ITEM 3. KEY INFORMATION
3.A SELECTED FINANCIAL DATA
The following table presents financial data for Brookfield Infrastructure as of and for the periods indicated:
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For the Year Ended December 31,
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US$ MILLIONS, EXCEPT PER UNIT AMOUNTS
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2016
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2015
|
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2014
|
|
2013
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|
2012
|
|
Statements of Operating Results
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|
Revenue
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$
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2,115
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$
|
1,855
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$
|
1,924
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$
|
1,826
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$
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1,524
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Direct operating costs
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(1,063
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)
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(798
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)
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(846
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)
|
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(823
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)
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(766
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)
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General and administrative expenses
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(166
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)
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(134
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)
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(115
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)
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(110
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)
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(95
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)
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Depreciation and amortization expense
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(447
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)
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(375
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)
|
|
(380
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)
|
|
(329
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)
|
|
(230
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)
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Interest expense
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(392
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)
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|
(367
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)
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|
(362
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)
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|
(362
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)
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(322
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)
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Share of earnings (losses) from investments in associates and joint ventures
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248
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69
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50
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(217
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)
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1
|
|
Mark-to-market on hedging items
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|
|
74
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|
|
83
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|
|
38
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|
|
19
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(49
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)
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Gain on sale of associates
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|
|
|
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|
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53
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|
|
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Other income (expenses)
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|
|
174
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|
|
54
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(1
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)
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(35
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)
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8
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|
|
|
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|
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|
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|
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Income before income tax
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|
|
543
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|
|
387
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|
|
308
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|
|
22
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|
|
71
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|
Current income tax expense
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|
|
(33
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)
|
|
(22
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)
|
|
(30
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)
|
|
(3
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)
|
|
(12
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)
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Deferred income tax recovery (expense)
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|
|
18
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|
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26
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(49
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)
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1
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|
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42
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|
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Net income from continuing operations
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528
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|
|
391
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|
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229
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|
|
20
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|
|
101
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Income from discontinued operations, net of income tax
(1)
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45
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|
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190
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|
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|
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|
|
|
|
|
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Net income
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$
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528
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|
$
|
391
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$
|
229
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|
$
|
65
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|
$
|
291
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net income (loss) attributable to partnership
(2)
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|
|
474
|
|
|
298
|
|
|
184
|
|
|
(58
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)
|
|
106
|
|
Net income (loss) per limited partnership unit (basic and diluted)
(3)
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|
|
1.13
|
|
|
0.69
|
|
|
0.45
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|
|
(0.29
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)
|
|
0.31
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|
Funds from operations (FFO)
(4)
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|
|
944
|
|
|
808
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|
|
724
|
|
|
682
|
|
|
462
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|
Per unit FFO
(5)
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|
|
2.72
|
|
|
2.39
|
|
|
2.30
|
|
|
2.20
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|
|
1.61
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Adjusted funds from operations (AFFO)
(6)
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|
771
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|
|
672
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|
|
593
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|
|
553
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|
|
355
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Adjusted EBITDA
(7)
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|
|
1,322
|
|
|
1,177
|
|
|
1,142
|
|
|
1,110
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|
|
841
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|
Adjusted Earnings
(8)
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|
|
657
|
|
|
461
|
|
|
350
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|
|
58
|
|
|
245
|
|
Adjusted Earnings per unit
(5)
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|
|
1.66
|
|
|
1.18
|
|
|
0.97
|
|
|
0.09
|
|
|
0.80
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Per unit distributions
|
|
|
1.55
|
|
|
1.41
|
|
|
1.28
|
|
|
1.15
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|
|
1.00
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|
-
(1)
-
The timber segment was reported as part of continuing operations until the second quarter of 2013 and has since been classified as discontinued operations
for the comparative periods. Our Canadian and U.S. freehold timberlands were disposed of in the second and third quarter of 2013, respectively.
-
(2)
-
Net income (loss) attributable to partnership includes net income (loss) attributable to non-controlling interestsRedeemable Partnership Units
held by Brookfield, general partner and limited partners.
-
(3)
-
During 2016, on average there were 244.7 million limited partnership units outstanding (2015: 238.9 million, 2014:
225.4 million, 2013: 221.7 million, 2012: 205.4 million).
8 Brookfield Infrastructure
Table of Contents
-
(4)
-
FFO is defined as net income excluding the impact of depreciation and amortization, deferred income taxes, breakage and transaction costs, and non-cash
valuation gains or losses. Along with net income and other measures, FFO is a key measure of our financial performance that we use to assess the operating results and performance of our operations on
a segmented basis. It is not calculated in accordance with, and does not have any standardized meanings prescribed by IFRS. For further details regarding our use of FFO as well as a reconciliation of
net income to this measure, please see the "Reconciliation of Non-IFRS Financial Measures" section in Item 5 "Operating and Financial Review and ProspectsManagement's Discussion
and Analysis of Financial Condition and Results of Operations".
-
(5)
-
During 2016, on average there were 347.2 million units outstanding (2015: 337.4 million, 2014: 315.1 million, 2013:
310.0 million, 2012: 287.2 million), being inclusive of our units, the Redeemable Partnership Units, and the Special Limited Partner Units.
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(6)
-
AFFO is defined as FFO less capital expenditures required to maintain the current performance of our operations (maintenance capital expenditures). AFFO is
a measure of operating performance that is not calculated in accordance with, and does not have any standardized meaning prescribed by, IFRS. AFFO is therefore unlikely to be comparable to similar
measures presented by other issuers. AFFO has limitations as an analytical tool. For further details regarding our use of AFFO, as well as a reconciliation of net income to these measures, please see
the "Reconciliation of Non-IFRS Financial Measures" section in Item 5 "Operating and Financial Review and ProspectsManagement's Discussion and Analysis of Financial Condition and
Results of Operations".
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(7)
-
Adjusted EBITDA is defined as net income excluding the impact of depreciation and amortization, interest expense, current and deferred income taxes,
breakage and transaction costs, and non-cash valuation gains or losses. Adjusted EBITDA is not calculated in accordance with, and does not have any standardized meaning prescribed by, IFRS. Adjusted
EBITDA is therefore unlikely to be comparable to similar measures presented by other issuers. Adjusted EBITDA has limitations as an analytical tool. For further details regarding our use of Adjusted
EBITDA, as well as a reconciliation of net income to this measures, please see the "Reconciliation of Non-IFRS Financial Measures" section in Item 5 "Operating and Financial Review and
ProspectsManagement's Discussion and Analysis of Financial Condition and Results of Operations".
-
(8)
-
Adjusted Earnings is defined as net income attributable to our partnership, excluding the impact of depreciation and amortization expense from revaluing
property, plant and equipment and the effects of purchase price accounting, mark-to-market on hedging items and disposition gains or losses. Adjusted Earnings is not calculated in accordance with, and
does not have any standardized meaning prescribed by, IFRS. Adjusted Earnings is therefore unlikely to be comparable to similar measures presented by other issuers. Adjusted Earnings has limitations
as an analytical tool. For further details regarding our use of Adjusted Earnings, as well as a reconciliation of net income to this measures, please see the "Reconciliation of Non-IFRS Financial
Measures" section in Item 5 "Operating and Financial Review and ProspectsManagement's Discussion and Analysis of Financial Condition and Results of Operations".
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|
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As of December 31,
|
|
US$ MILLIONS
|
|
2016
|
|
2015
|
|
2014
|
|
2013
|
|
2012
|
|
Statements of Financial Position Key Metrics
|
|
Cash and cash equivalents
|
|
$
|
786
|
|
$
|
199
|
|
$
|
189
|
|
$
|
538
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|
$
|
263
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|
Total assets
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|
|
21,275
|
|
|
17,735
|
|
|
16,495
|
|
|
15,682
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|
|
19,718
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|
Corporate borrowings
|
|
|
1,002
|
|
|
1,380
|
|
|
588
|
|
|
377
|
|
|
946
|
|
Non-recourse borrowings
|
|
|
7,324
|
|
|
5,852
|
|
|
6,221
|
|
|
5,790
|
|
|
6,993
|
|
Partnership capitalattributable to limited partners
|
|
|
4,611
|
|
|
3,838
|
|
|
3,533
|
|
|
3,751
|
|
|
3,632
|
|
Non-controlling interestRedeemable Partnership Units held by Brookfield
|
|
|
1,860
|
|
|
1,518
|
|
|
1,321
|
|
|
1,408
|
|
|
1,365
|
|
Non-controlling interestin operating subsidiaries
|
|
|
2,771
|
|
|
1,608
|
|
|
1,444
|
|
|
1,419
|
|
|
2,784
|
|
Partnership capitalattributable to general partner
|
|
|
27
|
|
|
23
|
|
|
24
|
|
|
27
|
|
|
27
|
|
Partnership capitalattributable to preferred unitholders
|
|
|
375
|
|
|
189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Partnership Capital
|
|
|
9,644
|
|
|
7,176
|
|
|
6,322
|
|
|
6,605
|
|
|
7,808
|
|
Brookfield Infrastructure 9
Table of Contents
Net income (loss) attributable to our partnership is the most directly comparable IFRS measure to FFO and AFFO. The following table reconciles net
income (loss) attributable to our partnership to FFO and AFFO.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
US$ MILLIONS, EXCEPT PER UNIT AMOUNTS
(1)
|
|
2016
|
|
2015
|
|
2014
|
|
2013
|
|
2012
|
|
Net income (loss) attributable to partnership
(2)
|
|
$
|
474
|
|
$
|
298
|
|
$
|
184
|
|
$
|
(58
|
)
|
$
|
106
|
|
Add back or deduct the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
609
|
|
|
506
|
|
|
481
|
|
|
400
|
|
|
300
|
|
Impairment charge
|
|
|
|
|
|
|
|
|
|
|
|
275
|
|
|
16
|
|
Deferred income taxes
|
|
|
(5
|
)
|
|
(53
|
)
|
|
(2
|
)
|
|
65
|
|
|
(37
|
)
|
Gain on sale of associate
|
|
|
|
|
|
|
|
|
|
|
|
(53
|
)
|
|
|
|
Mark-to-market on hedging items
|
|
|
(17
|
)
|
|
(63
|
)
|
|
(39
|
)
|
|
(7
|
)
|
|
50
|
|
Valuation (gains) losses and other
|
|
|
(117
|
)
|
|
120
|
|
|
100
|
|
|
60
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO
|
|
|
944
|
|
|
808
|
|
|
724
|
|
|
682
|
|
|
462
|
|
Maintenance capital expenditures
|
|
|
(173
|
)
|
|
(136
|
)
|
|
(131
|
)
|
|
(129
|
)
|
|
(107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
AFFO
|
|
$
|
771
|
|
$
|
672
|
|
$
|
593
|
|
$
|
553
|
|
$
|
355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
See Item 5 "Operating and Financial Review and ProspectsManagement's Discussion and Analysis of Financial Condition and Results of
OperationsReconciliation of Non-IFRS Financial Measures" for a detailed reconciliation of our proportionate results to our consolidated statements of operating results.
-
(2)
-
Net income (loss) attributable to partnership includes net income (loss) attributable to non-controlling interestRedeemable Partnership Units
held by Brookfield, general partner and limited partners.
Please see Item 5 "Operating and Financial Review and ProspectsManagement's Discussion and Analysis of Financial Condition and
Results of OperationsReconciliation of Non-IFRS Financial Measures" for a reconciliation of net income to Adjusted EBITDA and Adjusted Earnings.
3.B CAPITALIZATION AND INDEBTEDNESS
Not applicable.
3.C REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
3.D RISK FACTORS
You should carefully consider the following factors in addition to the other information set forth in this annual report on
Form 20-F. If any of the following risks actually occur, our business, financial condition and results of operations and the value of our units and preferred units would likely suffer.
10 Brookfield Infrastructure
Table of Contents
Risks Relating to Our Operations and the Infrastructure Industry
All of our operating entities are subject to general economic and political conditions and risks relating to the markets in which we operate.
Many industries, including the industries in which we operate, are impacted by political and economic conditions, and in particular,
adverse events in financial markets, which may have a profound effect on global or local economies. Some key impacts of general financial market turmoil include contraction in credit markets resulting
in a widening of credit spreads, devaluations and enhanced volatility in global equity, commodity and foreign exchange markets and a general lack of market liquidity. A slowdown in the financial
markets or other key measures of the global economy or the local economies of the regions in which we operate, including, but not limited to, new home construction, employment rates, business
conditions, inflation, fuel and energy costs, commodity prices, lack of available credit, the state of the financial markets, interest rates and tax rates may adversely affect our growth and
profitability.
The
demand for services provided by our operating entities are, in part, dependent upon and correlated to general economic conditions and economic growth of the regions applicable to the
relevant asset. Poor economic conditions or lower economic growth in a region or regions may, either directly or indirectly, reduce demand for the services provided by an asset.
For
example, a credit/liquidity crisis, such as the global crisis experienced in 2008/2009, could materially impact the cost and availability of financing and overall liquidity; the
volatility of commodity output prices and currency exchange markets could materially impact revenues, profits and cash flow; volatile energy, commodity input and consumables prices and currency
exchange rates could materially impact production costs; poor local or regional economic conditions could materially impact the level of traffic on our toll roads or volume of commodities transported
on our rail network and/or shipped through our ports; our U.K. regulated distribution business earns connection revenues that would be negatively impacted by an economic recession and a
reduction of housing starts in the U.K.; and the devaluation and volatility of global stock markets could materially impact the valuation of our units and preferred units. Any one of these factors
could have a material adverse effect on our business, financial condition and results of operations. If such increased levels of volatility and market turmoil were to continue, our operations and the
trading price of our units and preferred units may be further adversely impacted.
In
addition, we may be affected by political uncertainties in the U.S. and Europe, which may have global repercussions, including in markets where we currently operate or intend to
expand into in the future.
Brookfield Infrastructure 11
Table of Contents
Some of our operations depend on continued strong demand for commodities, such as natural gas or minerals, for their financial performance. Material reduction in demand for
these key commodities can potentially result in reduced value for assets, or in extreme cases, a stranded asset.
Some of our operations are critically linked to the transport or production of key commodities. For example, our Australian regulated
terminal operation relies on demand for coal exports, our Australian rail operation relies on demand for iron ore for steel production and our North American gas transmission operation relies on
demand for natural gas and benefits from higher gas prices. While we endeavour to protect against short to medium term commodity demand risk wherever possible by structuring our contracts in a way
that minimizes volume risk (e.g. minimum guaranteed volumes and 'take-or-pay' arrangements), these contract terms are finite and in some cases contracts contain termination or suspension rights
for the benefit of the customer. Accordingly, a long-term and sustained downturn in the demand for or price of a key commodity linked to one of our operations may result in termination, suspension or
default under a key contract, or otherwise have a material adverse impact on the financial performance or growth prospects of that particular operation, notwithstanding our efforts to maximize
contractual protections.
If
a critical upstream or downstream business ceased to operate, this could materially impact our financial performance or the value of one or more of our operating businesses. In
extreme cases, our infrastructure could become redundant, resulting in an inability to recover a return on or of capital and potentially triggering covenants and other terms and conditions under
associated debt facilities.
Acquisitions may subject us to additional risks and the expected benefits of our acquisitions may not materialize.
A key part of Brookfield Infrastructure's strategy involves seeking acquisition opportunities. Acquisitions may increase the scale,
scope and diversity of our operations. We depend on the diligence and skill of Brookfield's professionals to manage us, including integrating all of the acquired business' operations with our existing
operations. These individuals may have difficulty managing the additional operations and may have other responsibilities within Brookfield's asset management business. If Brookfield does not
effectively manage the additional operations, our existing business, financial condition and results of operations may be adversely affected.
Acquisitions
will likely involve some or all of the following risks, which could materially and adversely affect our business, financial condition or results of operations: the
difficulty of integrating the acquired operations and personnel into our current operations; the ability to achieve potential synergies; potential disruption of our current operations; diversion of
resources, including Brookfield's time and attention; the difficulty of managing the growth of a larger organization; the risk of entering markets in which we have little experience; the risk of
becoming involved in labour, commercial or regulatory disputes or litigation related to the new enterprise; the risk of environmental or other liabilities associated with the acquired business; and
the risk of a change of control resulting from an acquisition triggering rights of third parties or government agencies under contracts with, or authorizations held by the operating business being
acquired. While it is our practice to conduct extensive due diligence investigations into businesses being acquired, it is possible that due diligence may fail to uncover all material risks in the
business being acquired, or to identify a change of control trigger in a material contract or authorization, or that a contractual counterparty or government agency may take a different view on the
interpretation of such a provision to that taken by us, thereby resulting in a dispute. The discovery of any material liabilities subsequent to an acquisition, as well as the failure of an acquisition
to perform according to expectations, could have a material adverse effect on Brookfield Infrastructure's business, financial condition and results of operations. In addition, if returns are lower
than anticipated from acquisitions, we may not be able to achieve growth in our distributions in line with our stated goals and the market value of our units may decline.
12 Brookfield Infrastructure
Table of Contents
We operate in a highly competitive market for acquisition opportunities.
Our acquisition strategy is dependent to a significant extent on the ability of Brookfield to identify acquisition opportunities that
are suitable for us. We face competition for acquisitions primarily from investment funds, operating companies acting as strategic buyers, construction companies, commercial and investment banks, and
commercial finance companies. Many of these competitors are substantially larger and have considerably greater financial, technical and marketing resources than are available to us. Some of these
competitors may also have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of acquisitions and to offer terms that we are unable or unwilling to
match. Due to the capital intensive nature of infrastructure acquisitions, in order to finance acquisitions we will need to compete for equity capital from institutional investors and other equity
providers, including Brookfield, and our ability to consummate acquisitions will be dependent on such capital continuing to be available. Increases in interest rates could also make it more difficult
to consummate acquisitions because our competitors may have a lower cost of capital which may enable them to bid higher prices for assets. In addition, because of our affiliation with Brookfield,
there is a higher risk that when we participate with Brookfield and others in joint ventures, partnerships and consortiums on acquisitions we may become subject to antitrust or competition laws that
we would not be subject to if we were acting alone. These factors may create competitive disadvantages for us with respect to acquisition opportunities.
We
cannot provide any assurance that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations or that
Brookfield will be able to identify and make acquisitions on our behalf that are consistent with our objectives or that generate attractive returns for our unitholders. We may lose acquisition
opportunities if we do not match prices, structures and terms offered by competitors, if we are unable to access sources of equity or obtain indebtedness at attractive rates or if we become subject to
antitrust or competition laws. Alternatively, we may experience decreased rates of return and increased risks of loss if we match prices, structures and terms offered by competitors.
We may be unable to identify and complete acquisitions as planned.
Our acquisitions are subject to a number of closing conditions, including, as applicable, securityholder approval, regulatory approval
(including competition authorities) and other third party consents and approvals that are beyond our control and may not be satisfied. In particular, many jurisdictions in which we seek to invest
impose government consent requirements on investments by foreign persons. Consents and approvals may not be obtained, may be obtained subject to conditions which adversely affect anticipated returns,
and/or may be delayed and delay or ultimately preclude the completion of acquisitions. Government policies and attitudes in relation to foreign investment may change, making it more difficult to
complete acquisitions in such jurisdictions. Furthermore, interested stakeholders could take legal steps to prevent an acquisition from being completed. If all or some of our acquisitions are unable
to be completed on the terms agreed, we may need to modify or delay certain acquisitions or terminate these acquisitions altogether, the market value of our units may significantly decline and we may
not be able to achieve the expected benefits of the acquisitions. For example, our previously announced acquisition of NTS is subject to a number of conditions, including the finalization, to the
satisfaction of the relevant Petrobras and consortium parties, of terms and conditions of a number of long-term agreements relating to the operation of the business and other customary conditions,
including regulatory approvals, some of which are beyond our control and may not be satisfied. In addition, the NTS Acquisition may be blocked or modified by regulators or pursuant to litigation. If
the NTS Acquisition is unable to be completed on the terms agreed, or is blocked or modified by regulators pursuant to litigation, we may need to delay or modify the transaction or terminate it
altogether. In addition, if we are not able to complete the NTS Acquisition, we may not be able to identify alternative investments that are of a comparable quality to the NTS Acquisition in a timely
manner, or at all.
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Infrastructure assets may be subject to competition risk.
Some assets may be affected by the existence of other competing assets owned and operated by other parties. There can be no assurance
that our businesses can renew all their existing contracts or win additional contracts with their existing or potential customers. The ability of our businesses to maintain or improve their revenue is
dependent on price, availability and customer service as well as on the availability of access to alternative infrastructure. In the case where the relevant business is unable to retain customers
and/or unable to win additional customers to replace those customers it is unable to retain, the revenue from such assets will be reduced.
Investments in infrastructure projects prior to or during a construction or expansion phase are likely to be subject to increased risk.
A key part of our growth strategy involves identifying and taking advantage of organic growth opportunities within our existing
businesses. These opportunities typically involve development and construction of new infrastructure or expansion or upgrades to existing infrastructure. Investments in new infrastructure projects
during a development or construction phase are likely to be subject to additional risk that the project will not receive all required approvals, will not be completed within budget, within the agreed
timeframe and to the agreed specifications and, where applicable, will not be successfully integrated into the existing assets. During the construction phase, major risks include: (i) a delay
in the projected completion of the project, which can result in an increase in total project construction costs through higher capitalized interest charges and additional labour, material expenses,
and a resultant delay in the commencement of cash flow; (ii) the insolvency of the head contractor, a major subcontractor and/or a key equipment supplier; (iii) construction costs
exceeding estimates for various reasons, including inaccurate engineering and planning, labour and building material costs in excess of expectations and unanticipated problems with project start-up;
and (iv) defects in design, engineering or construction (including, without limitation, latent defects that do not materialize during an applicable warranty or limitation periods). Such
unexpected increases may result in increased debt service costs, operations and maintenance expenses and damage payments for late delivery. This may result in the inability of project owners to meet
the higher interest and principal repayments arising from the additional debt required.
In
addition, construction projects may be exposed to significant liquidated damages to the extent that commercial operations are delayed beyond prescribed dates or that performance
levels do not meet guaranteed levels. For example, a liquidated damages regime applies in respect of some of the expansion of works at our Brazilian toll road business.
We
currently have approximately $1.4 billion of committed backlog. Total capital to be commissioned in the next two to three years currently stands at approximately
$2.4 billion. We can provide no assurance that we will be able to complete these projects on time or within budget. In addition, we are pursuing a number of other organic growth opportunities
that are not yet committed. Accordingly, we can provide no assurance that these projects will materialize on the terms currently contemplated, or at all.
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We are subject to foreign currency risk and our risk management activities may adversely affect the performance of our operations.
A significant portion of our current operations are in countries where the U.S. dollar is not the functional currency. These
operations pay distributions in currencies other than the U.S. dollar, which we must convert to U.S. dollars prior to making distributions, and certain of our operations have revenues
denominated in currencies different from our expense structure, thus exposing us to currency risk. Fluctuations in currency exchange rates could reduce the value of cash flows generated by our
operating entities or could make it more expensive for our customers to purchase our services and consequently reduce the demand for our services. In addition, a significant depreciation in the value
of such foreign currencies may have a material adverse effect on our business, financial condition and results of operations.
