact on net income as the company's market capitalization fluctuates.
- Decommissioning Estimates: Assess the sensitivity of the $946 million decommissioning liability to changes in regulatory requirements and inflation rates.