When
managing our exposure to such market risks, we may use forward contracts, options, swaps, caps, collars and floors or pursue other strategies or use other forms of derivative
instruments. The success of any hedging or other derivative transactions that we enter into generally will depend on our ability to structure contracts that appropriately offset our risk position. As
a result, while we may enter into such transactions in order to reduce our exposure to market risks, unanticipated market changes may result in poorer overall investment performance than if the
derivative transaction had not been executed. Such transactions may also limit the opportunity for gain if the value of a hedged position increases.
General economic and business conditions that impact the debt or equity markets could impact our ability to access credit markets.
General economic and business conditions that impact the debt or equity markets could impact the availability of credit to, and cost of
credit for, Brookfield Infrastructure. We have revolving credit facilities and other short-term borrowings. The amount of interest charged on these will fluctuate based on changes in short-term
interest rates. Any economic event that affects interest rates or the ability to refinance borrowings could materially adversely impact our financial condition. Movements in interest rates could also
affect the discount rates used to value our assets, which in turn could cause their valuations calculated under IFRS to be reduced resulting in a material reduction in our equity value.
In
addition, some of our operations either currently have a credit rating or may have a credit rating in the future. A credit rating downgrade may result in an increase in the cost of
debt for the relevant businesses and reduced access to debt markets.
Some
assets in our portfolio have a requirement for significant capital expenditure. For other assets, cash, cash equivalents and short-term investments combined with cash flow generated
from operations are believed to be sufficient for it to make the foreseeable required level of capital investment. However, no assurance can be given that additional capital investments will not be
required in these businesses. If we are unable to generate enough cash to finance necessary capital expenditures through operating cash flow, then we may be required to issue additional equity or
incur additional indebtedness. The issue of additional equity would be dilutive to existing unitholders at the time. Any additional indebtedness would increase our leverage and debt payment
obligations, and may negatively impact its business, financial condition and results of operations.
Our
business relies on continued access to capital to fund new investments and capital projects. While we aim to prudently manage our capital requirements and ensure access to capital is
always available, it is possible we may overcommit ourselves or misjudge the requirement for capital or the availability of liquidity. Such a misjudgment may require capital to be raised quickly and
the inability to do so could result in negative financial consequences or in extreme cases bankruptcy.
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All of our operating entities are subject to changes in government policy and legislation.
Our financial condition and results of operations could also be affected by changes in economic or other government policies or other
political or economic developments in each country or region, as well as regulatory changes or administrative practices over which we have no control such as: the regulatory environment related to our
business operations, concession agreements and periodic regulatory resets; interest rates; currency fluctuations; exchange controls and restrictions; inflation; liquidity of domestic financial and
capital markets; policies relating to climate change or policies relating to tax; and other political, social, economic, and environmental and occupational health and safety developments that may
occur in or affect the countries in which our operating entities are located or conduct business or the countries in which the customers of our operating entities are located or conduct business
or both.
In
addition, operating costs can be influenced by a wide range of factors, many of which may not be under the control of the owner/operator, including the need to comply with the
directives of central and local government authorities. For example, in the case of our utility, transport and energy operations, we cannot predict the impact of future economic conditions, energy
conservation measures, alternative fuel requirements, or governmental regulation all of which could reduce the demand for or availability of commodities our transport and energy operations rely upon,
most notably coal and natural gas. It is difficult to predict government policies and what form of laws and regulations will be adopted or how they will be construed by the relevant courts, or to the
extent which any changes may adversely affect us.
We may be exposed to natural disasters, weather events, uninsurable losses and force majeure events.
Force majeure is the term generally used to refer to an event beyond the control of the party claiming that the event has occurred,
including but not limited to acts of God, fires, floods, earthquakes, wars and labour strikes. The assets of our infrastructure businesses are exposed to unplanned interruptions caused by significant
catastrophic events such as cyclones, landslides, explosions, terrorist attacks, war, floods, earthquakes, fires, major plant breakdowns, pipeline or electricity line ruptures, accidents, extreme
weather events or other disasters. Operational disruption, as well as supply disruption, could adversely affect the cash flow available from these assets. In addition, the cost of repairing or
replacing damaged assets could be considerable and could give rise to third-party claims. In some cases, project agreements can be terminated if the force majeure event is so catastrophic as to render
it incapable of remedy within a reasonable time period. Repeated or prolonged interruption may result in a permanent loss of customers, substantial litigation, damage, or penalties for regulatory or
contractual non-compliance. Moreover, any loss from such events may not be recoverable in whole or in part under relevant insurance policies. Business interruption insurance is not always available,
or available on reasonable economic terms to protect the business from these risks.
Given
the nature of the assets operated by our operating entities, we may be more exposed to risks in the insurance market that lead to limitations on coverage and/or increases in
premium. For example, many components of our South American electricity transmission operations and toll roads are not insured or not fully insured against losses from earthquakes and our North
American gas transmission operation, our Australian distribution operations and our European regulated distribution operations self-insure the majority of their line and pipe assets. Therefore, the
occurrence of a major or uninsurable event could have a material adverse effect on financial performance. Even if such insurance were available, the cost may be prohibitive. The ability of the
operating entities to obtain the required insurance coverage at a competitive price may have an impact on the returns generated by them and accordingly the returns we receive.
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For
example, our regulated energy distribution businesses generate revenue based on the volume transmitted through their systems. Weather that deviates materially from normal conditions
could impact these businesses. A number of our businesses may be adversely impacted by extreme weather. Our Australian rail operation transports grain on its system, for which it is contracted on a
volume basis. A drought could have a material negative impact on revenue from grain transportation.
All of our infrastructure operations may require substantial capital expenditures in the future.
Our utilities, transport and energy operations are capital intensive and require substantial ongoing expenditures for, among other
things, additions and improvements, and maintenance and repair of plant and equipment related to our operations. Any failure to make necessary capital expenditures to maintain our operations in the
future could impair the ability of our operations to serve existing customers or accommodate increased volumes. In addition, we may not be able to recover such investments based upon the rates our
operations are able to charge.
In
some of the jurisdictions in which we have utilities, transport or energy operations, certain maintenance capital expenditures may not be covered by the regulatory framework. If our
operations in these jurisdictions require significant capital expenditures to maintain our asset base, we may not be able to recover such costs through the regulatory framework. In addition, we may be
exposed to disallowance risk in other jurisdictions to the extent that capital expenditures and other costs are not fully recovered through the regulatory framework.
Performance of our operating entities may be harmed by future labour disruptions and economically unfavourable collective bargaining agreements.
Several of our current operations or other business operations have workforces that are unionized or that in the future may become
unionized and, as a result, are required to negotiate the wages, benefits and other terms with many of their employees collectively. If an operating entity were unable to negotiate acceptable
contracts with any of its unions as existing agreements expire, it could experience a significant disruption of its operations, higher ongoing labour costs and restrictions on its ability to maximize
the efficiency of its operations, which could have a material adverse effect on its business, financial condition and results of operations.
In
addition, in some jurisdictions where we have operations, labour forces have a legal right to strike which may have an impact on our operations, either directly or indirectly, for
example if a critical upstream or downstream counterparty was itself subject to a labour disruption which impacted our ability to operate.
Our operations are exposed to occupational health and safety and accident risks.
Infrastructure projects and operational assets are highly exposed to the risk of accidents that may give rise to personal injury, loss
of life, disruption to service and economic loss. Some of the tasks undertaken by employees and contractors are inherently dangerous and have the potential to result in serious injury or death.
Our
operating entities are subject to laws and regulations governing health and safety matters, protecting both members of the public and their employees and contractors. Occupational
health and safety legislation and regulations differ in each jurisdiction. Any breach of these obligations, or serious accidents involving our employees, contractors or members of the public could
expose them to adverse regulatory consequences, including the forfeit or suspension of operating licenses, potential litigation, claims for material financial compensation, reputational damage, fines
or other legislative sanction, all of which have the potential to impact the results of our operating entities and our ability to make distributions. Furthermore, where we do not control a business,
we have a limited ability to influence health and safety practices and outcomes.
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Many of our operations are subject to economic regulation and may be exposed to adverse regulatory decisions.
Due to the essential nature of some of the services provided by our assets and the fact that some of these services are provided on a
monopoly or near monopoly basis, many of our operations are subject to forms of economic regulation. This regulation can involve different forms of price control and can involve ongoing commitments to
economic regulators and other governmental agencies. The terms upon which access to our facilities is provided, including price, can be determined or amended by a regulator periodically. Future terms
to apply, including access charges that our operations are entitled to charge, cannot be determined with any certainty, as we do not have discretion as to the amount that can be charged. New
legislation, regulatory determinations or changes in regulatory approaches may result in regulation of previously unregulated businesses or material changes to the revenue or profitability of our
operations. In addition, a decision by a government or regulator to regulate non-regulated assets may significantly and negatively change the economics of these businesses and the value or financial
performance of Brookfield Infrastructure. For example, in 2010 regulatory action taken by the Federal Energy Regulatory Commission ("FERC") saw a significant reduction in annual cashflow expectations
of our North American gas transmission operations. Similarly, in 2016 a periodic regulatory reset at our Australian coal terminal resulted in a decline in annual cashflows at that business.
Our operating entities are exposed to the risk of environmental damage.
Many of Brookfield Infrastructure's assets are involved in using, handling or transporting substances that are toxic, combustible or
otherwise hazardous to the environment. Furthermore, some of our assets have operations in or in close proximity to environmentally sensitive areas or densely populated communities. There is a risk of
a leak, spillage or other environmental emission at one of these assets, which could cause regulatory infractions, damage to the environment, injury or loss of life. Such an incident if it occurred
could result in fines or penalties imposed by regulatory authorities, revocation of licenses or permits required to operate the business or the imposition of more stringent conditions in those
licenses or permits, or legal claims for compensation (including punitive damages) by affected stakeholders. In addition, some of our assets may be subject to regulations or rulings made by
environmental agencies that conflict with existing obligations we have under concession or other permitting agreements. Resolution of such conflicts may lead to uncertainty and increased risk of
delays or cost over-runs on projects. All of these have the potential to significantly impact the value or financial performance of Brookfield Infrastructure.
Our operating entities are exposed to the risk of increasing environmental legislation and the broader impacts of climate change.
With an increasing global focus and public sensitivity to environmental sustainability and environmental regulation becoming more
stringent, Brookfield Infrastructure's assets could be subject to increasing environmental responsibility and liability. For example, many jurisdictions in which Brookfield Infrastructure operates are
considering implementing, or have implemented, schemes relating to the regulation of carbon emissions. As a result, there is a risk that the consumer demand for some of the energy sources supplied by
Brookfield Infrastructure will be reduced. For example, the United Kingdom's phasing out of analog meters and use of gas as a source of heating for residential customers could lead to a
reduction in revenue and growth at our U.K. utility business. The nature and extent of future regulation in the various jurisdictions in which Brookfield Infrastructure's operations are
situated is uncertain, but is expected to become more complex and stringent.
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It
is difficult to assess the impact of any such changes on Brookfield Infrastructure. These schemes may result in increased costs to our operations that may not be able to be passed
onto our customers and may have an adverse impact on prospects for growth of some businesses. To the extent such regimes (such as carbon emissions schemes or other carbon emissions regulations) become
applicable to the operations of Brookfield Infrastructure (and the costs of such regulations are not able to be fully passed on to consumers), its financial performance may be impacted due to
costs applied to carbon emissions and increased compliance costs.
Our
operating entities are also subject to laws and regulations relating to the protection of the environment and pollution. Standards are set by these laws and regulations regarding
certain aspects of environmental quality and reporting, provide for penalties and other liabilities for the violation of such standards, and establish, in certain circumstances, obligations to
remediate and rehabilitate current and former facilities and locations where our operations are, or were, conducted. These laws and regulations may have a detrimental impact on the financial
performance of our infrastructure operations and projects through increased compliance costs or otherwise. Any breach of these obligations, or even incidents relating to the environment that do not
amount to a breach, could adversely affect the results of our operating entities and their reputations and expose them to claims for financial compensation or adverse regulatory consequences.
Our
operations may also be exposed directly or indirectly to the broader impacts of climate change, including extreme weather events, export constraints on commodities, increased
resource prices and restrictions on energy and water usage.
Our operating entities may be exposed to higher levels of regulation than in other sectors and breaches of such regulations could expose our operating entities to claims for
financial compensation and adverse regulatory consequences.
In many instances, our ownership and operation of infrastructure assets involves an ongoing commitment to a governmental agency. The
nature of these commitments exposes the owners of infrastructure assets to a higher level of regulatory control than typically imposed on other businesses. For example, several of our utilities,
transport and energy operations are subject to government safety and reliability regulations that are specific to their industries. The risk that a governmental agency will repeal, amend, enact or
promulgate a new law or regulation or that a governmental authority will issue a new interpretation of the law or regulations, could affect our operating entities substantially.
Sometimes
commitments to governmental agencies, for example, under toll road concession arrangements, involve the posting of financial security for performance of obligations. If
obligations are breached these financial securities may be called upon by the relevant agency.
There
is also the risk that our operating entities do not have, might not obtain, or may lose permits necessary for their operations. Permits or special rulings may be required on
taxation, financial and regulatory related issues. Even though most permits and licenses are obtained before the commencement of operations, many of these licenses and permits have to be renewed or
maintained over the life of the business. The conditions and costs of these permits, licenses and consents may be changed on any renewal, or, in some cases, may not be renewed due to unforeseen
circumstances or a subsequent change in regulations. In any event, the renewal or non-renewal could have a material adverse effect on our business, financial condition and results
of operations.
The
risk that a government will repeal, amend, enact or promulgate a new law or regulation or that a regulator or other government agency will issue a new interpretation of the law or
regulations, may affect our operations or a project substantially. This may also be due to court decisions and actions of government agencies that affect these operations or a project's performance or
the demand for its services. For example, a government policy decision may result in adverse financial outcomes for us through directions to spend money to improve security, safety, reliability or
quality of service.
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The lands used for our infrastructure assets may be subject to adverse claims or governmental or First Nations rights.
Our operations require large areas of land on which to be constructed and operated. The rights to use the land can be obtained through
freehold title, leases and other rights of use. Although we believe that we have valid rights to all material easements, licenses and rights of way for our infrastructure operations, not all of our
easements, licenses and rights of way are registered against the lands to which they relate and may not bind subsequent owners. Additionally, different jurisdictions have adopted different systems of
land title and in some jurisdictions it may not be possible to ascertain definitively who has the legal right to enter into land tenure arrangements with the asset owner. In some jurisdictions where
we have operations, it is possible to claim indigenous or aboriginal rights to land and the existence or declaration of native title may affect the existing or future activities of our utilities,
transport or energy operations and impact on their business, financial condition and results of operations.
In
addition, a government, court, regulator, or indigenous or aboriginal group may make a decision or take action that affects an asset or project's performance or the demand for its
services. In particular, a regulator may restrict our access to an asset, or may require us to provide third parties with access, or may affect the pricing structure so as to lower our revenues and
earnings. In Australia, native title legislation provides for a series of procedures that may need to be complied with if native title is declared on relevant land. In Canada, for example, courts have
recognized that First Nations peoples may possess rights at law in respect of land used or occupied by their ancestors where treaties have not been concluded to deal with these rights. In either case,
the claims of a First Nations group may affect the existing or future activities of our operations, impact on our business, financial condition and results of operations, or require that compensation
be paid.
Some of our transactions and current operations are structured as joint ventures, partnerships and consortium arrangements, and we intend to continue to operate in this
manner in the future, which may reduce Brookfield's and our influence over our operations and may subject us to additional obligations.
Some of our transactions and current operations are structured as joint ventures, partnerships and consortium arrangements. An integral
part of our strategy is to participate with institutional investors in Brookfield-sponsored or co-sponsored consortiums for single asset acquisitions and as a partner in or alongside
Brookfield-sponsored or co-sponsored partnerships that target acquisitions that suit our profile. These arrangements are driven by the magnitude of capital required to complete acquisitions of
infrastructure assets and other industry-wide trends that we believe will continue. Such arrangements involve risks not present where a third party is not involved, including the possibility that
partners or co-venturers might become bankrupt or otherwise fail to fund their share of required capital contributions. Additionally, partners or co-venturers might at any time have economic or other
business interests or goals different from us and Brookfield.
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Joint
ventures, partnerships and consortium investments may provide for a reduced level of influence over an acquired company because governance rights are shared with others.
Accordingly, decisions relating to the underlying operations, including decisions relating to the management and operation and the timing and nature of any exit, will be made by a majority or
supermajority vote of the investors or by separate agreements that are reached with respect to individual decisions. For example, when we participate with institutional investors in
Brookfield-sponsored or co-sponsored consortiums for asset acquisitions and as a partner in or alongside Brookfield-sponsored or co-sponsored partnerships, there is often a finite term to the
investment or a date after which partners are granted liquidity rights, which could lead to the investment being sold prior to the date we would otherwise choose. In addition, such operations may be
subject to the risk that the company may make business, financial or management decisions with which we do not agree or the management of the company may take risks or otherwise act in a manner that
does not serve our interests. Because we may have a reduced level of influence over such operations, we may not be able to realize some or all of the benefits that we believe will be created from our
and Brookfield's involvement. If any of the foregoing were to occur, our business, financial condition and results of operations could suffer as a result.
In
addition, because some of our transactions and current operations are structured as joint ventures, partnerships or consortium arrangements, the sale or transfer of interests in some
of our operations are or may be subject to rights of first refusal or first offer, tag along rights or drag along rights and some agreements provide for buy-sell or similar arrangements. For example,
some of our investments are subject to a shareholder agreement which allows for the sale of the assets without our consent. Such rights may be triggered at a time when we may not want them to be
exercised and such rights may inhibit our ability to sell our interest in an entity within our desired time frame or on any other desired basis.
Our infrastructure business is at risk of becoming involved in disputes and possible litigation.
Our infrastructure business is at risk of becoming involved in disputes and possible litigation, the extent of which cannot be
ascertained. Any material or costly dispute or litigation could adversely affect the value of the assets or future financial performance of Brookfield Infrastructure. In addition, as a result of the
actions of the Holding Entities or the operating entities, Brookfield Infrastructure could be subject to various legal proceedings concerning disputes of a commercial nature, or to claims in the event
of bodily injury or material damage. The final outcome of any proceeding could have a negative impact on the business, financial condition or results of operations of Brookfield Infrastructure during
a given quarter or financial year.
Some of our businesses operate in jurisdictions with less developed legal systems and could experience potential difficulties in obtaining effective legal redress and create
uncertainties.
Some of our businesses operate in jurisdictions with less developed legal systems than those in more established economies. In these
jurisdictions, Brookfield Infrastructure could be faced with potential difficulties in obtaining effective legal redress; a higher degree of discretion on the part of governmental authorities; a lack
of judicial or administrative guidance on interpreting applicable rules and regulations; inconsistencies or conflicts between and within various laws, regulations, decrees, orders and resolutions; and
relative inexperience of the judiciary and courts in such matters.
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In
addition, in certain jurisdictions, Brookfield Infrastructure may find that the commitment of local business people, government officials and agencies and the judicial system to abide
by legal requirements and negotiated agreements could be uncertain, creating particular concerns with respect to permits, approvals and licenses required or desirable for, or agreements entered into
in connection with, the Brookfield Infrastructure business in any such jurisdiction. These may be susceptible to revision or cancellation and legal redress may be uncertain or delayed. There can be no
assurance that joint ventures, licenses, permits or approvals (or applications for licenses, permits or approvals) or other legal arrangements will not be adversely affected by the actions of
government authorities or others and the effectiveness of and enforcement of such arrangements in these jurisdictions cannot be assured.
Action taken by national, state or provincial governments, including nationalization or the imposition of new taxes, could materially impact the financial performance or
value of our assets.
Our assets are located in many different jurisdictions, each with its own government and legal system. Different levels of political
risk exist in each jurisdiction and it is possible that action taken by a national, state or provincial government, including the nationalization of a business or the imposition of new taxes, could
materially impact our financial performance or in extreme cases deprive Brookfield Infrastructure of one or more of its businesses without adequate compensation.
Our business relies on the use of technology, and as a result, we may be exposed to cyber-security attacks.
Our business places significant reliance on information and other technology. This technology includes our computer systems used for
information, processing, administrative and commercial operations and the operating plant and equipment used by our assets, including that on our toll roads, in our electricity transmission systems,
coal terminal operations, ports, rail networks, and by our electricity and gas distribution companies. In addition, our business also relies upon telecommunication services to interface with its
widely distributed business network and customers. The information and embedded systems of key business partners and regulatory agencies are also important to our operations. Our business relies on
this technology functioning as intended.
Our
computer systems may be subject to cybersecurity risks or other breaches of information technology security, noting the increasing frequency and severity of these kinds of incidents.
Further, the operating equipment used by our assets may not continue to perform as it has in the past, and there is a risk of equipment failure due to wear and tear, latent defect, design or operator
errors or early obsolescence, among other things.
A
breach of our cyber/data security measures, the failure of any such computerized system or of the operating equipment used by our assets for a significant time period could have a
material adverse effect on our business prospects, financial condition, results of operations and cash flow and it may not be possible to recover losses suffered from such incidents under our
insurance policies. Although we are continuing to develop defenses to such attacks, we can provide no assurance they will be successful in preventing or ameliorating damage from such an attack on us
and, as the manner in which cyber-attacks are undertaken has become more sophisticated, there is a risk that the occurrence of cyber-attack may remain undetected for an extended period.
Furthermore,
our communications infrastructure operations rely for their continued viability on the ongoing demand for tower infrastructure, which is uncertain and could be subject to
bypass risk or obsolescence as a result of new or developing technologies.
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Many of our operations depend on relevant contractual arrangements.
Many of our operations rely on revenue from customers under contracts. There is a risk that customers will default under these
contracts. We cannot provide assurance that one or more customers will not default on their obligations to us or that such a default or defaults will not have a material adverse effect on our
operations, financial position, future results of operations, or future cash flows. Furthermore, the bankruptcy of one or more of our customers, or some other similar proceeding or liquidity
constraint, might make it unlikely that we would be able to collect all or a significant portion of amounts owed by the distressed entity or entities. In addition, such events might force such
customers to reduce or curtail their future use of our products and services, which could have a material adverse effect on our business, financial condition and results of operations. For example, we
have a single customer which represented a majority of contractual and regulated revenues of our South American electricity transmission operations in 2014. As this accounts for a majority of its cash
flow, our South American electricity transmission operations could be materially adversely affected by any material change in the financial condition of that customer. Similarly, our rail business is
party to several commercial track access agreements to provide access to our rail network for the haulage of iron ore. The largest of these contracts currently accounts for a significant portion of
forecast Adjusted EBITDA within the rail business and an event of default under this contract could have a materially adverse effect on that business.
We
endeavour to minimize risk wherever possible by structuring our contracts in a way that minimizes volume risk (e.g. minimum guaranteed volumes and 'take-or-pay' arrangements),
however it is possible that the take-or-pay arrangements may not be fully effective. In addition, the contract terms are finite and in some cases the contracts contain termination or suspension rights
for the benefit of the customer.
Certain
of our assets with revenues contracted under contracts will be subject to re-contracting risk in the future. We cannot provide assurance that we will be able to re-negotiate
these contracts once their terms expire, or that even if we are able to do so, that we will be able to obtain the same prices or terms we currently receive. If we are unable to renegotiate these
contracts, or unable to receive prices at least equal to the current prices we receive, our business, financial condition, results of operation and prospects could be adversely affected.
We rely on tolling and revenue collection systems.
Revenues at some of our assets depend on reliable and efficient tolling, metering or other revenue collection systems. There is a risk
that, if one or more of our businesses are not able to operate and maintain these tolling, metering or other revenue collection systems in the manner expected, or if the cost of operation and
maintenance is greater than expected, our assets, business, financial condition, and risks of operations could be materially adversely affected. Users of our facilities who do not pay tolls or other
charges may be subject to either direct legal action from the relevant business, or in some cases may be referred to the state for enforcement action. We bear the ultimate risk if enforcement actions
against defaulting customers are not successful or if enforcement actions are more costly or take more time than expected.
Our ability to finance our operations is subject to various risks relating to the state of the capital markets.
Our financing strategy involves both the issuance of partnership level equity and the issuance of corporate debt. For example, in
December 2016, we issued approximately 15.6 million units at $32 per unit in the United States and Canada, together with 8,139,000 additional Redeemable Partnership Units
to Brookfield in a concurrent private placement, and in August 2016, we raised C$250 million of gross proceeds through the issuance of Series 5 Preferred Units in Canada.
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We have corporate debt and limited recourse project level debt, the majority of which is non-recourse that will need to be replaced from time to time. Our
financings may contain conditions that limit our ability to repay indebtedness prior to maturity without incurring penalties, which may limit our capital markets flexibility. Refinancing risk
includes, among other factors, dependence on continued operating performance of our assets, future electricity market prices, future capital markets conditions, the level of future interest rates and
investors' assessment of our credit risk at such time. In addition, certain of our financings are, and future financings may be exposed to floating interest rate risks, and if interest rates increase,
an increased proportion of our cash flow may be required to service indebtedness. Future acquisitions, development and construction of new facilities and other capital expenditures will be financed
out of cash generated from our operations, borrowings and possible future sales of equity. Our ability to obtain financing to finance our growth is dependent on, among other factors, the overall state
of the capital markets, continued operating performance of our assets, future electricity market prices, the level of future interest rates and investors' assessment of our credit risk at such time,
and investor appetite for investments in renewable energy and infrastructure assets in general and in our securities in particular. To the extent that external sources of capital become limited or
unavailable or available on onerous terms, our ability to make necessary capital investments to construct new or maintain existing facilities will be impaired, and as a result, our business, financial
condition, results of operations and prospects may be materially adversely affected.
Changes in our credit ratings may have an adverse effect on our financial position and ability to raise capital.
We cannot assure you that any credit rating assigned to us or any of our subsidiaries' debt securities will remain in effect for any
given period of time or that any rating will not be lowered or withdrawn entirely by the relevant rating agency. A lowering or withdrawal of such ratings may have an adverse effect on our financial
position and ability to raise capital.
We may suffer a significant loss resulting from fraud, bribery, corruption other illegal acts, inadequate or failed internal processes or systems, or from external events.
We may suffer a significant loss resulting from fraud, bribery, corruption, other illegal acts by our employees or those of Brookfield,
inadequate or failed internal processes or systems, or from external events, such as security threats affecting our ability to operate. Both Brookfield and our partnership operate in different markets
and rely on our employees to follow our policies and processes as well as applicable laws in their activities. Risk of illegal acts or failed systems is managed through our infrastructure, controls,
systems and people, complemented by a focus on enterprise-wide management of specific operational risks such as fraud, bribery and corruption, as well as personnel and systems risks. Specific
programs, policies, standards and methodologies have been developed to support the management of these risks, however these cannot guarantee that such conduct does not occur and if it does, it can
result in direct or indirect financial loss, reputational impact or regulatory consequences.
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Risks Relating to Our Relationship with Brookfield
Brookfield exercises substantial influence over our partnership and we are highly dependent on the Service Provider.
Brookfield is the sole shareholder of our General Partner. As a result of its ownership of our General Partner, Brookfield is able to
control the appointment and removal of our General Partner's directors and, accordingly, exercise substantial influence over our partnership and over the Holding LP, for which our partnership
is the managing general partner. Our partnership and the Holding LP do not have any employees and depend on the management and administration services provided by the Service Provider.
Brookfield personnel and support staff that provide services to us are not required to have as their primary responsibility the management and administration of our partnership or the
Holding LP or to act exclusively for either of us. Any failure to effectively manage our current operations or to implement our strategy could have a material adverse effect on our business,
financial condition and results of operations.
Brookfield has no obligation to source acquisition opportunities for us and we may not have access to all infrastructure acquisitions that Brookfield identifies.
Our ability to grow depends on Brookfield's ability to identify and present us with acquisition opportunities. Brookfield established
our partnership to own and operate certain infrastructure assets on a global basis. However, Brookfield has no obligation to source acquisition opportunities for us. In addition, Brookfield has not
agreed to commit to us any minimum level of dedicated resources for the pursuit of infrastructure-related acquisitions. There are a number of factors which could materially and adversely impact the
extent to which suitable acquisition opportunities are made available from Brookfield, for example:
-
-
there is no accepted industry standard for what constitutes an infrastructure asset. For example, Brookfield may consider
certain assets that have both real-estate related characteristics and infrastructure related characteristics to be real estate and not infrastructure;
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it is an integral part of Brookfield's (and our) strategy to pursue the acquisition of infrastructure assets
through consortium arrangements with institutional investors, strategic partners or financial sponsors and to form partnerships to pursue such acquisitions on a specialized or global basis. Although
Brookfield has agreed with us that it will not enter any such arrangements that are suitable for us without giving us an opportunity to participate in them, there is no minimum level of participation
to which we will be entitled;
-
-
the same professionals within Brookfield's organization that are involved in acquisitions that are suitable for us are
responsible for the consortiums and partnerships referred to above, as well as having other responsibilities within Brookfield's broader asset management business. Limits on the availability of such
individuals will likewise result in a limitation on the availability of acquisition opportunities for us;
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-
Brookfield will only recommend acquisition opportunities that it believes are suitable for us. Our focus is on assets
where we believe that our operations-oriented approach can be deployed to create value. Accordingly, opportunities where Brookfield cannot play an active role in influencing the underlying operating
company or managing the underlying assets may not be suitable for us, even though they may be attractive from a purely financial perspective. Legal, regulatory, tax and other commercial considerations
will likewise be an important consideration in determining whether an opportunity is suitable and will limit our ability to participate in these more passive investments and may limit our ability to
have more than 50% of our assets concentrated in a single jurisdiction; and
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in addition to structural limitations, the question of whether a particular acquisition is suitable is highly subjective
and is dependent on a number of factors including our liquidity position at the time, the risk profile of the opportunity, its fit with the balance of our then current operations and other factors. If
Brookfield determines that an opportunity is not suitable for us, it may still pursue such opportunity on its own behalf, or on behalf of a Brookfield-sponsored partnership or consortium.
In
making these determinations, Brookfield may be influenced by factors that result in a misalignment or conflict of interest. See Item 7.B "Related Party
TransactionsConflicts of Interest and Fiduciary Duties."
The departure of some or all of Brookfield's professionals could prevent us from achieving our objectives.
We depend on the diligence, skill and business contacts of Brookfield's professionals and the information and opportunities they
generate during the normal course of their activities. Our future success will depend on the continued service of these individuals, who are not obligated to remain employed with Brookfield.
Brookfield has experienced departures of key professionals in the past and may do so in the future, and we cannot predict the impact that any such departures will have on our ability to achieve our
objectives. The departure of a significant number of Brookfield's professionals for any reason, or the failure to appoint qualified or effective successors in the event of such departures, could have
a material adverse effect on our ability to achieve our objectives. Our Limited Partnership Agreement and our Master Services Agreement do not require Brookfield to maintain the employment of any of
its professionals or to cause any particular professionals to provide services to us or on our behalf.
The control of our General Partner may be transferred to a third party without unitholder or preferred unitholder consent.
Our General Partner may transfer its general partnership interest to a third party in a merger or consolidation or in a transfer of all
or substantially all of its assets without the consent of our unitholders or preferred unitholders. Furthermore, at any time, the shareholder of our General Partner may sell or transfer all or part of
its shares in our General Partner without the approval of our unitholders or preferred unitholders. If a new owner were to acquire ownership of our General Partner and to appoint new directors or
officers of its own choosing, it would be able to exercise substantial influence over our partnership's policies and procedures and exercise substantial influence over our management and the types of
acquisitions that we make. Such changes could result in our partnership's capital being used to make acquisitions in which Brookfield has no involvement or in making acquisitions that are
substantially different from our targeted acquisitions. Additionally, our partnership cannot predict with any certainty the effect that any transfer in the ownership of our General Partner would have
on the trading price of our units and preferred units or our partnership's ability to raise capital or make investments in the future, because such matters would depend to a large extent on the
identity of the new owner and the new owner's intentions with regard to our partnership. As a result, the future of our partnership would be uncertain and our partnership's business, financial
condition and results of operations may suffer.
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Brookfield's ownership position of our partnership and the Holding LP entitles it to a significant percentage of our distributions, and Brookfield may increase its
ownership relative to other unitholders.
Brookfield beneficially owns, directly or indirectly, approximately 29.5% of our units on a fully-exchanged basis, substantially all of
which consists of 108,401,992 Redeemable Partnership Units of the Holding LP that are redeemable for cash or exchangeable for our units in accordance with the Redemption-Exchange
Mechanism. See Item 10.B "Memorandum and Articles of AssociationDescription of the Holding LP's Limited Partnership AgreementRedemption-Exchange Mechanism." In
addition, Brookfield owns approximately 0.4% of the Holding LP through Special Limited Partner Units, which entitle Brookfield to receive distributions in proportion to its special limited
partnership interest, plus additional incentive distributions, as described in Item 7.B "Related Party TransactionsSpecial Limited Partner Distributions" and
"Incentive Distributions." Accordingly, Brookfield's ownership position of Redeemable Partnership Units and Special Limited Partner Units allows Brookfield to receive a substantial
percentage of our distributions. See Item 10.B "Memorandum and Articles of Association."
Brookfield
may increase its ownership position in our partnership and the Holding LP. Under the distribution reinvestment plan of the Holding LP, Brookfield can reinvest
distributions on its Redeemable Partnership Units for additional Redeemable Partnership Units. In addition, Brookfield may also elect to reinvest incentive distributions from its Special Limited
Partner Units in exchange for additional Redeemable Partnership Units. Brookfield has advised us that it may from time to time reinvest these distributions for such additional Redeemable Partnership
Units, which would increase its beneficial ownership percentage of our units and increase its share of distributions relative to public unitholders. To date, Brookfield has not elected to reinvest any
of the distributions from its Redeemable Partnership Units or its Special Limited Partner Units for additional Redeemable Partnership Units, but it may elect to do so in the future.
Brookfield
may also purchase additional units of our partnership in the open market or pursuant to private placement. Brookfield historically has purchased additional Redeemable
Partnership Units in private placements concurrent with public offerings of our units. Most recently, it purchased 8,139,000 Redeemable Partnership Units in connection with our
December 2016 offering. See Item 5.B "Liquidity and Capital ResourcesPartnership Capital."
Any
of these events may result in Brookfield increasing its ownership of our units relative to other unitholders, which could reduce the amount of cash available for distribution to
public unitholders.
Our Master Services Agreement and our other arrangements with Brookfield do not impose on Brookfield any fiduciary duties to act in the best interests of our unitholders or
preferred unitholders.
Our Master Services Agreement and our other arrangements with Brookfield do not impose on Brookfield any duty (statutory or otherwise)
to act in the best interests of the Service Recipients, nor do they impose other duties that are fiduciary in nature. As a result, our General Partner, a wholly-owned subsidiary of Brookfield Asset
Management, in its capacity as our General Partner, has sole authority to enforce the terms of such agreements and to consent to any waiver, modification or amendment of their provisions, subject to
approval by a majority of our independent directors in accordance with our conflicts protocol.
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In
addition, the
Bermuda Limited Partnership Act of 1883
("Bermuda Limited Partnership Act"), under which our partnership and the
Holding LP were established, does not impose statutory fiduciary duties on a general partner of a limited partnership in the same manner that certain corporate statutes, such as the
Canada Business Corporations
Act
("Canada Business Corporations Act"), impose fiduciary duties on directors of a corporation. In general, under
applicable Bermudian legislation, a general partner has a duty to: (i) act at all times in good faith; and (ii) subject to any express provisions of the partnership agreement to the
contrary, act in the interests of the limited partnership. Applicable Bermuda legislation also provides that a general partner has certain limited duties to its limited partners, such as the duty to
render accounts, account for private profits and not compete with the partnership in business. In addition, Bermudian common law recognizes that a general partner owes a duty of utmost good faith to
its limited partners. These duties are, in most respects, similar to duties imposed on a general partner of a limited partnership under U.S. and Canadian law. However, to the extent that our General
Partner owes any such fiduciary duties to our partnership, our preferred unitholders and unitholders, these duties have been modified pursuant to our Limited Partnership Agreement as a matter of
contract law, with the exception of the duty of our General Partner to act in good faith, which cannot be modified. We have been advised by Bermudian counsel that such modifications are not prohibited
under Bermudian law, subject to typical qualifications as to enforceability of contractual provisions, such as the application of general equitable principles. This is similar to Delaware law which
expressly permits modifications to the fiduciary duties owed to partners, other than an implied contractual covenant of good faith and fair dealing.
Our
Limited Partnership Agreement contains various provisions that modify the fiduciary duties that might otherwise be owed to our partnership, our preferred unitholders and unitholders,
including when conflicts of interest arise. Specifically, our Limited Partnership Agreement states that no breach of our Limited Partnership Agreement or a breach of any duty, including fiduciary
duties, may be found for any matter that has been approved by a majority of the independent directors of our General Partner. In addition, when resolving conflicts of interest, our Limited Partnership
Agreement does not impose any limitations on the discretion of the independent directors or the factors which they may consider in resolving any such conflicts. The independent directors of our
General Partner can therefore take into account the interests of third parties, including Brookfield, when resolving conflicts of interest. Additionally, any fiduciary duty that is imposed under any
applicable law or agreement is modified, waived or limited to the extent required to permit our General Partner to undertake any affirmative conduct or to make any decisions, so long as such action is
reasonably believed to be in, or not inconsistent with, the best interests of our partnership.
In
addition, our Limited Partnership Agreement provides that our General Partner and its affiliates do not have any obligation under our Limited Partnership Agreement, or as a result of
any duties stated or implied by law or equity, including fiduciary duties, to present business or investment opportunities to our partnership, the Holding LP, any Holding Entity or any other
holding entity established by us. They also allow affiliates of our General Partner to engage in activities that may compete with us or our activities. Additionally, any failure by our General Partner
to consent to any merger, consolidation or combination will not result in a breach of our Limited Partnership Agreement or any other provision of law. Our Limited Partnership Agreement prohibits our
limited partners from advancing claims that otherwise might raise issues as to compliance with fiduciary duties or applicable law. These modifications to the fiduciary duties are detrimental to our
unitholders and preferred unitholders because they restrict the remedies available for actions that might otherwise constitute a breach of fiduciary duty and permit conflicts of interest to be
resolved in a manner that is not in the best interests of our partnership or the best interests of our unitholders and preferred unitholders. See Item 7.B "Related Party
TransactionsConflicts of Interest and Fiduciary Duties".
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Our organizational and ownership structure may create significant conflicts of interest that may be resolved in a manner that is not in the best interests of our partnership
or the best interests of our unitholders and preferred unitholders.
Our organizational and ownership structure involves a number of relationships that may give rise to conflicts of interest between our
partnership, our unitholders and preferred unitholders, on the one hand, and Brookfield, on the other hand. In certain instances, the interests of Brookfield may differ from the interests of our
partnership, our preferred unitholders and our unitholders, including with respect to the types of acquisitions made, the timing and amount of distributions by our partnership, the reinvestment of
returns generated by our operations, the use of leverage when making acquisitions and the appointment of outside advisors and service providers, including as a result of the reasons described under
Item 7.B "Related Party Transactions".
In
addition, the Service Provider, an affiliate of Brookfield, provides management services to us pursuant to our Master Services Agreement. Pursuant to our Master Services Agreement, on
a quarterly basis, we pay a base management fee to the Service Provider equal to 0.3125% (1.25% annually) of the market value of our partnership. For purposes of calculating the base management fee,
the market value of our partnership is equal to the aggregate value of all our outstanding units (assuming full conversion of Brookfield's limited partnership interests in Brookfield Infrastructure
into units), preferred units and securities of the other Service Recipients that are not held by Brookfield Infrastructure, plus all outstanding third party debt with recourse to a Service Recipient,
less all cash held by such entities. Infrastructure Special LP will also receive incentive distributions based on the amount by which quarterly distributions on the Holding LP's units
(other than Holding LP Class A Preferred Units) exceed specified target levels as set forth in the Holding LP's limited partnership agreement. For a further explanation of the base
management fee and incentive distributions, see Item 6.A "Directors and Senior ManagementManagement Fee" and Item 7.B "Related Party TransactionsIncentive
Distributions". This relationship may give rise to conflicts of interest between us, our unitholders and preferred unitholders, on the one hand, and Brookfield, on the other, as Brookfield's interests
may differ from the interests of Brookfield Infrastructure, our unitholders and preferred unitholders.
Our
General Partner, the sole shareholder of which is Brookfield, has sole authority to determine whether we will make distributions and the amount of distributions on our units and
timing of these distributions. The arrangements we have with Brookfield may create an incentive for Brookfield to take actions which would have the effect of increasing distributions and fees payable
to it, which may be to the detriment of us, our unitholders and preferred unitholders. For example, because the base management fee is calculated based on the market value of our partnership, it may
create an incentive for Brookfield to increase or maintain the market value of our partnership over the near-term when other actions may be more favourable to us or our unitholders and preferred
unitholders. Similarly, Brookfield may take actions to increase distributions on our units in order to ensure Brookfield is paid incentive distributions in the near-term when other investments or
actions may be more favourable to us or our unitholders and preferred unitholders. Also, through Brookfield's ownership of our units and the Redeemable Partnership Units, it has an effective economic
interest in our partnership of approximately 29.5% and therefore may be incentivized to increase distributions payable to our unitholders and thereby to Brookfield.
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Our arrangements with Brookfield were negotiated in the context of an affiliated relationship and may contain terms that are less favourable than those which otherwise might
have been obtained from unrelated parties.
The terms of our arrangements with Brookfield were effectively determined by Brookfield in the context of the spin-off. While our
General Partner's independent directors are aware of the terms of these arrangements and have approved the arrangements on our behalf, they did not negotiate the terms. These terms, including terms
relating to compensation, contractual or fiduciary duties, conflicts of interest and Brookfield's ability to engage in outside activities, including activities that compete with us, our activities and
limitations on liability and indemnification, may be less favourable than otherwise might have resulted if the negotiations had involved unrelated parties. Under our Limited Partnership Agreement,
persons who acquire our units or preferred units and their transferees will be deemed to have agreed that none of those arrangements constitutes a breach of any duty that may be owed to them under our
Limited Partnership Agreement or any duty stated or implied by law or equity.
Our General Partner may be unable or unwilling to terminate the Master Services Agreement.
The Master Services Agreement provides that the Service Recipients may terminate the agreement only if: the Service Provider defaults
in the performance or observance of any material term, condition or covenant contained in the agreement in a manner that results in material harm to us and the default continues unremedied for a
period of 30 days after written notice of the breach is given to the Service Provider; the Service Provider engages in any act of fraud, misappropriation of funds or embezzlement against any
Service Recipient that results in material harm to us; the Service Provider is grossly negligent in the performance of its duties under the agreement and such negligence results in material harm to
the Service Recipients; or upon the happening of certain events relating to the bankruptcy or insolvency of the Service Provider. Our General Partner cannot terminate the agreement for any other
reason, including if the Service Provider or Brookfield experiences a change of control, and there is no fixed term to the agreement. In addition, because our General Partner is an affiliate of
Brookfield, it may be unwilling to terminate the Master Services Agreement, even in the case of a default. If the Service Provider's performance does not meet the expectations of investors, and our
General Partner is unable or unwilling to terminate the Master Services Agreement, the market price of our units or preferred units could suffer. Furthermore, the termination of the Master Services
Agreement would terminate our partnership's rights under the Relationship Agreement and our Licensing Agreements. See Item 7.B "Related Party TransactionsRelationship Agreement"
and Item 7.B "Related Party TransactionsLicensing Agreements".
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The liability of the Service Provider is limited under our arrangements with it and we have agreed to indemnify the Service Provider against claims that it may face in
connection with such arrangements, which may lead it to assume greater risks when making decisions relating to us than it otherwise would if acting solely for its own account.
Under the Master Services Agreement, the Service Provider has not assumed any responsibility other than to provide or arrange for the
provision of the services described in the Master Services Agreement in good faith and will not be responsible for any action that our General Partner takes in following or declining to follow its
advice or recommendations. In addition, under our Limited Partnership Agreement, the liability of our General Partner and its affiliates, including the Service Provider, is limited to the fullest
extent permitted by law to conduct involving bad faith, fraud or willful misconduct or, in the case of a criminal matter, action that was known to have been unlawful. The liability of the Service
Provider under the Master Services Agreement is similarly limited, except that the Service Provider is also liable for liabilities arising from gross negligence. In addition, our partnership has
agreed to indemnify the Service Provider to the fullest extent permitted by law from and against any claims, liabilities, losses, damages, costs or expenses incurred by an indemnified person or
threatened in connection with our operations, investments and activities or in respect of or arising from the Master Services Agreement or the services provided by the Service Provider, except to the
extent that the claims, liabilities, losses, damages, costs or expenses are determined to have resulted from the conduct in respect of which such persons have liability as described above. These
protections may result in the Service Provider tolerating greater risks when making decisions than otherwise would be the case, including when determining whether to use leverage in connection with
acquisitions. The indemnification arrangements to which the Service Provider is a party may also give rise to legal claims for indemnification that are adverse to our partnership, our unitholders and
preferred unitholders.
Risks Relating to Our Partnership Structure
Brookfield Infrastructure and our operating entities use leverage and such indebtedness may result in Brookfield Infrastructure or our operating entities being subject to
certain covenants which restrict our ability to engage in certain types of activities or to make distributions to equity.
The Holding LP and many of our Holding Entities and operating entities have entered into credit facilities or have incurred
other forms of debt, including for the purposes of acquisitions and investments as well as for general corporate purposes. The total quantum of exposure to debt within Brookfield Infrastructure is
significant, and we may become more highly leveraged in the future. Some facilities are fully drawn, while some have amounts of principal which are undrawn.
Highly
leveraged assets are inherently more sensitive to declines in revenues, increases in expenses and interest rates and adverse economic, market and industry developments. A
leveraged company's income and net assets also tend to increase or decrease at a greater rate than would otherwise be the case if money had not been borrowed. As a result, the risk of loss associated
with a leveraged company, all other things being equal, is generally greater than for companies with comparatively less debt. In addition, the use of indebtedness in connection with an acquisition may
give rise to negative tax consequences to certain investors. Leverage may also result in a requirement for short-term liquidity, which may force the sale of assets at times of low demand and/or prices
for such assets. This may mean that we are unable to realize fair value for the assets in a sale.
Our
credit facilities also contain covenants applicable to the relevant borrower and events of default. Covenants can relate to matters including limitations on financial indebtedness,
dividends, investments, or minimum amounts for interest coverage, Adjusted EBITDA, cash flow or net worth. If an event of default occurs, or minimum covenant requirements are not satisfied, this can
result in a requirement to immediately repay any drawn amounts or the imposition of other restrictions including a prohibition on the payment of distributions to equity.
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Our
credit facilities or other debt or debt-like instruments may or may not be rated. Should such debt or debt-like instruments be rated, a credit downgrade may have an adverse impact on
the cost of such debt.
Our partnership is a holding entity and currently we rely on the Holding LP and, indirectly, the Holding Entities and our operating entities to provide us with the
funds necessary to pay distributions and meet our financial obligations.
Our partnership is a holding entity and its sole material asset is its managing general partnership interest and preferred limited
partnership interest in the Holding LP, which owns all of the common shares of the Holding Entities, through which we hold all of our interests in the operating entities. Our partnership has no
independent means of generating revenue. As a result, we depend on distributions and other payments from the Holding LP and, indirectly, the Holding Entities and our operating entities to
provide us with the funds necessary to pay distributions on our units and preferred units and to meet our financial obligations. The Holding LP, the Holding Entities and our operating entities
are legally distinct from us and some of them are or may become restricted in their ability to pay dividends and distributions or otherwise make funds available to us pursuant to local law, regulatory
requirements and their contractual agreements, including agreements governing their financing arrangements, such as the Holding LP's credit facilities and other indebtedness incurred by the
Holding Entities and operating entities. Any other entities through which we may conduct operations in the future will also be legally distinct from us and may be similarly restricted in their ability
to pay dividends and distributions or otherwise make funds available to us under certain conditions. The Holding LP, the Holding Entities and our operating entities will generally be required
to service their debt obligations before making distributions to us or their parent entities, as applicable, thereby reducing the amount of our cash flow available to pay distributions, fund working
capital and satisfy other needs.
Our
partnership anticipates that the only distributions that it will receive in respect of our partnership's managing general partnership interest in the Holding LP will consist
of amounts that are intended to assist our partnership in making distributions to our unitholders in accordance with our partnership's distribution policy and to allow our partnership to pay expenses
as they become due. Distributions received in respect of our partnership's preferred limited partnership interest in the Holding LP will consist of amounts that are intended to assist our
partnership in making distributions to our preferred unitholders in accordance with the terms of our preferred units. The declaration and payment of cash distributions by our partnership is at the
discretion of our General Partner. Our partnership is not required to make such distributions and neither our partnership nor our General Partner can assure you that our partnership will make such
distributions as intended.
While
we plan to review our partnership's distributions to our unitholders periodically, there is no guarantee that we will be able to increase, or even maintain the level of
distributions that are paid. Historically, as a result of this review, we decided to increase distributions in each of the last five years. However, such historical increases in distribution payments
may not be reflective of any future increases in distribution payments which will be subject to review by the board of directors of our General Partner taking into account prevailing circumstances at
the relevant time. Although we intend to make distributions on our units in accordance with our distribution policy, our partnership is not required to pay distributions on our units and neither our
partnership nor our General Partner can assure you that our partnership will be able to increase or even maintain the level of distributions on our units that are made in the future.
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Future sales or issuances of our units or preferred units in the public markets, or the perception of such sales or issuances, could depress the trading price of our units
and/or preferred units.
The sale or issuance of a substantial number of our units, preferred units or other equity related securities of our partnership in the
public markets, or the perception that such sales or issuances could occur, could depress the market price of our units or preferred units and impair our ability to raise capital through the sale of
additional units or preferred units. For example, in December 2016, we issued 15,625,000 units in a public offering in the United States and Canada, together with
8,139,000 additional Redeemable Partnership Units to Brookfield in a concurrent private placement, and in August 2016, we raised C$250 million of gross proceeds through the
issuance of Series 5 Preferred Units in Canada. We cannot predict the effect that future sales or issuances of our units, preferred units or other equity-related securities would have on the
market price of our units or preferred units.
Our partnership is not, and does not intend to become, regulated as an investment company under the Investment Company Act (and similar legislation in other
jurisdictions) and if our partnership was deemed an "investment company" under the Investment Company Act, applicable restrictions could make it impractical for us to operate as contemplated.
The Investment Company Act (and similar legislation in other jurisdictions) provide certain protections to investors and impose
certain restrictions on companies that are required to be regulated as investment companies. Among other things, such rules limit or prohibit transactions with affiliates, impose limitations on the
issuance of debt and equity securities and impose certain governance requirements. Our partnership has not been and does not intend to become regulated as an investment company and our partnership
intends to conduct its activities so it will not be deemed to be an investment company under the Investment Company Act (and similar legislation in other jurisdictions). In order to ensure that
we are not deemed to be an investment company, we may be required to materially restrict or limit the scope of our operations or plans. We will be limited in the types of acquisitions that we may
make, and we may need to modify our organizational structure or dispose of assets of which we would not otherwise dispose. Moreover, if anything were to happen which causes our partnership to be
deemed an investment company under the Investment Company Act, it would be impractical for us to operate as contemplated. Agreements and arrangements between and among us and Brookfield would be
impaired, the type and amount of acquisitions that we would be able to make as a principal would be limited and our business, financial condition and results of operations would be materially
adversely affected. Accordingly, we would be required to take extraordinary steps to address the situation, such as the amendment or termination of the Master Services Agreement, the restructuring of
our partnership and the Holding Entities, the amendment of our Limited Partnership Agreement or the termination of our partnership, any of which could materially adversely affect the value of our
units and preferred units. In addition, if our partnership were deemed to be an investment company under the Investment Company Act, it would be taxable as a corporation for U.S. federal income
tax purposes, and such treatment could materially adversely affect the value of our units and preferred units.
Our partnership is an "SEC foreign issuer" under Canadian securities regulations and is exempt from certain requirements of Canadian securities laws and a "foreign private
issuer" under U.S. securities laws and as a result is subject to disclosure obligations different from requirements applicable to U.S. domestic registrants listed on the New York
Stock Exchange ("NYSE").
Although our partnership is a reporting issuer in Canada, it is an "SEC foreign issuer" and is exempt from certain Canadian securities
laws relating to disclosure obligations and proxy solicitation, subject to certain conditions. Therefore, there may be less publicly available information in Canada about our partnership than would be
available if we were a typical Canadian reporting issuer.
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Although
our partnership is subject to the periodic reporting requirement of the
U.S. Securities Exchange Act of 1934
, as amended,
and the rules and regulations promulgated thereunder ("Exchange Act"), the periodic disclosure required of foreign private issuers under the Exchange Act is different from periodic disclosure required
of U.S. domestic registrants. Therefore, there may be less publicly available information about our partnership than is regularly published by or about other public limited partnerships in the
U.S. Our partnership is exempt from certain other sections of the Exchange Act to which U.S. domestic issuers are subject, including the requirement to provide our unitholders with
information statements or proxy statements that comply with the Exchange Act. In addition, insiders and large unitholders of our partnership are not obligated to file reports under Section 16
of the Exchange Act, and certain corporate governance rules imposed by the NYSE are inapplicable to our partnership.
We may be subject to the risks commonly associated with a separation of economic interest from control or the incurrence of debt at multiple levels within an organizational
structure.
Our ownership and organizational structure is similar to structures whereby one company controls another company which in turn holds
controlling interests in other companies; thereby, the company at the top of the chain may control the company at the bottom of the chain even if its effective equity position in the bottom company is
less than a controlling interest. Brookfield controls the sole shareholder of our General Partner and, as a result of such ownership of our General Partner, Brookfield is able to control the
appointment and removal of our General Partner's directors and, accordingly, exercises substantial influence over us. In turn, we often have a majority controlling interest or a significant influence
in our investments. Even though Brookfield currently has an effective economic interest in our partnership of approximately 29.5% as a result of ownership of our units and the Redeemable Partnership
Units, over time Brookfield may reduce this economic interest while still maintaining its controlling interest, and, therefore, Brookfield may use its control rights in a manner that conflicts with
the economic interests of our other unitholders and preferred unitholders. For example, despite the fact that we have a conflicts protocol in place, which addresses the requirement for independent
approval and other requirements for transactions in which there is greater potential for a conflict of interest to arise, including transactions with affiliates of Brookfield, because Brookfield will
be able to exert substantial influence over us, and, in turn, over our investments, there is a greater risk of transfer of assets of our investments at non-arm's length values to Brookfield and its
affiliates. In addition, debt incurred at multiple levels within the chain of control could exacerbate the separation of economic interest from controlling interest at such levels, thereby creating an
incentive to leverage us and our investments. Any such increase in debt would also make us more sensitive to declines in revenues, increases in expenses and interest rates, and adverse market
conditions. The servicing of any such debt would also reduce the amount of funds available to pay distributions to us and ultimately to our unitholders and preferred unitholders.
Our failure to maintain effective internal controls could have a material adverse effect on our business in the future and the price of our units and preferred units.
Any failure to maintain adequate internal controls over financial reporting or to implement required, new or improved controls, or
difficulties encountered in their implementation, could cause us to report material weaknesses or other deficiencies in our internal controls over financial reporting and could result in errors or
misstatements in our consolidated financial statements that could be material. If we or our independent registered public accounting firm were to conclude that our internal controls over financial
reporting were not effective, investors could lose confidence in our reported financial information and the price of our units and preferred units could decline. Our failure to achieve and maintain
effective internal controls could have a material adverse effect on our business in the future, our access to the capital markets and investors' perception of us. In addition, material weaknesses in
our internal controls could require significant expense and management time to remediate.
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Risks Relating to Our Units and Preferred Units
Our unitholders and preferred unitholders do not have a right to vote on partnership matters or to take part in the management of our partnership.
Under our Limited Partnership Agreement, our unitholders and preferred unitholders are not entitled to vote on matters relating to our
partnership, such as acquisitions, dispositions or financing, or to participate in the management or control of our partnership. In particular, our unitholders and preferred unitholders do not have
the right to remove our General Partner, to cause our General Partner to withdraw from our partnership, to cause a new general partner to be admitted to our partnership, to appoint new directors to
our General Partner's board of directors, to remove existing directors from our General Partner's board of directors or to prevent a change of control of our General Partner. In addition, except for
certain fundamental matters and as prescribed by applicable laws, our unitholders' and preferred unitholders consent rights apply only with respect to certain amendments to our Limited Partnership
Agreement. As a result, unlike holders of common stock of a corporation, our unitholders are not able to influence the direction of our partnership, including its policies and procedures, or to cause
a change in its management, even if they are unsatisfied with the performance of our partnership. Consequently, our unitholders may be deprived of an opportunity to receive a premium for their units
in the future through a sale of our partnership and the trading price of our units may be adversely affected by the absence or a reduction of a takeover premium in the trading price. Unitholders and
preferred unitholders only have a right to vote under limited circumstances as described in Item 10.B "Memorandum and Articles of AssociationDescription of Our Units, Preferred
Units and Our Limited Partnership Agreement."
The market price of our units and preferred units may be volatile.
The market price of our units and preferred units may be highly volatile and could be subject to wide fluctuations. Some of the factors
that could negatively affect the price of our units and preferred units include: general market and economic conditions, including disruptions, downgrades, credit events and perceived problems in the
credit markets; actual or anticipated variations in our quarterly operating results or distributions on our units; actual or anticipated variations or trends in market interest rates; changes in our
investments or asset composition; write-downs or perceived credit or liquidity issues affecting our assets; market perception of our partnership, our business and our assets; our level of indebtedness
and/or adverse market reaction to any indebtedness we incur in the future; our ability to raise capital on favourable terms or at all; loss of any major funding source; the termination of our Master
Services Agreement or additions or departures of our or Brookfield's key personnel; changes in market valuations of similar infrastructure companies; speculation in the press or investment community
regarding us or Brookfield; and changes in U.S. tax laws that make it impractical or impossible for our partnership to continue to be taxable as a partnership for U.S. federal income tax
purposes. Securities markets in general have experienced extreme volatility that has often been unrelated to the operating performance of particular companies or partnerships. Any broad market
fluctuations may adversely affect the trading price of our units and preferred units.
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We may need additional funds in the future and we may issue additional units or preferred units in lieu of incurring indebtedness which may dilute existing holders of our
units or we may issue securities that have rights and privileges that are more favourable than the rights and privileges accorded to our unitholders and preferred unitholders.
Under our Limited Partnership Agreement subject to the terms of any preferred units then outstanding, we may issue additional
partnership securities, including units, preferred units and options, rights, warrants and appreciation rights relating to partnership securities for any purpose and for such consideration and on such
terms and conditions as our General Partner may determine. Subject to the terms of any preferred units outstanding, our General Partner's board of directors will be able to determine the class,
designations, preferences, rights, powers and duties of any additional partnership securities, including any rights to share in our profits, losses and distributions, any rights to receive partnership
assets upon our dissolution or liquidation and any redemption, conversion and exchange rights. Subject to the terms of any preferred units outstanding, our General Partner may use such authority to
issue additional units or preferred units, which could dilute holders of our units, or to issue securities with rights and privileges that are more favourable than those of our units or preferred
units. Subject to the terms of any preferred units then outstanding, holders of units and preferred units will not have any pre-emptive right or any right to consent to or otherwise approve the
issuance of any such securities or the terms on which any such securities may be issued.
Non-U.S. unitholders will be subject to foreign currency risk associated with Brookfield Infrastructure's distributions.
A significant number of our unitholders will reside in countries where the U.S. dollar is not the functional currency. Our
distributions are denominated in U.S. dollars but are settled in the local currency of the unitholder receiving the distribution. For each non-U.S. unitholder, the value received in the
local currency from the distribution will be determined based on the exchange rate between the U.S. dollar and the applicable local currency at the time of payment. As such, if the
U.S. dollar depreciates significantly against the local currency of the non-U.S. unitholder, the value received by such unitholder in its local currency will be adversely affected.
U.S. investors in our units and preferred units may find it difficult or impossible to enforce service of process and enforcement of judgments against us and
directors and officers of our General Partner and the Service Provider.
We were established under the laws of Bermuda, and most of our subsidiaries are organized in jurisdictions outside of the
United States. In addition, our directors and senior management identified in this annual report on Form 20-F are located outside of the United States. Certain of the directors
and officers of our General Partner and the Service Provider reside outside of the United States. A substantial portion of our assets are, and the assets of the directors and officers of our
General Partner and the Service Provider identified in this annual report on Form 20-F may be, located outside of the United States. It may not be possible for investors to effect
service of process within the United States upon the directors and officers of our General Partner and the Service Provider. It may also not be possible to enforce against us or the directors
and officers of our General Partner and the Service Provider judgments obtained in U.S. courts predicated upon the civil liability provisions of applicable securities law in the
United States.
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Canadian investors in our units and preferred units may find it difficult or impossible to enforce service of process and enforcement of judgments against us and the
directors and officers of our General Partner and the Service Provider.
We were established under the laws of Bermuda, and most of our subsidiaries are organized in jurisdictions outside of Canada. Certain
of the directors and officers of our General Partner and the Service Provider reside outside of Canada. A substantial portion of our assets are, and the assets of the directors and officers of our
General Partner and the Service Provider and the experts identified in this annual report on Form 20-F may be, located outside of Canada. It may not be possible for investors to effect service
of process within Canada upon the directors and officers of our General Partner and the Service Provider. It may also not be possible to enforce against us, the experts identified in this annual
report on Form 20-F, or the directors and officers of our General Partner and the Service Provider judgments obtained in Canadian courts predicated upon the civil liability provisions of
applicable securities laws in Canada.
We may not be able to continue paying comparable or growing cash distributions to our unitholders in the future.
The amount of cash we can distribute to our unitholders depends upon the amount of cash we receive from the Holding LP and,
indirectly, the Holding Entities and the operating entities. The amount of cash the Holding LP, the Holding Entities and the operating entities generate will fluctuate from quarter to quarter
and will depend upon, among other things: the weather in the jurisdictions in which they operate; the level of their operating costs; and prevailing economic conditions. In addition, the actual amount
of cash we will have available for distribution will also depend on other factors, such as: the level of costs related to litigation and regulatory compliance matters; the cost of acquisitions, if
any; our debt service requirements; fluctuations in our working capital needs; our ability to borrow under our credit facilities; our ability to access capital markets; restrictions on distributions
contained in our debt agreements; and the amount, if any, of cash reserves established by our General Partner in its discretion for the proper conduct of our business. As a result of all these
factors, we cannot guarantee that we will have sufficient available cash to pay a specific level of cash distributions to our unitholders. Furthermore, unitholders should be aware that the amount of
cash we have available for distribution depends primarily upon the cash flow of the Holding LP, the Holding Entities and the operating entities, and is not solely a function of profitability,
which is affected by non-cash items. As a result, we may declare and/or pay cash distributions on our units during periods when we record net losses.
Risks Related to Taxation
General
Changes in tax law and practice may have a material adverse effect on the operations of our partnership, the Holding Entities, and the operating entities and, as a
consequence, the value of our assets and the net amount of distributions payable to our unitholders.
Our structure, including the structure of the Holding Entities and the operating entities, is based on prevailing taxation law and
practice in the local jurisdictions in which we operate. Any change in tax legislation (including in relation to taxation rates) and practice in these jurisdictions could adversely affect these
entities, as well as the net amount of distributions payable to our unitholders. Taxes and other constraints that would apply to our operating entities in such jurisdictions may not apply to local
institutions or other parties, and such parties may therefore have a significantly lower effective cost of capital and a corresponding competitive advantage in pursuing such acquisitions.
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Our partnership's ability to make distributions depends on it receiving sufficient cash distributions from its underlying operations, and we cannot assure our unitholders
that our partnership will be able to make cash distributions to them in amounts that are sufficient to fund their tax liabilities.
Our Holding Entities and operating entities may be subject to local taxes in each of the relevant territories and jurisdictions in
which they operate, including taxes on income, profits or gains and withholding taxes. As a result, our partnership's cash available for distribution is indirectly reduced by such taxes, and the
post-tax return to our unitholders is similarly reduced by such taxes. We intend for future acquisitions to be assessed on a case-by-case basis and, where possible and commercially viable, structured
so as to minimize any adverse tax consequences to our unitholders as a result of making such acquisitions.
In
general, a unitholder that is subject to income tax in Canada or the United States must include in income its allocable share of our partnership's items of income, gain, loss
and deduction (including, so long as it is treated as a partnership for tax purposes, our partnership's allocable share of those items of the Holding LP) for each of our partnership's fiscal
years ending with or within such unitholder's tax year. See Item 10.E "TaxationCertain Material Canadian Federal Income Tax Considerations" and "TaxationCertain
Material U.S. Federal Income Tax Considerations". However, the cash distributed to a unitholder may not be sufficient to pay the full amount of such unitholder's tax liability in respect of its
investment in our partnership, because each unitholder's tax liability depends on such unitholder's particular tax situation and the tax treatment of the underlying activities or assets of our
partnership. If our partnership is unable to distribute cash in amounts that are sufficient to fund our unitholders' tax liabilities, each of our unitholders will still be required to pay income taxes
on its share of our partnership's taxable income.
As a result of holding our units, our unitholders may be subject to U.S. federal, state, local or non-U.S. taxes and return filing obligations in jurisdictions
in which they are not resident for tax purposes or otherwise not subject to tax.
Our unitholders may be subject to U.S. federal, state, local and non-U.S. taxes, including unincorporated business taxes
and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which our partnership entities do business or own property now or in the future, even if our unitholders do
not reside in any of those jurisdictions. Our unitholders may be required to file income tax returns and pay income taxes in some or all of these jurisdictions. Further, our unitholders may be subject
to penalties for failure to comply with these requirements. Although our partnership will attempt, to the extent reasonably practicable, to structure our partnership operations and investments so as
to minimize income tax filing obligations by our unitholders in such jurisdictions, there may be circumstances in which our partnership is unable to do so. It is the responsibility of each unitholder
to file all U.S. federal, state, local, and non-U.S. tax returns that may be required of such unitholder.
To the extent that our partnership, the Holding LP, the Holding Entities or the operating entities enter into transactions or
arrangements with parties with whom they do not deal at arm's length, including Brookfield, the relevant tax authorities may seek to adjust the quantum or nature of the amounts included or deducted
from taxable income by such entities if they consider that the terms and conditions of such transactions or arrangements differ from those that would have been made between persons dealing at arm's
length. This could result in more tax (and penalties and interest) being paid by such entities, and therefore the return to investors could be reduced. For Canadian tax purposes, a transfer
pricing adjustment may in certain circumstances result in additional income being allocated to a unitholder with no corresponding cash distribution or in a dividend being deemed to be paid by a
Canadian-resident to a non-arm's length non-resident, which is subject to Canadian withholding tax.
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Our General Partner believes that the base management fee and any other amount that is paid to the Service Provider will be commensurate with the value of the
services being provided by the Service Provider and comparable to the fees or other amounts that would be agreed to in an arm's length arrangement. However, no assurance can be given in
this regard.
If
the relevant tax authority were to assert that an adjustment should be made under the transfer pricing rules to an amount that is relevant to the computation of the income of the
Holding LP or our partnership, such assertion could result in adjustments to amounts of income (or loss) allocated to our unitholders by our partnership for tax purposes. In addition, we
might also be liable for transfer pricing penalties in respect of transfer pricing adjustments unless reasonable efforts were made to determine, and use, arm's length transfer prices. Generally,
reasonable efforts in this regard are only considered to be made if contemporaneous documentation has been prepared in respect of such transactions or arrangements that support the transfer pricing
methodology.
For
Canadian tax purposes, the general tax risks described above are equally relevant to preferred unitholders in respect of their preferred units.
The U.S. Internal Revenue Service ("IRS") or Canada Revenue Agency ("CRA") may not agree with certain assumptions and conventions that our partnership uses in order
to comply with applicable U.S. and Canadian federal income tax laws or that our partnership uses to report income, gain, loss, deduction, and credit to our unitholders.
Our partnership will apply certain assumptions and conventions in order to comply with applicable tax laws and to report income, gain,
deduction, loss, and credit to a unitholder in a manner that reflects such unitholder's beneficial ownership of partnership items, taking into account variation in ownership interests during each
taxable year because of trading activity. However, these assumptions and conventions may not be in compliance with all aspects of the applicable tax requirements. A successful IRS or CRA challenge to
such assumptions or conventions could adversely affect the amount of tax benefits available to our unitholders and could require that items of income, gain, deduction, loss, or credit, including
interest deductions, be adjusted, reallocated or disallowed in a manner that adversely affects our unitholders. See Item 10.E "TaxationCertain Material Canadian Federal Income Tax
Considerations" and "TaxationCertain Material U.S. Federal Income Tax Considerations".
United States
If our partnership or the Holding LP were to be treated as a corporation for U.S. federal income tax purposes, the value of our units might be adversely
affected.
The value of our units to unitholders will depend in part on the treatment of our partnership and the Holding LP as partnerships
for U.S. federal income tax purposes. However, in order for our partnership to be treated as a partnership for U.S. federal income tax purposes, under present law, 90% or more of our
partnership's gross income for every taxable year must consist of qualifying income, as defined in Section 7704 of the U.S. Internal Revenue Code of 1986, as amended
("U.S. Internal Revenue Code"), and our partnership must not be required to register, if it were a U.S. corporation, as an investment company under the Investment Company Act and related
rules. Although our General Partner intends to manage our partnership's affairs so that our partnership will not need to be registered as an investment company if it were a U.S. corporation and
so that it will meet the 90% test described above in each taxable year, our partnership may not meet these requirements, or current law may change so as to cause, in either event, our partnership to
be treated as a corporation for U.S. federal income tax purposes. If our partnership (or the Holding LP) were treated as a corporation for U.S. federal income tax purposes,
adverse U.S. federal income tax consequences could result for our unitholders and our partnership (or the Holding LP, as applicable), as described in greater detail in
Item 10.E "TaxationCertain Material U.S. Federal Income Tax ConsiderationsPartnership Status of Our Partnership and the Holding LP".
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We may be subject to U.S. backup withholding tax or other U.S. withholding taxes if any unitholder fails to comply with U.S. tax reporting rules or if
the IRS or other applicable state or local taxing authority does not accept our withholding methodology, and such excess withholding tax cost will be an expense borne by our partnership and,
therefore, by all of our unitholders on a pro rata basis.
We may become subject to U.S. "backup" withholding tax or other U.S. withholding taxes with respect to any unitholder who
fails to timely provide our partnership (or the applicable clearing agent or other intermediary) with an IRS Form W-9 or IRS Form W-8, as the case may be, or if the
withholding methodology we use is not accepted by the IRS or other applicable state or local taxing authority. See Item 10.E "TaxationCertain Material U.S. Federal Income
Tax ConsiderationsAdministrative MattersWithholding and Backup Withholding". To the extent that any unitholder fails to timely provide the applicable form (or such
form is not properly completed), or should the IRS or other applicable state or local taxing authority not accept our withholding methodology, our partnership might treat such U.S. backup
withholding taxes or other U.S. withholding taxes as an expense, which would be borne indirectly by all of our unitholders on a pro rata basis. As a result, our unitholders that fully
comply with their U.S. tax reporting obligations may bear a share of such burden created by other unitholders that do not comply with the U.S. tax reporting rules.
Tax-exempt organizations may face certain adverse U.S. tax consequences from owning our units.
Our General Partner intends to use commercially reasonable efforts to structure the activities of our partnership and the
Holding LP, to avoid generating income connected with the conduct of a trade or business (which income generally would constitute "unrelated business taxable income" ("UBTI") to the extent
allocated to a tax-exempt organization). However, neither our partnership nor the Holding LP is prohibited from incurring indebtedness, and no assurance can be provided that neither our
partnership nor the Holding LP will generate UBTI attributable to debt-financed property in the future. In particular, UBTI includes income attributable to debt-financed property, and neither
our partnership nor the Holding LP is prohibited from financing the acquisition of property with debt. The potential for income to be characterized as UBTI could make our units an unsuitable
investment for a tax-exempt organization. Each tax-exempt organization should consult its own tax adviser to determine the U.S. federal income tax consequences of an investment in
our units.
If our partnership were engaged in a U.S. trade or business, non-U.S. persons would face certain adverse U.S. tax consequences from owning
our units.
Our General Partner intends to use commercially reasonable efforts to structure the activities of our partnership and the
Holding LP to avoid generating income treated as effectively connected with a U.S. trade or business, including effectively connected income attributable to the sale of a
"United States real property interest", as defined in the U.S. Internal Revenue Code. If our partnership were deemed to be engaged in a U.S. trade or business, or to realize gain
from the sale or other disposition of a U.S. real property interest, Non-U.S. Holders (as defined in Item 10.E "TaxationCertain Material U.S. Federal
Income Tax Considerations") generally would be required to file U.S. federal income tax returns and could be subject to U.S. federal withholding tax at the highest marginal
U.S. federal income tax rates applicable to ordinary income. See Item 10.E "TaxationCertain Material U.S. Federal Income Tax ConsiderationsConsequences
to Non-U.S. Holders".
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To meet U.S. federal income tax and other objectives, our partnership and the Holding LP may invest through U.S. and non-U.S. Holding Entities that are
treated as corporations for U.S. federal income tax purposes, and such Holding Entities may be subject to corporate income tax.
To meet U.S. federal income tax and other objectives, our partnership and the Holding LP may invest through U.S. and
non-U.S. Holding Entities that are treated as corporations for U.S. federal income tax purposes, and such Holding Entities may be subject to corporate income tax. Consequently, items of
income, gain, loss, deduction, or credit realized in the first instance by the operating entities will not flow, for U.S. federal income tax purposes, directly to the Holding LP, our
partnership, or our unitholders, and any such income or gain may be subject to a corporate income tax, in the United States or other jurisdictions, at the level of the Holding Entity. Any such
additional taxes may adversely affect our partnership's ability to maximize its cash flow.
Our unitholders taxable in the United States may be viewed as holding an indirect interest in an entity classified as a "passive foreign investment company" or
"controlled foreign corporation" for U.S. federal income tax purposes.
U.S. Holders may face adverse U.S. tax consequences arising from the ownership of an indirect interest in a "passive
foreign investment company" ("PFIC") or "controlled foreign corporation" ("CFC"). These investments may produce taxable income prior to the receipt of cash relating to such income, and
U.S. Holders will be required to take such income into account in determining their gross income subject to tax. In addition, all or a portion of any gain realized upon the sale of a CFC may be
taxable at ordinary income rates. Further, with respect to gain realized upon the sale of and excess distributions from a PFIC for which an election for current inclusions is not made, such income
would be taxable at ordinary income rates and subject to an additional tax equivalent to an interest charge on the deferral of income inclusions from the PFIC. See Item 10.E
"TaxationCertain Material U.S. Federal Income Tax ConsiderationsConsequences to U.S. HoldersPassive Foreign Investment Companies" and
"TaxationCertain Material U.S. Federal Income Tax ConsiderationsConsequences to U.S. HoldersControlled Foreign Corporations". Each
U.S. Holder should consult its own tax adviser regarding the implications of the PFIC and CFC rules for an investment in our units.
Tax gain or loss from the disposition of our units could be more or less than expected.
If a sale of our units by a unitholder is taxable in the United States, the unitholder will recognize gain or loss for
U.S. federal income tax purposes equal to the difference between the amount realized and the unitholder's adjusted tax basis in such units. Prior distributions to a unitholder in excess of the
total net taxable income allocated to such unitholder will have decreased such unitholder's tax basis in our units. Therefore, such excess distributions will increase a unitholder's taxable gain or
decrease such unitholder's taxable loss when our units are sold, and may result in a taxable gain even if the sale price is less than the original cost. A portion of the amount realized, whether or
not representing gain, could be ordinary income to such unitholder.
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Our partnership structure involves complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available. The tax
characterization of our partnership structure is also subject to potential legislative, judicial, or administrative change and differing interpretations, possibly on a retroactive basis.
The U.S. federal income tax treatment of our unitholders depends in some instances on determinations of fact and interpretations
of complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available. Unitholders should be aware that the U.S. federal income tax rules,
particularly those applicable to partnerships, are constantly under review by the Congressional tax-writing committees and other persons involved in the legislative process, the IRS, the Treasury
Department and the courts, frequently resulting in changes which could adversely affect the value of our units or cause our partnership to change the way it conducts its activities. For example,
changes to the U.S. federal tax laws and interpretations thereof could make it more difficult or impossible for our partnership to be treated as a partnership that is not taxable as a
corporation for U.S. federal income tax purposes, change the character or treatment of portions of our partnership's income, reduce the net amount of distributions available to our unitholders,
or otherwise affect the tax considerations of owning our units. In addition, our partnership's organizational documents and agreements permit our General Partner to modify our Limited Partnership
Agreement, without the consent of our unitholders, to address such changes. These modifications could have a material adverse impact on our unitholders. See Item 10.E
"TaxationCertain Material U.S. Federal Income Tax ConsiderationsAdministrative MattersNew Legislation or Administrative or Judicial
Action".
Our partnership's delivery of required tax information for a taxable year may be subject to delay, which could require a unitholder who is a U.S. taxpayer to request
an extension of the due date for such unitholder's income tax return.
Our partnership has agreed to use commercially reasonable efforts to provide U.S. tax information (including IRS
Schedule K-1 information needed to determine a unitholder's allocable share of our partnership's income, gain, losses, and deductions) no later than 90 days after the close of each
calendar year. However, providing this U.S. tax information to our unitholders will be subject to delay in the event of, among other reasons, the late receipt of any necessary tax information
from lower-tier entities. It is therefore possible that, in any taxable year, a unitholder will need to apply for an extension of time to file such unitholder's tax returns. In addition, unitholders
that do not ordinarily have U.S. federal tax filing requirements will not receive a Schedule K-1 and related information unless such unitholders request it within 60 days
after the close of each calendar year. See Item 10.E "Certain Material U.S. Federal Income Tax ConsiderationsAdministrative MattersInformation Returns and Audit
Procedures".
The sale or exchange of 50% or more of our units will result in the constructive termination of our partnership for U.S. federal income tax purposes.
Our partnership will be considered to have been terminated for U.S. federal income tax purposes if there is a sale or exchange
of 50% or more of our units within a 12-month period. A constructive termination of our partnership would, among other things; result in the closing of its taxable year for U.S. federal income
tax purposes for all of our unitholders and could result in the possible acceleration of income to certain of our unitholders and certain other consequences that could adversely affect the value of
our units. However, our General Partner does not expect a constructive termination, should it occur, to have a material impact on the computation of the future taxable income generated by our
partnership for U.S. federal income tax purposes. See Item 10.E "TaxationCertain Material U.S. Federal Income Tax ConsiderationsAdministrative
MattersConstructive Termination".
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If the IRS makes an audit adjustment to our income tax returns for taxable years beginning after December 31, 2017, it may assess and collect any taxes (including
penalties and interest) resulting from such audit adjustment directly from us, in which case cash available for distribution to our unitholders might be substantially reduced.
Under the
Bipartisan Budget Act of 2015
, for taxable years beginning after
December 31, 2017, if the IRS makes an audit adjustment to our income tax returns, it may assess and collect any taxes (including penalties and interest) resulting from such audit adjustment
directly from our partnership instead of unitholders (as under prior law). We may be permitted to elect to have our General Partner and our unitholders take such audit adjustment into account
in accordance with their interests in us during the taxable year under audit. However, there can be no assurance that we will choose to make such election or that it will be available in all
circumstances. If we do not make the election, and we pay taxes, penalties, or interest as a result of an audit adjustment, then cash available for distribution to our unitholders might be
substantially reduced. As a result, our current unitholders might bear some or all of the cost of the tax liability resulting from such audit adjustment, even if our current unitholders did not own
our units during the taxable year under audit. The foregoing considerations also apply with respect to our partnership's interest in the Holding LP. These rules do not apply to our partnership
or the Holding LP for taxable years beginning on or before December 31, 2017.
Under the Foreign Account Tax Compliance ("FATCA") provisions of the Hiring Incentives to Restore Employment Act of 2010, certain payments made or received by our
partnership may be subject to a 30% federal withholding tax, unless certain requirements are met.
Under FATCA, a 30% withholding tax may apply to certain payments of U.S.-source income made to our partnership, the Holding LP,
the Holding Entities, or the operating entities, or by our partnership to a unitholder, unless certain requirements are met, as described in greater detail in Item 10.E
"TaxationCertain Material U.S. Federal Income Tax ConsiderationsAdministrative MattersForeign Account Tax Compliance". The 30% withholding tax may also
apply to certain payments made on or after January 1, 2019 that are attributable to U.S.-source income or that constitute gross proceeds from the disposition of property that could produce
U.S.-source dividends or interest. To ensure compliance with FATCA, information regarding certain unitholders' ownership of our units may be reported to the IRS or to a non-U.S. governmental
authority. Unitholders should consult their own tax advisers regarding the consequences under FATCA of an investment in our units.
Canada
For purposes of the following Canadian tax risks, references to our "units" are to the limited partnership units in our partnership,
including the preferred units, and references to our "unitholders" are to the holders of our units and preferred units.
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If the subsidiaries that are corporations ("Non-Resident Subsidiaries") and that are not resident or deemed to be resident in Canada for purposes of the Income
Tax Act (Canada) (together with the regulations thereunder, "Tax Act") and that are "controlled foreign affiliates" (as defined in the Tax Act and referred to herein as
"CFAs") in which the Holding LP directly invests earned income that is "foreign accrual property income" (as defined in the Tax Act and referred to herein as "FAPI"), our
unitholders may be required to include amounts allocated from our partnership in computing their income for Canadian federal income tax purposes even though there may be no corresponding cash
distribution.
Certain of the Non-Resident Subsidiaries in which the Holding LP directly invests are expected to be CFAs of the
Holding LP. If any CFA of the Holding LP or any direct or indirect subsidiary thereof that is itself a CFA of the Holding LP (an "Indirect CFA") earns income that is
characterized as FAPI in a particular taxation year of the CFA or Indirect CFA, the FAPI allocable to the Holding LP must be included in computing the income of the Holding LP for
Canadian federal income tax purposes for the fiscal period of the Holding LP in which the taxation year of that CFA or Indirect CFA ends, whether or not the Holding LP actually receives
a distribution of that FAPI. Our partnership will include its share of such FAPI of the Holding LP in computing its income for Canadian federal income tax purposes and our unitholders will be
required to include their proportionate share of such FAPI allocated from our partnership in computing their income for Canadian federal income tax purposes. As a result, our unitholders may be
required to include amounts in their income for Canadian federal income tax purposes even though they have not and may not receive an actual cash distribution of such amounts. The Tax Act
contains anti-avoidance rules to address certain foreign tax credit generator transactions (the "Foreign Tax Credit Generator Rules"). Under the Foreign Tax Credit Generator Rules, the "foreign
accrual tax" (as defined in the Tax Act) applicable to a particular amount of FAPI included in the Holding LP's income in respect of a particular "foreign affiliate"
(as defined in the Tax Act) of the Holding LP may be limited in certain specified circumstances. See Item 10.E "TaxationCertain Material Canadian Federal
Income Tax Considerations".
Unitholders may be required to include imputed amounts in their income for Canadian federal income tax purposes in accordance with section 94.1 of the Tax Act.
Section 94.1 of the Tax Act contains rules relating to interests in entities that are not resident or deemed to be
resident in Canada for purposes of the Tax Act or not situated in Canada, other than a CFA of the taxpayer (the "Non-Resident Entities"), that could in certain circumstances cause income
to be imputed to unitholders for Canadian federal income tax purposes, either directly or by way of allocation of such income imputed to our partnership or to the Holding LP. See
Item 10.E "TaxationCertain Material Canadian Federal Income Tax Considerations".
Unitholders' foreign tax credits for Canadian federal income tax purposes will be limited if the Foreign Tax Credit Generator Rules apply in respect of the foreign
"business-income tax" or "non-business-income tax" (each as defined in the Tax Act) paid by our partnership or the Holding LP to a foreign country.
Under the Foreign Tax Credit Generator Rules, the foreign "business-income tax" or "non-business-income tax" for Canadian federal
income tax purposes for any taxation year may be limited in certain circumstances. If the Foreign Tax Credit Generator Rules apply, the allocation to a unitholder of foreign "business-income tax" or
"non-business-income tax" paid by our partnership or the Holding LP, and therefore, such unitholder's foreign tax credits for Canadian federal income tax purposes, will be limited. See
Item 10.E "TaxationCertain Material Canadian Federal Income Tax Considerations".
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Unitholders who are not and are not deemed to be resident in Canada for purposes of the Tax Act and who do not use or hold, and are not deemed to use or hold, their
units of our partnership in connection with a business carried on in Canada ("non-Canadian limited partners"), may be subject to Canadian federal income tax with respect to any Canadian source
business income earned by our partnership or the Holding LP if our partnership or the Holding LP were considered to carry on business in Canada.
If our partnership or the Holding LP were considered to carry on business in Canada for purposes of the Tax Act,
non-Canadian limited partners would be subject to Canadian federal income tax on their proportionate share of any Canadian source business income earned or considered to be earned by our partnership,
subject to the potential application of the safe harbour rule in section 115.2 of the Tax Act and any relief that may be provided by any relevant income tax treaty or convention.
Our
General Partner intends to manage the affairs of our partnership and the Holding LP, to the extent possible, so that they do not carry on business in Canada and are not
considered or deemed to carry on business in Canada for purposes of the Tax Act. Nevertheless, because the determination of whether our partnership or the Holding LP is carrying on
business and, if so, whether that business is carried on in Canada, is a question of fact that is dependent upon the surrounding circumstances, the CRA might contend successfully that either or both
of our partnership and the Holding LP carries on business in Canada for purposes of the Tax Act.
If
our partnership or the Holding LP is considered to carry on business in Canada or is deemed to carry on business in Canada for the purposes of the Tax Act, non-Canadian
limited partners that are corporations would be required to file a Canadian federal income tax return for each taxation year in which they are a non-Canadian limited partner regardless of
whether relief from Canadian taxation is available under an applicable income tax treaty or convention. Non-Canadian limited partners who are individuals would only be required to file a
Canadian federal income tax return for any taxation year in which they are allocated income from our partnership from carrying on business in Canada that is not exempt from Canadian taxation under the
terms of an applicable income tax treaty or convention.
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Non-Canadian limited partners may be subject to Canadian federal income tax on capital gains realized by our partnership or the Holding LP on dispositions of "taxable
Canadian property" (as defined in the Tax Act).
A non-Canadian limited partner will be subject to Canadian federal income tax on its proportionate share of capital gains realized by
our partnership or the Holding LP on the disposition of "taxable Canadian property" other than "treaty-protected property" (as defined in the Tax Act). "Taxable Canadian property"
includes, but is not limited to, property that is used or held in a business carried on in Canada and shares of corporations that are not listed on a "designated stock exchange" (as defined in
the Tax Act) if more than 50% of the fair market value of the shares is derived from certain Canadian properties during the 60-month period immediately preceding the particular time. Property
of our partnership and the Holding LP generally will be "treaty-protected property" to a non-Canadian limited partner if the gain from the disposition of the property would, because of an
applicable income tax treaty or convention, be exempt from tax under the Tax Act. Our General Partner does not expect our partnership or the Holding LP to realize capital gains or losses
from dispositions of "taxable Canadian property". However, no assurance can be given in this regard. Non-Canadian limited partners will be required to file a Canadian federal income tax return
in respect of a disposition of "taxable Canadian property" by our partnership or the Holding LP unless the disposition is an "excluded disposition" for the purposes of section 150 of the
Tax Act. However, non-Canadian limited partners that are corporations will still be required to file a Canadian federal income tax return in respect of a disposition of "taxable Canadian
property" that is an "excluded disposition" for the purposes of section 150 of the Tax Act if tax would otherwise be payable under Part I of the Tax Act by the non-Canadian
limited partners in respect of the disposition but is not because of an applicable income tax treaty or convention (otherwise than in respect of a disposition of "taxable Canadian property" that is
"treaty-protected property" of the corporation). In general, an "excluded disposition" is a disposition of property by a taxpayer in a taxation year where (a) the taxpayer is a non-resident of
Canada at the time of the disposition; (b) no tax is payable by the taxpayer under Part I of the Tax Act for the taxation year; (c) the taxpayer is not liable to pay any
amounts under the Tax Act in respect of any previous taxation year (other than certain amounts for which the CRA holds adequate security); and (d) each "taxable Canadian property"
disposed of by the taxpayer in the taxation year is either (i) "excluded property" (as defined in subsection 116(6) of the Tax Act) or (ii) property in respect of
the disposition of which a certificate under subsection 116(2), (4) or (5.2) of the Tax Act has been issued by the CRA. Non-Canadian limited partners should consult their
own tax advisors with respect to the requirements to file a Canadian federal income tax return in respect of a disposition of "taxable Canadian property" by our partnership or the
Holding LP.
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Non-Canadian limited partners may be subject to Canadian federal income tax on capital gains realized on the disposition of our units if our units are "taxable Canadian
property".
Any capital gain arising from the disposition or deemed disposition of our units by a non-Canadian limited partner will be subject to
taxation in Canada, if, at the time of the disposition or deemed disposition, our units are "taxable Canadian property" of the non-Canadian limited partner, unless our units are "treaty-protected
property" to such non-Canadian limited partner. In general, our units will not constitute "taxable Canadian property" of any non-Canadian limited partner at the time of disposition or deemed
disposition, unless (a) at any time in the 60-month period immediately preceding the disposition or deemed disposition, more than 50% of the fair market value of our units was derived, directly
or indirectly (excluding through a corporation, partnership or trust, the shares or interests in which were not themselves "taxable Canadian property"), from one or any combination of (i) real
or immovable property situated in Canada; (ii) "Canadian resource properties" (as defined in the Tax Act); (iii) "timber resource properties" (as defined in the
Tax Act); and (iv) options in respect of, or interests in, or for civil law rights in, such property, whether or not such property exists, or (b) our units are otherwise deemed to
be "taxable Canadian property". Since our partnership's assets will consist principally of units of the Holding LP, our units would generally be "taxable Canadian property" at a particular time
if the units of the Holding LP held by our partnership derived, directly or indirectly (excluding through a corporation, partnership or trust, the shares or interests in which were not
themselves "taxable Canadian property") more than 50% of their fair market value from properties described in (i) to (iv) above, at any time in the 60-month period preceding the
particular time. Our General Partner does not expect our units to be "taxable Canadian property" of any non-Canadian limited partner at any time but no assurance can be given in this regard. See
Item 10.E "TaxationCertain Material Canadian Federal Income Tax Considerations". Even if our units constitute "taxable Canadian property", our units will be "treaty-protected
property" if the gain on the disposition of our units is exempt from tax under the Tax Act under the terms of an applicable income tax treaty or convention. If our units constitute "taxable
Canadian property", non-Canadian limited partners will be required to file a Canadian federal income tax return in respect of a disposition of our units unless the disposition is an "excluded
disposition" (as discussed above). If our units constitute "taxable Canadian property", non-Canadian limited partners should consult their own tax advisors with respect to the requirement to
file a Canadian federal income tax return in respect of a disposition of our units.
Non-Canadian limited partners may be subject to Canadian federal income tax reporting and withholding tax requirements on the disposition of "taxable Canadian property".
Non-Canadian limited partners who dispose of "taxable Canadian property", other than "excluded property" and certain other property
described in subsection 116(5.2) of the Tax Act, (or who are considered to have disposed of such property on the disposition of such property by our partnership or the
Holding LP), are obligated to comply with the procedures set out in section 116 of the Tax Act and obtain a certificate pursuant to the Tax Act. In order to obtain such
certificate, the non-Canadian limited partner is required to report certain particulars relating to the transaction to CRA not later than 10 days after the disposition occurs. Our General
Partner does not expect our units to be "taxable Canadian property" of any non-Canadian limited partner and does not expect our partnership or the Holding LP to dispose of property that is
"taxable Canadian property" but no assurance can be given in these regards.
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Payments of dividends or interest (other than interest not subject to Canadian federal withholding tax) by residents of Canada to the Holding LP will be subject to
Canadian federal withholding tax and we may be unable to apply a reduced rate taking into account the residency or entitlement to relief under an applicable income tax treaty or convention of our
unitholders.
Our partnership and the Holding LP will be deemed to be a non-resident person in respect of certain amounts paid or credited or
deemed to be paid or credited to them by a person resident or deemed to be resident in Canada, including dividends or interest. Dividends or interest (other than interest not subject to Canadian
federal withholding tax) paid or deemed to be paid by a person resident or deemed to be resident in Canada to the Holding LP will be subject to withholding tax under Part XIII of the
Tax Act at the rate of 25%. However, the CRA's administrative practice in similar circumstances is to permit the rate of Canadian federal withholding tax applicable to such payments to be
computed by looking through the partnership and taking into account the residency of the partners (including partners who are resident in Canada) and any reduced rates of Canadian federal withholding
tax that any non-Canadian limited partners may be entitled to under an applicable income tax treaty or convention, provided that the residency status and entitlement to treaty benefits can be
established. In determining the rate of Canadian federal withholding tax applicable to amounts paid by the Holding Entities to the Holding LP, our General Partner expects the Holding Entities
to look-through the Holding LP and our partnership to the residency of the partners of our partnership (including partners who are resident in Canada) and to take into account any reduced rates
of Canadian federal withholding tax that non-Canadian limited partners may be entitled to under an applicable income tax treaty or convention in order to determine the appropriate amount of Canadian
federal withholding tax to withhold from dividends or interest paid to the Holding LP. However, there can be no assurance that the CRA will apply its administrative practice in this context. If
the CRA's administrative practice is not applied and the Holding Entities withhold Canadian federal withholding tax from applicable payments on a look-through basis, the Holding Entities may be liable
for additional amounts of Canadian federal withholding tax plus any associated interest and penalties. Under the
Canada-United States Tax Convention
(1980)
(the "Treaty"), a Canadian-resident payer is required in certain circumstances to look-through fiscally transparent partnerships, such as our partnership, and the
Holding LP to the residency and Treaty entitlements of their partners and take into account the reduced rates of Canadian federal withholding tax that such partners may be entitled to under
the Treaty.
While
our General Partner expects the Holding Entities to look-through our partnership and the Holding LP in determining the rate of Canadian federal withholding tax applicable to
amounts paid or deemed to be paid by the Holding Entities to the Holding LP, we may be unable to accurately or timely determine the residency of our unitholders for purposes of establishing the
extent to which Canadian federal withholding taxes apply or whether reduced rates of withholding tax apply to some or all of our unitholders. In such a case, the Holding Entities will withhold
Canadian federal withholding tax from all payments made to the Holding LP that are subject to Canadian federal withholding tax at the rate of 25%. Canadian-resident unitholders will be entitled
to claim a credit for such taxes against their Canadian federal income tax liability but non-Canadian limited partners will need to take certain steps to receive a refund or credit in respect of any
such Canadian federal withholding taxes withheld equal to the difference between the withholding tax at a rate of 25% and the withholding tax at the reduced rate they are entitled to under an
applicable income tax treaty or convention. See Item 10.E "TaxationCertain Material Canadian Federal Income Tax Considerations" for further detail. Unitholders should consult their
own tax advisors concerning all aspects of Canadian federal withholding taxes.
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Our units may or may not continue to be "qualified investments" under the Tax Act for registered plans.
Provided that our units are listed on a "designated stock exchange" (which includes the NYSE and the TSX), our units will be "qualified
investments" under the Tax Act for a trust governed by a registered retirement savings plan ("RRSP"), deferred profit sharing plan, registered retirement income fund ("RRIF"), registered
education savings plan, registered disability savings plan, and a tax-free savings account ("TFSA"). However, there can be no assurance that our units will continue to be listed on a "designated stock
exchange". There can also be no assurance that tax laws relating to "qualified investments" will not be changed. Taxes may be imposed in respect of the acquisition or holding of non-qualified
investments by such registered plans and certain other taxpayers and with respect to the acquisition or holding of "prohibited investments" (as defined in the Tax Act) by an RRSP, RRIF
or TFSA.
Notwithstanding
the foregoing, an annuitant under an RRSP or RRIF or a holder of a TFSA, as the case may be, will be subject to a penalty tax if our units held in an RRSP, RRIF or TFSA
are "prohibited investments" for the RRSP, RRIF or TFSA, as the case may be. Generally, our units will not be a "prohibited investment" for a trust governed by an RRSP, RRIF or TFSA, provided that the
annuitant under the RRSP or RRIF or the holder of the TFSA, as the case may be, deals at arm's length with our partnership for purposes of the Tax Act and does not have a "significant interest"
(as defined in the Tax Act for purposes of the prohibited investment rules) in our partnership. Unitholders who will hold our units in an RRSP, RRIF or TFSA should consult with their own
tax advisors regarding the application of the foregoing prohibited investment rules having regard to their particular circumstances.
The Canadian federal income tax consequences to our unitholders could be materially different in certain respects from those described in this Form 20-F if our
partnership or the Holding LP is a "SIFT partnership" (as defined in the Tax Act).
Under the rules in the Tax Act applicable to a "SIFT partnership" (the "SIFT Rules"), certain income and gains earned by
a "SIFT partnership" will be subject to income tax at the partnership level at a rate similar to a corporation, and allocations of such income and gains to its partners will be taxed as a dividend
from a "taxable Canadian corporation" (as defined in the Tax Act). In particular, a "SIFT partnership" will be required to pay a tax on the total of its income from businesses carried on
in Canada, income from "non-portfolio properties" (as defined in the Tax Act) other than taxable dividends, and taxable capital gains from dispositions of "non-portfolio properties".
"Non-portfolio properties" include, among other things, equity interests or debt of corporations, trusts or partnerships that are resident in Canada, and of non-resident persons or partnerships the
principal source of income of which is one or any combination of sources in Canada (other than a "portfolio investment entity", as defined in the Tax Act), that are held by the "SIFT
partnership" and have a fair market value that is greater than 10% of the equity value of such entity, or that have, together with debt or equity that the "SIFT partnership" holds of entities
affiliated (within the meaning of the Tax Act) with such entity, an aggregate fair market value that is greater than 50% of the equity value of the "SIFT partnership". The tax rate that is
applied to the above mentioned sources of income and gains is set at a rate equal to the "net corporate income tax rate", plus the "provincial SIFT tax rate" (each as defined in the Tax Act).
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A
partnership will be a "SIFT partnership" throughout a taxation year if at any time in the taxation year (i) it is a "Canadian resident partnership" (as defined in the
Tax Act), (ii) "investments" (as defined in the Tax Act) in the partnership are listed or traded on a stock exchange or other public market, and (iii) it holds one
or more "non-portfolio properties". For these purposes, a partnership will be a "Canadian resident partnership" at a particular time if (a) it is a "Canadian partnership" (as defined in
the Tax Act) at that time, (b) it would, if it were a corporation, be resident in Canada (including, for greater certainty, a partnership that has its central management and control
located in Canada), or (c) it was formed under the laws of a province. A "Canadian partnership" for these purposes is a partnership all of whose members are resident in Canada or are
partnerships that are "Canadian partnerships".
Under
the SIFT Rules, our partnership and the Holding LP could each be a "SIFT partnership" if it is a "Canadian resident partnership". However, the Holding LP would not be
a "SIFT partnership" if our partnership is a "SIFT partnership" regardless of whether the Holding LP is a "Canadian resident partnership" on the basis that the Holding LP would be an
"excluded subsidiary entity" (as defined in the Tax Act). Our partnership and the Holding LP will be a "Canadian resident partnership" if the central management and control of
these partnerships is located in Canada. This determination is a question of fact and is expected to depend on where our General Partner is located and exercises central management and control of the
respective partnerships. Our General Partner will take appropriate steps so that the central management and control of these entities is not located in Canada such that the SIFT Rules should not apply
to our partnership or the Holding LP at any relevant time. However, no assurance can be given in this regard. If our partnership or the Holding LP is a "SIFT partnership", the Canadian
federal income tax consequences to our unitholders could be materially different in certain respects from those described in Item 10.E. "TaxationCertain Material Canadian Federal
Income Tax Considerations". In addition, there can be no assurance that the SIFT Rules will not be revised or amended in the future such that the SIFT Rules will apply.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ("MD&A")
Performance Targets and Key Measures
We target a total return of 12% to 15% per annum on the infrastructure assets that we own, measured over the long-term. We intend to
generate this return from the in-place cash flow from our operations plus growth through investments in upgrades and expansions of our asset base, as well as acquisitions. If we are successful in
growing our funds from operations per unit, we will be able to increase distributions to unitholders. Furthermore, the increase in our FFO per unit should result in capital appreciation
(see "Reconciliation of Non-IFRS Financial Measures" on page 101 for more detail). We also measure the growth of FFO per unit, which we believe is a proxy for our ability to increase
distributions to unitholders. In addition, we have performance measures that track the key value drivers for each of our operating segments. See "Segmented Disclosures" on page 86 for
more detail.
Performance Measures Used by Management
To measure performance, we focus on net income, an IFRS measure, as well as certain non-IFRS measures, including funds from operations
("FFO"), adjusted funds from operations ("AFFO"), adjusted EBITDA ("Adjusted EBITDA") and adjusted earnings ("Adjusted Earnings"), along with other measures.
FFO
We define FFO as net income excluding the impact of depreciation and amortization, deferred income taxes, breakage and transaction
costs, and non-cash valuation gains or losses. FFO is a measure of operating performance that is not calculated in accordance with, and does not have any standardized meaning prescribed by,
International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB"). FFO is therefore unlikely to be comparable to similar measures presented by
other issuers. FFO has limitations as an analytical tool. Specifically, our definition of FFO may differ from the definition used by other organizations, as well as the definition of funds from
operations used by the Real Property Association of Canada ("REALPAC") and the National Association of Real Estate Investment Trusts, Inc. ("NAREIT"), in part because the NAREIT definition is
based on U.S. GAAP, as opposed to IFRS.
AFFO
We define AFFO as FFO less capital expenditures required to maintain the current performance of our operations (maintenance capital
expenditures). AFFO is a measure of operating performance that is not calculated in accordance with, and does not have any standardized meaning prescribed by, IFRS. AFFO is therefore unlikely to be
comparable to similar measures presented by other issuers and has limitations as an analytical tool.
Adjusted EBITDA
In addition to FFO and AFFO, we focus on Adjusted EBITDA, which we define as net income excluding the impact of depreciation and
amortization, interest expense, current and deferred income taxes, breakage and transaction costs, and non-cash valuation gains or losses. Adjusted EBITDA is a measure of operating performance that is
not calculated in accordance with, and does not have any standardized meaning prescribed by, IFRS. Adjusted EBITDA is therefore unlikely to be comparable to similar measures presented by other
issuers. Adjusted EBITDA has limitations as an analytical tool.
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Adjusted Earnings
We also focus on Adjusted Earnings, which we define as net income attributable to the partnership, excluding the impact of depreciation
and amortization expense from revaluing property, plant and equipment and the effects of purchase price accounting, mark-to-market on hedging items and disposition gains or losses. Adjusted Earnings
is a measure of operating performance that is not calculated in accordance with, and does not have any standardized meaning prescribed by, IFRS. Adjusted Earnings is therefore unlikely to be
comparable to similar measures presented by other issuers. Adjusted Earnings has limitations as an analytical tool.
We
believe our presentation of FFO, AFFO, Adjusted EBITDA and Adjusted Earnings are useful to investors because it supplements investors' understanding of our operating performance by
providing information regarding our ongoing performance that excludes items we believe do not directly affect our core operations. Our presentation of FFO, AFFO, Adjusted EBITDA and Adjusted Earnings
also provide investors enhanced comparability of our ongoing performance across periods.
In
deriving FFO, AFFO and Adjusted EBITDA, we add back depreciation and amortization to net income. Specifically, in our financial statements we use the revaluation approach in
accordance with IAS 16, Property, Plant and Equipment, whereby depreciation expense is determined based on a revalued amount, thereby reducing comparability with our peers who do not report
under IFRS as issued by the IASB or who do not employ the revaluation approach to measuring property, plant and equipment. We add back deferred income taxes on the basis that we do not believe this
item reflects the present value of the actual tax obligations that we expect to incur over our long-term investment horizon. We add back non-cash valuation gains or losses recorded in net income as
well as breakage and transaction costs as these items are not reflective of our on-going sustainable performance.
To
provide a supplemental understanding of the performance of our business and to enhance comparability across periods and relative to our peers we utilize Adjusted EBITDA. Adjusted
EBITDA excludes the impact of interest expense and current income taxes to assist in assessing the operating performance of our business by eliminating for the effect of its current capital structure
and tax profile.
While
FFO provides a basis for assessing current operating performance, it does not take into consideration the cost to sustain the operating performance of our partnership's asset base.
In order to assess the long-term, sustainable operating performance of our businesses, we observe that investors take into account the impact of maintenance capital expenditures to derive AFFO, in
addition to FFO.
In
deriving Adjusted Earnings we add back depreciation due to the revaluation of property, plant and equipment and acquisition accounting. As we own capital assets with finite lives,
depreciation and amortization expense recognizes the fact that we must maintain or replace our asset base in order to preserve our revenue generating capability. We observe that certain of our
investors view depreciation based on historical cost as a more relevant proxy of the expenditures necessary to maintain the service capacity of our assets. Adjusted Earnings also does not include
mark-to-market on hedging items recorded in net income or disposition gains or losses. We add back mark-to-market on hedging items recorded in net income as these indicate a point in time
approximation of value on long-term positions. We also add back disposition gains or losses as these items are not reflective of the ongoing performance of our underlying operations.
For
further details regarding our use of FFO, AFFO, Adjusted EBITDA and Adjusted Earnings, as well as a reconciliation of net income to these measures, see the "Reconciliation of
Non-IFRS Financial Measures" section of this MD&A.
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Distribution Policy
Our objective is to pay a distribution per unit that is sustainable on a long-term basis while retaining sufficient liquidity within
our operations to fund recurring growth capital expenditures, debt repayments and general corporate requirements. We currently believe that a payout of 60% to 70% of our FFO is appropriate over
the long-term.
In
light of the current prospects for our business, the Board of Directors of our General Partner approved an 11% increase in our annual distribution to $1.74 per unit, or
43.5 cents per unit quarterly, starting with the distribution to be paid in March 2017. This increase reflects the forecasted contribution from our recently commissioned capital
projects, as well as the expected cash yield on acquisitions that we closed in the past year. Since the spin-off, we have increased our quarterly distribution from $0.18 per unit to $0.435 per unit, a
compound annual growth rate of 12%. We target 5% to 9% annual distribution growth in light of the per unit FFO growth we foresee in our operations.
Basis of Presentation
Our consolidated financial statements are prepared in accordance with International Financial Reporting Standards ("IFRS"), as issued
by the International Accounting Standards Board ("IASB"). Our consolidated financial statements include the accounts of Brookfield Infrastructure and the entities over which it has control. Brookfield
Infrastructure accounts for investments over which it exercises significant influence or joint control, but does not control, using the equity method.
Our
partnership's equity interests include units held by public unitholders and the Redeemable Partnership Units held by Brookfield. Our units and the Redeemable Partnership Units have
the same economic attributes in all respects, except that the Redeemable Partnership Units provide Brookfield the right to request that its units be redeemed for cash consideration. In the event that
Brookfield exercises this right, our partnership has the right, at its sole discretion, to satisfy the redemption request with our units, rather than cash, on a one-for-one basis. As a result,
Brookfield, as holder of Redeemable Partnership Units, participates in earnings and distributions on a per unit basis equivalent to the per unit participation of the limited partnership units of our
partnership. However, given the redeemable feature referenced above, we present the Redeemable Partnership Units as a component of non-controlling interests.
When
we discuss the results of our operating segments, we present Brookfield Infrastructure's proportionate share of results for operations accounted for using consolidation and the
equity method, in order to demonstrate the impact of key value drivers of each of these operating segments on our partnership's overall performance. As a result, segment revenues, costs attributable
to revenues, other income, interest expense, depreciation and amortization, deferred taxes, fair value adjustments and other items will differ from results presented in accordance with IFRS as they
(1) include Brookfield Infrastructure's proportionate share of earnings (losses) from investments in associates attributable to each of the above noted items, and (2) exclude the share
of earnings (losses) of consolidated investments not held by Brookfield Infrastructure apportioned to each of the above noted items. However, net income for each segment is consistent with results
presented in accordance with IFRS. See "Reconciliation of Operating Segments" on page 105 for a reconciliation of segment results to our partnership's statement of operating results in
accordance with IFRS.
On
September 14, 2016, we completed a three-for-two split of our units by way of a subdivision of units (the "Unit Split"), whereby unitholders received an additional
one-half of a unit for each unit held, resulting in the issuance of approximately 115 million additional units. All historical per unit disclosures have been adjusted to effect for the change
in units due to the Unit Split.
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Critical Accounting Policies and Estimates
The preparation of financial statements requires management to make critical judgments, estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses that are not
readily apparent from other sources, during the reporting period. These estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant.
Actual results may differ from these estimates.
The
estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision
affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.
Critical
judgments made by management and utilized in the normal course of preparing Brookfield Infrastructure's consolidated financial statements are outlined below.
Financial instruments
Critical judgments associated with the partnership's financial instruments pertain to the assessment of the effectiveness of hedging
relationships. Brookfield Infrastructure performs hedge effectiveness testing on an ongoing basis with a forward-looking evaluation of whether or not the changes in the fair value or cash flows of the
hedging item are expected to be highly effective in offsetting the changes in the fair value or cash flows of the hedged item over the term of the relationship, conversely our partnership performs a
retrospective hedge effectiveness test evaluating whether the changes in fair value or cash flows from the hedging item has been highly effective in offsetting changes in the fair value or cash flows
of the hedged item since the date of designation. Estimates and assumptions used in determining the fair value of financial instruments are equity and commodity prices; future interest rates; the
credit worthiness of the company relative to its counterparties; the credit risk of the company's counterparties relative to the company; estimated future cash flows; and discount rates.
Revaluation of property, plant and equipment
Property, plant and equipment is revalued on a regular basis. The critical estimates and assumptions underlying the valuation of
property, plant and equipment are set out in Note 12, "Property, Plant and Equipment" in our financial statements included in this annual report on Form 20-F. Our partnership's
property, plant, and equipment is measured at fair value on a recurring basis with an effective date of revaluation for all asset classes of December 31, 2016 and 2015. Brookfield
Infrastructure determined fair value under the income method with due consideration to significant inputs such as the discount rate, terminal value multiple and overall investment horizon.
Impairment of goodwill, intangibles with indefinite lives and investment in associates and joint ventures
Our partnership assesses the impairment of goodwill and intangible assets with indefinite lives by reviewing the value-in-use or fair
value less costs of disposal of the cash-generating units to which goodwill or the intangible asset has been allocated. Brookfield Infrastructure uses the following critical assumptions and estimates:
the circumstances that gave rise to the goodwill, timing and amount of future cash flows expected from the cash-generating unit; discount rates; terminal capitalization rates; terminal valuation
dates; useful lives and residual values.
The
impairment assessment of investments in associates and joint ventures requires estimation of the recoverable amount of the asset.
Brookfield Infrastructure 79
Table of Contents
Other
estimates utilized in the preparation of our partnership's financial statements are: depreciation and amortization rates and useful lives; recoverable amount of goodwill and
intangible assets; ability to utilize tax losses and other tax measurements.
Recently adopted accounting standard amendments
Brookfield Infrastructure applied, for the first time, certain amendments to Standards applicable to Brookfield Infrastructure that
became effective January 1, 2016. The impact of adopting these amendments on our partnership's accounting policies and disclosures are as follows:
IAS 16 Property, Plant, and Equipment ("IAS 16") and IAS 38 Intangible Assets ("IAS 38")
IAS 16, Property, Plant, and Equipment ("IAS 16") and IAS 38, Intangible Assets ("IAS 38") were both
amended by the IASB as a result of clarifying the appropriate amortization method for intangible assets of service concession arrangements under IFRIC 12, Service Concession Arrangements
("SCAs"). The IASB determined that the issue does not only relate to SCAs but all tangible and intangible assets that have finite useful lives. Amendments to IAS 16 prohibit entities from using
a revenue-based depreciation method for items of property, plant, and equipment. Similarly, the amendment to IAS 38 introduces a rebuttable presumption that revenue is not an appropriate basis
for amortization of an intangible asset, with only limited circumstances where the presumption can be rebutted. Guidance is also introduced to explain that expected future reductions in selling prices
could be indicative of a reduction of the future economic benefits embodied in an asset. Amendments to IAS 16 and IAS 38 were applied prospectively resulting in no material impact on
Brookfield Infrastructure's consolidated financial statements.
(s) Future Changes in Accounting Policies
Standards issued, but not yet adopted
IFRS 15 Revenue from Contracts with Customers("IFRS 15")
IFRS 15,
Revenue from Contracts with Customers
("IFRS 15") specifies how
and when revenue should be recognized as well as requiring more informative and relevant disclosures. The Standard also requires additional disclosures about the nature, amount, timing and uncertainty
of revenue and cash flows arising from customer contracts. The Standard supersedes IAS 18,
Revenue
, IAS 11,
Construction Contracts
and a number
of revenue-related interpretations. IFRS 15 applies to nearly all contracts with customers: the main
exceptions are leases, financial instruments and insurance contracts. IFRS 15 must be applied for periods beginning on or after January 1, 2018 with early application permitted. An
entity may adopt the Standard on a fully retrospective basis or on a modified retrospective basis. Brookfield Infrastructure is currently evaluating the impact of IFRS 15 on its consolidated
financial statements, including the method of initial adoption.
80 Brookfield Infrastructure
Table of Contents
IFRS 9 Financial Instruments("IFRS 9")
In July 2014, the IASB issued the final publication of the IFRS 9 standard, superseding the current IAS 39,
Financial Instruments: Recognition and
Measurement
standard. This standard establishes principles for the financial reporting of financial assets and
financial liabilities that will present relevant and useful information to users of financial statements for their assessment of the amounts, timing and uncertainty of an entity's future cash flows.
This new standard also includes a new general hedge accounting standard which will align hedge accounting more closely with an entity's risk management activities. It does not fully change the types
of hedging relationships or the requirement to measure and recognize ineffectiveness, however, it will provide more hedging strategies that are used for risk management to qualify for hedge accounting
and introduce more judgment to assess the effectiveness of a hedging relationship. The standard has a mandatory effective date for annual periods beginning on or after January 1, 2018, with
early adoption permitted. Brookfield Infrastructure is currently evaluating the impact of IFRS 9 on its consolidated financial statements.
IFRS 16 Leases("IFRS 16")
The International Accounting Standards Board has published a new standard, IFRS 16. The new standard brings most leases
on-balance sheet for lessees under a single model, eliminating the distinction between operating and finance leases. Lessor accounting however remains largely unchanged and the distinction between
operating and finance leases is retained. IFRS 16 supersedes IAS 17,
Leases
and related interpretations and is effective for periods
beginning on or after January 1, 2019, with earlier adoption permitted if IFRS 15 has also been applied. Brookfield Infrastructure is currently evaluating the impact of IFRS 16 on
its consolidated financial statements.
Amendments and Interpretations, not yet adopted
IAS 7 Statement of Cash Flows("IAS 7")
In January 2016, the IASB issued amendments to IAS 7, effective for annual periods beginning January 1, 2017. The
IASB requires that the following changes in liabilities arising from financing activities are disclosed (to the extent necessary): (i) changes from financing cash flows;
(ii) changes arising from obtaining or losing control of subsidiaries or other businesses; (iii) the effect of changes in foreign exchange rates; (iv) changes in fair values; and
(v) other changes. Brookfield Infrastructure is currently evaluating the impact of the IAS 7 amendments on its consolidated financial statements.
IFRIC 22 Foreign Currency Transactions("IFRIC 22")
In December 2016, the IASB issued IFRIC 22, effective for annual periods beginning January 1, 2018. The
interpretation clarifies that the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it)
is the date on which an entity initially recognizes the non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration. The interpretation may be applied
either retrospectively or prospectively. Brookfield Infrastructure is currently evaluating the impact of the IFRIC 22 interpretation on its consolidated financial statements, including the
method of initial adoption.
5.A OPERATING RESULTS
Consolidated Results
In this section we review our consolidated performance and financial position as of December 31, 2016 and 2015 and for the years
ended December 31, 2016, 2015 and 2014. Further details on the key drivers of our operations and financial position are contained within the review of operating segments.
Brookfield Infrastructure 81
Table of Contents
The
following table summarizes the financial results of Brookfield Infrastructure for the years ended December 31, 2016, 2015 and 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31
|
|
US$ MILLIONS, EXCEPT PER UNIT INFORMATION
|
|
2016
|
|
2015
|
|
2014
|
|
Summary Statements of Operating Results
|
|
Revenues
|
|
$
|
2,115
|
|
$
|
1,855
|
|
$
|
1,924
|
|
Direct operating costs
|
|
|
(1,063
|
)
|
|
(798
|
)
|
|
(846
|
)
|
General and administrative expenses
|
|
|
(166
|
)
|
|
(134
|
)
|
|
(115
|
)
|
Depreciation and amortization expense
|
|
|
(447
|
)
|
|
(375
|
)
|
|
(380
|
)
|
Interest expense
|
|
|
(392
|
)
|
|
(367
|
)
|
|
(362
|
)
|
Share of earnings from investments in associates and joint ventures
|
|
|
248
|
|
|
69
|
|
|
50
|
|
Mark-to-market on hedging items
|
|
|
74
|
|
|
83
|
|
|
38
|
|
Other income (expense)
|
|
|
174
|
|
|
54
|
|
|
(1
|
)
|
Income tax (expense) recovery
|
|
|
(15
|
)
|
|
4
|
|
|
(79
|
)
|
Net income
|
|
|
528
|
|
|
391
|
|
|
229
|
|
Net income attributable to our partnership
(1)
|
|
|
474
|
|
|
298
|
|
|
184
|
|
Net income per limited partnership unit
|
|
$
|
1.13
|
|
$
|
0.69
|
|
$
|
0.45
|
|
-
(1)
-
Includes net income attributable to non-controlling interestsRedeemable Partnership Units held by Brookfield, general partner and limited
partners.
2016 vs. 2015
For the year ended December 31, 2016, we reported net income of $528 million, of which $474 million is
attributable to our partnership. This is compared to net income of $391 million in the year ended December 31, 2015, of which $298 million was attributable to our partnership.
Revenues
for the year ended December 31, 2016 were $2,115 million, which increased by $260 million compared to the year ended December 31, 2015. Our utilities
segment contributed additional revenue of $72 million due to inflation indexation and various growth initiatives primarily at our U.K. regulated distribution operation. Our transport
operations contributed an additional $276 million of revenue, primarily due to inflationary tariff increases, higher volumes at our Chilean toll roads and the initial contribution from recently
completed acquisitions of toll roads in India and Peru as well as an Australian ports business. Revenue from organic growth initiatives within our district energy business and the expansion of our
North American gas storage business contributed to incremental revenue of $92 million in our energy segment. These items were partially offset by the impact of foreign exchange of
$96 million, a $25 million impact of a regulatory rate reset at our Australian regulated terminal operation, a $16 million impact of tariff relief extended to one of our clients
at our Australian rail operation and a $43 million decrease due to the sale of our New England electricity transmission, European energy distribution and Ontario electricity transmission
businesses in August 2015, May 2016 and October 2016, respectively.
Direct
operating expenses for the year ended December 31, 2016 were $1,063 million, which increased by $265 million compared to the year ended December 31,
2015. The current period includes $56 million of incremental costs resulting from our aforementioned organic growth initiatives and $279 million of incremental costs related to
acquisitions completed during the last 12 months, partially offset by the impact of foreign exchange of $37 million and $33 million associated with our capital recycling
initiatives completed over the past year.
82 Brookfield Infrastructure
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General
and administrative expenses for the year ended December 31, 2016 were $166 million, which increased by $32 million compared to the year ended
December 31, 2015. This line item primarily consists of the base management fee that is paid to Brookfield, which is equal to 1.25% of our partnership's market value plus net recourse debt. The
base management fee increased from prior year due to a larger market capitalization driven by the unit issuances over the last 12 months to fund investments and a higher unit price. General and
administrative expenses also include certain public company expenditures relating to the ongoing operations of our partnership which were consistent with the same period of 2015.
Depreciation
and amortization expense for the year ended December 31, 2016 was $447 million, which increased by $72 million compared to the year ended
December 31, 2015. Depreciation and amortization expense increased by $96 million due to higher asset values resulting from our annual revaluation process, capital expenditures and
acquisitions completed over the past year, partially offset by the impact of foreign exchange of $24 million.
Interest
expense for the year ended December 31, 2016 was $392 million, which increased by $25 million compared to the year ended December 31, 2015. Interest
expense increased by $36 million as a result of the aforementioned acquisitions. We also incurred additional interest expense of $14 million associated with two corporate medium term
note issuances completed in March and October of 2015. These increases were partially offset by the impact of foreign exchange, which decreased our interest expense by $15 million during the
period and a $10 million decrease due to the sale of our New England electricity transmission, European energy distribution and Ontario electricity transmission businesses in
August 2015, May 2016 and October 2016, respectively.
Earnings
from investments in associates for the year ended December 31, 2016 were $248 million, which increased by $179 million compared to the year ended
December 31, 2015. The increase is predominantly associated with $100 million of income earned on the privatization of our Brazilian toll road operations in May 2016,
$22 million of income earned on the sale of a non-core subsidiary of our Brazilian toll road operations in August 2016, and $22 million of deferred tax recoveries recorded at our
European telecommunications infrastructure operation as a result of favourable changes in tax laws and additional contribution from increased ownership in our Brazilian toll road operation and our
North American natural gas transmission business.
Mark-to-market
gains on hedging items for the year ended December 31, 2016 were $74 million compared to $83 million for the year ended December 31, 2015. Both
the current and comparative periods consist primarily of revaluation gains relating to foreign exchange hedging activities at the corporate level.
Other
income for the year ended December 31, 2016 totaled $174 million compared to $54 million for the year ended December 31, 2015. Current period balances
include dividend income received, break fee and a disposition gain of a combined $163 million associated with our toehold interest in Asciano Limited, a $24 million gain associated with
mark-to-market gains on our pre-existing interest in the senior notes of our North American gas storage businesses acquired in July 2016, fair value adjustments of $12 million associated
with our U.K. port operation and income of $40 million earned on financial assets purchased over the last 12 months. The gains were offset by $44 million of transaction
costs related to acquisitions and dispositions completed during the past 12 months and inflation indexation on our Chilean peso denominated debt of $21 million. The comparative period
primarily consists of a gain associated with the sale of our New England electricity transmission business.
Brookfield Infrastructure 83
Table of Contents
Income
tax expense for the year ended December 31, 2016 was $15 million compared to a recovery of $4 million for the year ended December 31, 2015. The expense
in the period was due to revaluation gains resulting from our annual revaluation process, which increases our deferred tax obligation. The recovery in the prior period related to a decrease in the
U.K. tax rate, which reduced the future tax obligation associated with our U.K. business.
2015 vs. 2014
For the year ended December 31, 2015, we reported net income of $391 million, of which $298 million is
attributable to our partnership. This is compared to net income of $229 million in the year ended December 31, 2014, of which $184 million was attributable to our partnership.
Revenues
for the year ended December 31, 2015 were $1,855 million, which decreased by $69 million compared to the year ended December 31, 2014. Revenue from
acquisitions completed in the second half of 2014 within our U.S. district energy and gas storage businesses contributed $79 million, while organic growth initiatives within our Canadian
and Australian district energy businesses contributed incremental revenue of $18 million. Our utilities segment contributed additional revenue of $42 million as results benefitted from
inflation indexation and various growth initiatives primarily at our U.K. regulated distribution operation. Our transport operations contributed an additional $36 million of revenue,
primarily due to higher rates at our Australian rail operation, inflationary tariff increases at our South American toll roads and higher volumes at our U.K. port operations. These increases
were more than offset by the impact of foreign exchange, as the U.S. dollar strengthened relative to most currencies in which we operate, which reduced our revenue in U.S. dollar terms
by $244 million.
Direct
operating expenses for the year ended December 31, 2015 were $798 million, which decreased by $48 million compared to the year ended December 31, 2014.
This was driven by $52 million of operating expenses representing the full year impact of district energy and gas storage businesses acquired in the second half of 2014, an additional
$28 million of costs resulting from the expansion of our systems through organic growth initiatives and higher volumes at our transport operations. These increases were more than offset by the
impact of foreign exchange, which reduced our expenses in U.S. dollar terms by $128 million.
General
and administrative expenses for the year ended December 31, 2015 were $134 million, which increased by $19 million compared to the year ended
December 31, 2014. These expenses are primarily comprised of the base management fee that is paid to Brookfield, which is equal to 1.25% of our partnership's market value plus net recourse
debt. This figure also includes certain public company expenditures relating to the on-going operations of our partnership. The base management fee increased as compared to the same period in 2014 as
a result of an increase in market capitalization and recourse debt throughout 2015.
Depreciation
and amortization expense for the year ended December 31, 2015 was $375 million, which decreased by $5 million compared to the year ended
December 31, 2014. Depreciation and amortization expense increased by $26 million due to the impact of acquisitions of district energy and gas storage businesses completed in 2014, and
$19 million attributable to higher asset values resulting from our annual revaluation process and capital expenditures over the past year. These increases were offset by the impact of foreign
exchange, which reduced our expenses in U.S. dollar terms by $50 million.
84 Brookfield Infrastructure
Table of Contents
Interest
expense for the year ended December 31, 2015 was $367 million, which increased by $5 million compared to the year ended December 31, 2014. Interest
expense increased by $12 million as a result of the aforementioned acquisitions, in addition to higher non-recourse borrowings primarily associated with organic growth initiatives, which
contributed incremental interest expense of $22 million. We also incurred additional interest expense of $18 million associated with our two corporate medium term note issuances
completed in March and October of 2015. These increases were partially offset by the impact of foreign exchange, which decreased our interest expense in U.S. dollar terms by $47 million
during the period.
Earnings
from investments in associates for the year ended December 31, 2015 were $69 million, which increased by $19 million compared to the year ended
December 31, 2014. The increase is due to the $28 million contribution from the acquisition of our European telecommunications infrastructure operation, completed in March of 2015, and
the full-year contribution from our Brazilian rail operations that was acquired in August of 2014. Our results also benefitted from numerous organic growth initiatives across the business that
contributed an additional $11 million, resulting from increased volumes across a number of our businesses. These items were offset by the impact of foreign exchange.
Mark-to-market
gains on hedging items for the year ended December 31, 2015 were $83 million compared to $38 million for the year ended December 31, 2014. Both
the current and comparative period consist primarily of revaluation gains relating to foreign exchange hedging activities at the corporate level. The gains recognized in the current and comparative
period are the result of lower hedged rates on various currency contracts we had in place relative to the spot rates at period end.
Other
income for the year ended December 31, 2015 totaled $54 million compared to a loss of $1 million for the year ended December 31, 2014. The current
period includes a $63 million gain associated with the disposition of our New England electricity transmission business. The comparative period primarily consists of losses associated
with inflation indexation of our Chilean peso denominated non-recourse borrowings.
Income
tax recovery for the year ended December 31, 2015 was $4 million compared to an expense of $79 million for the year ended December 31, 2014. The
recovery in the current period was caused by a decrease in the U.K. corporate tax rate, which reduced the future tax obligation associated with our U.K. businesses. The expense in the
prior period was due to revaluation gains resulting from our annual revaluation process, which increases our deferred tax obligation.
The
following table summarizes the statement of financial position of Brookfield Infrastructure for the years ended December 31, 2016 and December 31, 2015.
|
|
|
|
|
|
|
|
|
|
As of
|
|
US$ MILLIONS
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Summary Statements of Financial Position Key Metrics
|
|
Cash and cash equivalents
|
|
|
$ 786
|
|
|
$ 199
|
|
Total assets
|
|
|
21,275
|
|
|
17,735
|
|
Corporate borrowings
|
|
|
1,002
|
|
|
1,380
|
|
Non-recourse borrowings
|
|
|
7,324
|
|
|
5,852
|
|
Limited Partners' capital
|
|
|
4,611
|
|
|
3,838
|
|
General Partner capital
|
|
|
27
|
|
|
23
|
|
Non-controlling interestRedeemable Partnership Units held by Brookfield
|
|
|
1,860
|
|
|
1,518
|
|
Non-controlling interestin operating subsidiaries
|
|
|
2,771
|
|
|
1,608
|
|
Preferred Unitholders
|
|
|
375
|
|
|
189
|
|
Brookfield Infrastructure 85
Table of Contents
Total assets were $21,275 million at December 31, 2016, compared to $17,735 million at December 31, 2015, an increase of
$3,540 million. The acquisitions of our Australian ports, Indian and Peruvian toll roads and North American gas storage operations during 2016 increased total assets by $2,648 million.
Total assets also increased by $512 million as a result of revaluation gains recorded, primarily at our U.K. regulated distribution business and European telecommunications
infrastructure operations. In addition, total assets increased due to capital injections into our equity accounted North American gas transmission operation and Brazilian toll roads of
$312 million and $467 million respectively, and $323 million of cash on hand as result of the equity issuance in December 2016. These increases were offset by a
$418 million decline in assets due to the sale of our European energy distribution business and the sale of our Ontario electricity transmission businesses in May 2016 and
October 2016, respectively, as well as by the impact of depreciation of most foreign currencies in which we operate against the U.S. dollar, which reduced our asset base by
$304 million.
Corporate
borrowings were $1,002 million at December 31, 2016, compared to $1,380 million at December 31, 2015, a decrease of $378 million. The
decrease is due to repayment of our corporate credit facility of $407 million, partially offset by a $29 million increase in our Canadian dollar denominated corporate debt due to the
strengthening of the Canadian dollar against the U.S. dollar since December 31, 2015.
Non-recourse
borrowings were $7,324 million at December 31, 2016, compared to $5,852 million at December 31, 2015, an increase of $1,472 million. The
increase is attributable to the debt assumed in conjunction with acquisitions completed over the past 12 months of $1,161 million and subsidiary borrowings, net of repayments, of
$422 million for the year ended December 31, 2016. This was partially offset by a $111 million decrease of debt balances denominated in foreign currencies which have weakened
relative to the U.S. dollar since December 31, 2015.
Partnership
capital was $6,498 million at December 31, 2016, compared to $5,379 million at December 31, 2015, an increase of $1,119 million. This
increase was mainly driven by $730 million of net proceeds from partnership units issued in December 2016 and comprehensive income attributable to our partnership of $983 million,
partially offset by $594 million in distributions paid, net of units issued as part of our dividend reinvestment plan.
Preferred
unitholders equity was $375 million at December 31, 2016, compared to $189 million at December 31, 2015. The increase was a result of the net
proceeds of $186 million from the issuance of the Series 5 Preferred Units in August 2016.
SEGMENTED DISCLOSURES
In this section, we review the results of our principal operating segments: utilities, transport, energy and communications
infrastructure. Each segment is presented on a proportionate basis, taking into account Brookfield Infrastructure's ownership in operations accounted for using the consolidation and equity methods,
whereby our partnership either controls or exercises significant influence or joint control over its investments. See "Discussion of Segment Reconciling Items" on page 108 for a reconciliation
of segment results to our partnership's statement of operating results in accordance with IFRS.
86 Brookfield Infrastructure
Table of Contents
Utilities Operations
Results of Operations
The following table presents our proportionate share of the key metrics of our utility segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
US$ MILLIONS
|
|
2016
|
|
2015
|
|
2014
|
|
Funds from operations (FFO)
|
|
$
|
399
|
|
$
|
387
|
|
$
|
367
|
|
Maintenance capital expenditures
|
|
|
(15
|
)
|
|
(13
|
)
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
Adjusted funds from operations (AFFO)
|
|
$
|
384
|
|
$
|
374
|
|
$
|
353
|
|
|
|
|
|
|
|
|
|
Return on rate base
(1),(2)
|
|
|
11%
|
|
|
11%
|
|
|
11%
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Return on rate base is Adjusted EBITDA divided by time weighted average rate base.
-
(2)
-
Return on rate base excludes impact of connections revenues at our U.K. regulated distribution operation.
The following table presents our utilities segment's proportionate share of financial results:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
US$ MILLIONS
|
|
2016
|
|
2015
|
|
2014
|
|
Revenue
|
|
$
|
684
|
|
$
|
698
|
|
$
|
736
|
|
Costs attributable to revenues
|
|
|
(160
|
)
|
|
(174
|
)
|
|
(217
|
)
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
|
524
|
|
|
524
|
|
|
519
|
|
Interest expense
|
|
|
(130
|
)
|
|
(142
|
)
|
|
(158
|
)
|
Other income
|
|
|
5
|
|
|
5
|
|
|
6
|
|
|
|
|
|
|
|
|
|
Funds from operations (FFO)
|
|
|
399
|
|
|
387
|
|
|
367
|
|
Depreciation and amortization
|
|
|
(154
|
)
|
|
(153
|
)
|
|
(155
|
)
|
Deferred taxes and other items
|
|
|
(83
|
)
|
|
(24
|
)
|
|
(58
|
)
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
162
|
|
$
|
210
|
|
$
|
154
|
|
|
|
|
|
|
|
|
|
The following table presents our proportionate Adjusted EBITDA and FFO for the businesses in this operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
FFO
|
|
US$ MILLIONS
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
|
Regulated Distribution
|
|
$
|
257
|
|
$
|
228
|
|
$
|
200
|
|
$
|
213
|
|
$
|
183
|
|
$
|
158
|
|
Electricity Transmission
|
|
|
135
|
|
|
140
|
|
|
147
|
|
|
105
|
|
|
112
|
|
|
116
|
|
Regulated Terminal
|
|
|
132
|
|
|
156
|
|
|
172
|
|
|
81
|
|
|
92
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
524
|
|
$
|
524
|
|
$
|
519
|
|
$
|
399
|
|
$
|
387
|
|
$
|
367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brookfield Infrastructure 87
Table of Contents
The following table presents the roll-forward of our rate base:
|
|
|
|
|
|
|
|
|
|
Year ended
December 31
|
|
US$ MILLIONS
|
|
2016
|
|
2015
|
|
Rate base, start of period
|
|
$
|
4,018
|
|
$
|
4,118
|
|
Dispositions
|
|
|
(162
|
)
|
|
(38
|
)
|
Capital expenditures commissioned
|
|
|
226
|
|
|
234
|
|
Inflation and other indexation
|
|
|
63
|
|
|
97
|
|
Regulatory depreciation
|
|
|
(44
|
)
|
|
(53
|
)
|
Foreign exchange and other
|
|
|
(313
|
)
|
|
(340
|
)
|
|
|
|
|
|
|
Rate base, end of period
|
|
$
|
3,788
|
|
$
|
4,018
|
|
|
|
|
|
|
|
The following table presents the roll-forward of our proportionate share of capital backlog and capital to be commissioned:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
US$ MILLIONS
|
|
2016
|
|
2015
|
|
2014
|
|
Capital backlog, start of period
|
|
$
|
452
|
|
$
|
397
|
|
$
|
300
|
|
Additional capital project mandates
|
|
|
793
|
|
|
341
|
|
|
395
|
|
Less: capital expenditures
|
|
|
(428
|
)
|
|
(258
|
)
|
|
(242
|
)
|
Foreign exchange and other
|
|
|
(56
|
)
|
|
(28
|
)
|
|
(56
|
)
|
|
|
|
|
|
|
|
|
Capital backlog, end of period
|
|
|
761
|
|
|
452
|
|
|
397
|
|
Construction work in progress
|
|
|
225
|
|
|
124
|
|
|
101
|
|
|
|
|
|
|
|
|
|
Total capital to be commissioned
|
|
$
|
986
|
|
$
|
576
|
|
$
|
498
|
|
|
|
|
|
|
|
|
|
2016 vs. 2015
For the year ended December 31, 2016 our regulated distribution operations generated Adjusted EBITDA of $257 million and
FFO of $213 million compared to $228 million and $183 million, respectively, in 2015. This increase was primarily attributable to the performance of our U.K. regulated
distribution business that benefitted from an increased rate base, inflation indexation and the initial contribution from our smart meter acquisition, which were partially offset by the impact of
foreign exchange.
For
the year ended December 31, 2016 our electricity transmission operations generated Adjusted EBITDA of $135 million and FFO of $105 million compared to
$140 million and $112 million, respectively, in 2015. Adjusted EBITDA and FFO decreased compared to the prior year as the impact of inflation indexation and additions to our rate base
were more than offset by the impact of foreign exchange and the sale of our New England and Ontario electricity transmission businesses in August 2015 and October 2016,
respectively.
For
the year ended December 31, 2016 our regulated terminal reported Adjusted EBITDA of $132 million and FFO of $81 million compared to $156 million and
$92 million, respectively, in 2015. Adjusted EBITDA and FFO decreased from the prior year as the benefits of inflation indexation and additions to our rate base were more than offset by the
impacts of the regulatory rate reset effective July 1, 2016 and foreign exchange.
88 Brookfield Infrastructure
Table of Contents
Depreciation
and amortization expenses increased to $154 million for the year ended December 31, 2016, compared to $153 million for the same period in 2015.
Depreciation and amortization expense was relatively consistent with 2015 levels as the impact of higher asset values as a result of our annual revaluation process were partially offset by foreign
exchange.
Deferred
taxes and other items for the year ended December 31, 2016 were a loss of $83 million compared to a loss of $24 million for the same period in 2015. The
variance is due to higher mark-to-market losses on hedging items at our U.K. regulated distribution operation in the current period and a gain on sale of our New England electricity
transmission business recorded in the third quarter of 2015.
As
of December 31, 2016, total capital to be commissioned into rate base was $986 million compared to $576 million as of December 31, 2015. The capital to be
commissioned relates to projects that have been awarded or filed with regulators with anticipated commissioning into rate base in the next two to three years. The total capital to be commissioned as
of December 31, 2016 includes smart meter installations and connections added to our backlog at our U.K. regulated distribution business, the acquisition of 4,200 kilometres of
greenfield transmission lines in our Brazil transmission business, and system upgrades and expansions at our Chilean transmission business. Our U.K. regulated distribution business, Chilean
electricity transmission operations and Brazil transmission system are the largest contributors at $530 million, $210 million and $230 million, respectively.
2015 vs. 2014
For the year ended December 31, 2015 our regulated distribution operations generated Adjusted EBITDA of $228 million and
FFO of $183 million compared to $200 million and $158 million, respectively, in 2014. Results increased year-over-year primarily due to record connections activity at our
U.K. regulated distribution business, additions to our rate base and inflation indexation.
For
the year ended December 31, 2015 our electricity transmission operations generated Adjusted EBITDA of $140 million and FFO of $112 million compared to
$147 million and $116 million, respectively, in 2014. Adjusted EBITDA and FFO decreased slightly as inflation indexation and additions to rate base were offset by the impact of foreign
exchange and the sale of our New England electricity transmission business in August 2015.
For
the year ended December 31, 2015 our regulated terminal reported Adjusted EBITDA of $156 million and FFO of $92 million compared to $172 million and
$93 million, respectively, in 2014. Adjusted EBITDA and FFO decreased from prior year as the benefits of inflation indexation and additions to rate base were offset by the impact of foreign
exchange as our hedged rate declined compared to prior year. This was partially offset at the FFO level by the favourable impact of foreign exchange on our Australian dollar denominated interest
expense.
Depreciation
and amortization decreased to $153 million for the year ended December 31, 2015, compared to $155 million for the same period in 2014. The decrease of
$2 million from 2014 is primarily due to the impact of foreign exchange, mostly offset by higher depreciation expense from additions to our regulated asset base and higher asset values as a
result of our annual revaluation process.
Deferred
taxes and other items for the year ended December 31, 2015 was a loss of $24 million compared to a loss of $58 million for the same period in 2014. The
variance is associated with a deferred tax recovery due to a favourable change in U.K. tax law offset by lower mark-to-market gains on hedging items at our U.K. regulated distribution
business.
Brookfield Infrastructure 89
Table of Contents
As
of December 31, 2015, total capital to be commissioned into rate base was $576 million compared to $498 million as of December 31, 2014. The total capital
to be commissioned increased as capital project mandates awarded were partially offset by capital expenditures made during the period and the impact of foreign exchange. Our U.K. regulated
distribution business and Chilean transmission system are the largest contributors at approximately $400 million and $150 million, respectively.
Transport Operations
Results of Operations
The following table presents our proportionate share of the key metrics of our transport segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
US$ MILLIONS
|
|
2016
|
|
2015
|
|
2014
|
|
Growth capital expenditures
|
|
$
|
319
|
|
$
|
297
|
|
$
|
332
|
|
Adjusted EBITDA margin
(1)
|
|
|
48%
|
|
|
49%
|
|
|
48%
|
|
Funds from operations (FFO)
|
|
|
423
|
|
|
398
|
|
|
392
|
|
Maintenance capital expenditures
|
|
|
(88
|
)
|
|
(72
|
)
|
|
(80
|
)
|
|
|
|
|
|
|
|
|
Adjusted funds from operations (AFFO)
|
|
$
|
335
|
|
$
|
326
|
|
$
|
312
|
|
|
|
|
|
|
|
|
|
-
(1)
-
EBITDA margin is calculated based on net of construction revenues and costs which are incurred at our Peruvian toll road operation during the construction
of our toll roads.
The following table presents our transport segment's proportionate share of financial results:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
US$ MILLIONS
|
|
2016
|
|
2015
|
|
2014
|
|
Revenues
|
|
$
|
1,247
|
|
$
|
1,143
|
|
$
|
1,238
|
|
Cost attributed to revenues
|
|
|
(650
|
)
|
|
(588
|
)
|
|
(639
|
)
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
|
597
|
|
|
555
|
|
|
599
|
|
Interest expense
|
|
|
(157
|
)
|
|
(142
|
)
|
|
(173
|
)
|
Other expenses
|
|
|
(17
|
)
|
|
(15
|
)
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
Funds from operations (FFO)
|
|
|
423
|
|
|
398
|
|
|
392
|
|
Depreciation and amortization
|
|
|
(253
|
)
|
|
(217
|
)
|
|
(250
|
)
|
Deferred taxes and other items
|
|
|
36
|
|
|
(46
|
)
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
206
|
|
$
|
135
|
|
$
|
103
|
|
|
|
|
|
|
|
|
|
The following table presents proportionate Adjusted EBITDA and FFO for each business in this operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
FFO
|
|
US$ MILLIONS
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
|
Rail
|
|
$
|
270
|
|
$
|
292
|
|
$
|
270
|
|
$
|
206
|
|
$
|
231
|
|
$
|
201
|
|
Toll Roads
|
|
|
239
|
|
|
180
|
|
|
248
|
|
|
152
|
|
|
111
|
|
|
140
|
|
Ports
|
|
|
88
|
|
|
83
|
|
|
81
|
|
|
65
|
|
|
56
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
597
|
|
$
|
555
|
|
$
|
599
|
|
$
|
423
|
|
$
|
398
|
|
$
|
392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90 Brookfield Infrastructure
Table of Contents
The following table presents the roll-forward of our proportionate share of capital backlog and capital to be commissioned:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
US$ MILLIONS
|
|
2016
|
|
2015
|
|
2014
|
|
Capital backlog, start of period
|
|
$
|
467
|
|
$
|
655
|
|
$
|
373
|
|
Impact of acquisitions, net of disposals
|
|
|
|
|
|
|
|
|
242
|
|
Additional capital project mandates
|
|
|
533
|
|
|
316
|
|
|
412
|
|
Less: capital expenditures
|
|
|
(319
|
)
|
|
(297
|
)
|
|
(332
|
)
|
Foreign exchange and other
|
|
|
40
|
|
|
(207
|
)
|
|
(40
|
)
|
|
|
|
|
|
|
|
|
Capital backlog, end of period
|
|
|
721
|
|
|
467
|
|
|
655
|
|
Construction work in progress
|
|
|
349
|
|
|
110
|
|
|
77
|
|
|
|
|
|
|
|
|
|
Total capital to be commissioned
|
|
$
|
1,070
|
|
$
|
577
|
|
$
|
732
|
|
|
|
|
|
|
|
|
|
2016 vs. 2015
For the year ended December 31, 2016, our rail business generated Adjusted EBITDA of $270 million and FFO of
$206 million compared to $292 million and $231 million, respectively, in 2015. Adjusted EBITDA and FFO decreased as the benefit from increased tariffs in South America was more
than offset by lower agricultural volumes in Brazil, the impact of a tariff relief package extended to one of our clients in Australia and foreign exchange movements.
For
the year ended December 31, 2016, our toll roads contributed Adjusted EBITDA of $239 million and FFO of $152 million compared to $180 million and
$111 million, respectively, in 2015. The current period Adjusted EBITDA and FFO benefitted from an 11% increase in average tariffs, increased ownership in our Brazilian toll road business,
strong traffic volumes on our Chilean toll roads and contributions from our recent investments in Peru and India. These positive results were partially offset by lower vehicle traffic in Brazil and
foreign exchange movements.
For
the year ended December 31, 2016, our port operations reported Adjusted EBITDA of $88 million and FFO of $65 million compared to $83 million and
$56 million, respectively, in 2015. Adjusted EBITDA and FFO increased versus the prior year due to the acquisition of our Australian ports business in August 2016 and contribution from
new contracts signed at our U.K. port terminal, partially offset by lower volumes at our European port operations.
Depreciation
and amortization increased to $253 million for the year ended December 31, 2016, up from $217 million in 2015. The increase in depreciation expense
arose from acquisitions during the past 12 months, expansionary capital expenditure programs and higher asset values as a result of our annual revaluation process.
Deferred
taxes and other items for the year ended December 31, 2016 were a gain of $36 million compared to a loss of $46 million for the same period in 2015. The
increase is predominately associated with the $100 million gain recorded on the privatization of our Brazil toll road operations in May 2016 with our partner in the business, as the fair
value of the incremental ownership interest exceeded consideration paid.
As
of December 31, 2016, total capital to be commissioned into rate base was $1,070 million compared to $577 million as of December 31, 2015. We expect
enhancements to our networks over the next two to three years to expand capacity and support additional volumes, leading to cash flow growth over the long term. Included in this balance is the port of
Santos expansion project currently over 95% complete at our Brazilian rail operation, and several lane duplication projects at our Brazilian toll road operations.
Brookfield Infrastructure 91
Table of Contents
2015 vs. 2014
For the year ended December 31, 2015, our rail business generated Adjusted EBITDA of $292 million and FFO of
$231 million compared to $270 million and $201 million, respectively, in 2014. Adjusted EBITDA and FFO increased versus prior year as a result of improved agricultural volumes and
a full year contribution from our South American rail operation acquired in the third quarter of 2014, as well as increased volumes and inflationary rate increases at our Australian operation. These
increases were partially offset by the impact of foreign exchange.
For
the year ended December 31, 2015, our toll roads contributed Adjusted EBITDA of $180 million and FFO of $111 million compared to $248 million and
$140 million, respectively, in 2014. Adjusted EBITDA and FFO decreased versus prior year as the benefit of regulatory tariff increases and stronger light vehicle volumes were more than offset
by the impact of foreign exchange. In local currency, toll road Adjusted EBITDA was 5% higher than prior year.
For
the year ended December 31, 2015, our port operations reported Adjusted EBITDA of $83 million and FFO of $56 million compared to $81 million and
$51 million, respectively, in 2014. Adjusted EBITDA and FFO have increased versus the prior year as benefits from the delivery of the first phase of the automation project at our North American
container terminal and increased container volumes at our U.K. port operation were partially offset by the impact of foreign exchange.
Depreciation
and amortization decreased to $217 million for the year ended December 31, 2015, down from $250 million in 2014. The $33 million decrease versus
2014 is due to foreign exchange, which more than offset incremental depreciation from our South American rail acquisition in the third quarter of 2014.
Deferred
taxes and other expenses for the year ended December 31, 2015 were $46 million compared to $39 million for the same period in 2014. The $7 million
increase versus the prior year was due to the acquisition of our South American rail business in August 2014 and higher inflation indexation on our Chilean peso denominated debt.
As
of December 31, 2015, total capital to be commissioned into rate base was $577 million compared to $732 million as of December 31, 2014. The total capital
to be commissioned decreased as capital project mandates awarded were more than offset by capital expenditures made during the period and the impact of foreign exchange. Our Brazilian toll road
business and Brazilian rail operation are the largest contributors to our capital to be commissioned over the next two to three years at approximately $325 million and $150 million,
respectively.
92 Brookfield Infrastructure
Table of Contents
Energy Operations
Results of Operations
The following table presents our proportionate share of the key metrics of our energy segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
US$ MILLIONS
|
|
2016
|
|
2015
|
|
2014
|
|
Growth capital expenditures
|
|
$
|
67
|
|
$
|
27
|
|
$
|
37
|
|
Adjusted EBITDA margin
(1)
|
|
|
56%
|
|
|
48%
|
|
|
45%
|
|
Funds from operations (FFO)
|
|
|
175
|
|
|
90
|
|
|
68
|
|
Maintenance capital expenditures
|
|
|
(61
|
)
|
|
(45
|
)
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
Adjusted funds from operations (AFFO)
|
|
$
|
114
|
|
$
|
45
|
|
$
|
31
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Adjusted EBITDA margin is Adjusted EBITDA divided by revenues.
The following table presents our energy segment's proportionate share of financial results:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
US$ MILLIONS
|
|
2016
|
|
2015
|
|
2014
|
|
Revenues
|
|
$
|
496
|
|
$
|
349
|
|
$
|
311
|
|
Cost attributed to revenues
|
|
|
(220
|
)
|
|
(183
|
)
|
|
(172
|
)
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
|
276
|
|
|
166
|
|
|
139
|
|
Interest expense
|
|
|
(109
|
)
|
|
(79
|
)
|
|
(71
|
)
|
Other income
|
|
|
8
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from operations (FFO)
|
|
|
175
|
|
|
90
|
|
|
68
|
|
Depreciation and amortization
|
|
|
(128
|
)
|
|
(90
|
)
|
|
(76
|
)
|
Deferred taxes and other items
|
|
|
43
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
90
|
|
$
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
The following table presents proportionate Adjusted EBITDA and FFO for each business in this operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
FFO
|
|
US$ MILLIONS
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
|
Energy Transmission, Distribution & Storage
|
|
$
|
225
|
|
$
|
118
|
|
$
|
111
|
|
$
|
131
|
|
$
|
49
|
|
$
|
45
|
|
District Energy
|
|
|
51
|
|
|
48
|
|
|
28
|
|
|
44
|
|
|
41
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
276
|
|
$
|
166
|
|
$
|
139
|
|
$
|
175
|
|
$
|
90
|
|
$
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brookfield Infrastructure 93
Table of Contents
The following table presents the roll-forward of our proportionate share of capital backlog and capital to be commissioned:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
US$ MILLIONS
|
|
2016
|
|
2015
|
|
2014
|
|
Capital backlog, start of period
|
|
$
|
181
|
|
$
|
73
|
|
$
|
30
|
|
Additional capital project mandates
|
|
|
37
|
|
|
151
|
|
|
84
|
|
Less: capital expenditures
|
|
|
(67
|
)
|
|
(27
|
)
|
|
(37
|
)
|
Foreign exchange and other
|
|
|
(4
|
)
|
|
(16
|
)
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
Capital backlog, end of period
|
|
|
147
|
|
|
181
|
|
|
73
|
|
Construction work in progress
|
|
|
37
|
|
|
37
|
|
|
21
|
|
|
|
|
|
|
|
|
|
Total capital to be commissioned
|
|
$
|
184
|
|
$
|
218
|
|
$
|
94
|
|
|
|
|
|
|
|
|
|
2016 vs. 2015
For the year ended December 31, 2016, our energy transmission, distribution and storage operations generated Adjusted EBITDA of
$225 million and FFO of $131 million compared to $118 million and $49 million, respectively, in 2015. Adjusted EBITDA and FFO increased versus prior year as a result of our
increased ownership, the impact of de-leveraging and higher transportation volumes, all at our North American natural gas transmission operation. Results also benefited from the recent acquisition of
Niska Gas Storage which closed in July of this year.
For
the year ended December 31, 2016, our district energy business contributed Adjusted EBITDA of $51 million and FFO of $44 million compared to $48 million
and $41 million, respectively, in 2015. Adjusted EBITDA and FFO increased versus the prior year as a result of adding over 1,400 residential connections across the business and the
contribution from a tuck-in acquisition completed in Houston during the second half of 2016.
Depreciation
and amortization increased to $128 million for the year ended December 31, 2016, up from $90 million in 2015. The increase is primarily due to
additional depreciation as a result of our annual revaluation process, increased ownership in our North American natural gas transmission business and acquisitions completed over the past
12 months.
Deferred
taxes and other items for the year ended December 31, 2016 were a gain of $43 million compared to $nil for the same period in 2015. The current year balance
includes non-recurring gains, partially offset by losses related to hedging activities in our gas storage operations during the current period.
As
of December 31, 2016, total capital to be commissioned is $184 million compared to $218 million as of December 31, 2015. We completed the Chicago market
expansion project at our North American natural gas transmission business during the fourth quarter of 2016 and are seeing increasing demand for gas transportation from the north end of our system to
markets in the south. Our first expansion to the south is scheduled to be in service during the fourth quarter of 2018 and is the first of several expansions of this nature that could materialize over
the next five years. Across our businesses, we expect enhancements to our systems over the next two to three years that will expand capacity to support additional volumes, leading to cash flow growth
over the long term. Capital to be commissioned includes $100 million within our energy transmission, distribution and storage operations and $80 million in our district energy business.
94 Brookfield Infrastructure
Table of Contents
2015 vs. 2014
For the year ended December 31, 2015, our energy transmission, distribution and storage operations generated Adjusted EBITDA of
$118 million and FFO of $49 million compared to $111 million and $45 million, respectively, in 2014. Adjusted EBITDA and FFO increased from 2014 to 2015 as the segment
benefitted from higher transportation volumes at our North American natural gas transmission operation.
For
the year ended December 31, 2015, our district energy business contributed Adjusted EBITDA of $48 million and FFO of $41 million compared to $28 million
and $23 million, respectively, in 2014. Adjusted EBITDA and FFO increased compared to the year ended December 31, 2014 as a result of contributions from new district energy systems that
were acquired in the third quarter of 2014, the completion of organic growth projects, such as the Louisiana State University medical center project, new customer connections and renewal of existing
customers at favourable rates.
Depreciation
and amortization increased to $90 million for the year ended December 31, 2015, up from $76 million for the same period in 2014, respectively. The
increase is primarily due to additional depreciation as a result of our annual revaluation process and acquisitions in our district energy business, partially offset by the impact of foreign exchange.
Deferred
taxes and other expenses for the year ended December 31, 2015 was $nil compared to $12 million of income for the same period in 2014. The decrease of
$12 million compared to the prior year is due to the benefit from a reduction in our gas storage obligation recognized in 2014 with the acquisition of our U.S. gas storage business.
As
of December 31, 2015, total capital to be commissioned into rate base was $218 million compared to $94 million as of December 31, 2014. The total capital
to be commissioned increased as capital project mandates awarded were partially offset by capital expenditures made during the period and the impact of foreign exchange. Capital to be commissioned
includes approximately $140 million within our energy transmission, distribution and storage operations and approximately $80 million in our District Energy businesses.
Communications Infrastructure Operations
Results of Operations
The following table presents our proportionate share of the key metrics of our communications infrastructure segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
US$ MILLIONS
|
|
2016
|
|
2015
|
|
2014
|
|
Growth capital expenditures
|
|
$
|
29
|
|
$
|
15
|
|
$
|
|
|
Adjusted EBITDA margin
(1)
|
|
|
56%
|
|
|
54%
|
|
|
|
|
Funds from operations (FFO)
|
|
|
77
|
|
|
60
|
|
|
|
|
Maintenance capital expenditures
|
|
|
(9
|
)
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted funds from operations (AFFO)
|
|
$
|
68
|
|
$
|
54
|
|
$
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Adjusted EBITDA margin is Adjusted EBITDA divided by revenues.
Brookfield Infrastructure 95
Table of Contents
The following table presents our communications infrastructure segment's proportionate share of financial results:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
US$ MILLIONS
|
|
2016
|
|
2015
|
|
2014
|
|
Revenues
|
|
$
|
163
|
|
$
|
123
|
|
$
|
|
|
Cost attributed to revenues
|
|
|
(72
|
)
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
|
91
|
|
|
66
|
|
|
|
|
Interest expense
|
|
|
(12
|
)
|
|
(6
|
)
|
|
|
|
Other expenses
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from operations (FFO)
|
|
|
77
|
|
|
60
|
|
|
|
|
Depreciation and amortization
|
|
|
(74
|
)
|
|
(46
|
)
|
|
|
|
Deferred taxes and other items
|
|
|
24
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
27
|
|
$
|
15
|
|
$
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2016, our communications infrastructure segment generated Adjusted EBITDA and FFO of $91 million and
$77 million, respectively, versus $66 million and $60 million, respectively, in the prior year. Adjusted EBITDA increased compared to the prior year due to the full year
contribution of the business which was acquired at the end of the first quarter of 2015, the benefit of additional points of presence in the second half of 2016 and inflationary revenue increases. FFO
increased compared to the prior year as the aforementioned items were partially offset by higher interest costs associated with the long-term financing put in place in the first half of 2016.
Depreciation
and amortization increased to $74 million for the year ended December 31, 2016, up from $46 million for the same period in 2015, respectively. The
increase is primarily due to a full year's ownership of the business and additional depreciation as a result of our annual revaluation process over the past 12 months.
Deferred
taxes and other items for the year ended December 31, 2016 were a gain of $24 million compared to a gain of $1 million for the same period in 2015. The
$23 million variance is mainly attributable to the benefit from a decrease in the French income tax rate enacted during 2016.
As
of December 31, 2016, total capital to be commissioned into rate base was $40 million compared to $30 million as of December 31, 2015. Increase in total
capital to be commissioned reflects more than 700 towers to be constructed over the next 12 months.
96 Brookfield Infrastructure
Table of Contents
Corporate and other
The following table presents the components of Corporate and Other, on a proportionate basis for the twelve months ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
US$ MILLIONS
|
|
2016
|
|
2015
|
|
2014
|
|
General and administrative costs
|
|
$
|
(8
|
)
|
$
|
(8
|
)
|
$
|
(8
|
)
|
Base management fee
|
|
|
(158
|
)
|
|
(126
|
)
|
|
(107
|
)
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
|
(166
|
)
|
|
(134
|
)
|
|
(115
|
)
|
Other income
|
|
|
84
|
|
|
34
|
|
|
26
|
|
Financing costs
|
|
|
(48
|
)
|
|
(27
|
)
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
Funds from operations (FFO)
|
|
|
(130
|
)
|
|
(127
|
)
|
|
(103
|
)
|
Deferred taxes and other items
|
|
|
119
|
|
|
65
|
|
|
26
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(11
|
)
|
$
|
(62
|
)
|
$
|
(77
|
)
|
|
|
|
|
|
|
|
|
2016 vs. 2015
General and administrative costs for the year ended December 31, 2016 were consistent with the comparative periods.
Pursuant
to our Master Services Agreement, we pay Brookfield an annual base management fee equal to 1.25% of our market value plus net recourse debt. The base management fee increased
from prior year due to a larger market capitalization from capital raised in the last 12 months to fund new investments and a higher unit price.
Other
income includes interest and distribution income as well as realized gains or losses earned on corporate financial assets. The increase during the year ended December 31,
2016 versus the comparative period is primarily due to investments made in higher yielding financial assets during the past 12 months.
Corporate
financing costs include interest expense and standby fees on our committed credit facility and corporate medium term notes, less interest earned on cash balances. Financing
costs increased year-over-year due to increased borrowings used to finance new investments.
Deferred
taxes and other items for the year ended December 31, 2016 were a gain of $119 million compared to a gain of $65 million in 2015. The current period balance
includes a gain on our Asciano toehold investment, partially offset by the impact of foreign exchange on our hedging program compared to last year. The comparative period consisted primarily of
revaluation items relating to foreign exchange hedging activities at the corporate level.
2015 vs. 2014
General and administrative costs for the year ended December 31, 2015 were consistent with the comparative periods.
Pursuant
to our Master Services Agreement, we pay Brookfield an annual base management fee equal to 1.25% of our market value plus net recourse debt. The base management fee increased
from prior year due to a larger market capitalization from capital raised in the last 12 months to fund new investments and a higher unit price.
Brookfield Infrastructure 97
Table of Contents
Other income includes interest and distribution income as well as realized gains earned on corporate financial assets. The increase during the year ended
December 31, 2015 versus the comparative period is primarily due to incremental interest income generated on corporate financial assets acquired over the past 12 months.
Corporate
financing costs include interest expense and standby fees on our committed credit facility and corporate medium term notes, less interest earned on cash balances. Corporate
financing costs for the year ended December 31, 2015 increased versus 2014 due to higher draws on our credit facility used to bridge finance new investments during 2015 and interest on
corporate medium term notes issued in March and October 2015.
Deferred
taxes and other expenses for the year ended December 31, 2015 were $65 million of income compared to $26 million of income in 2014. The $39 million
variance is due to incremental mark-to-market gains related to our foreign currency hedging program in 2015.
SELECTED STATEMENT OF OPERATING RESULTS AND FINANCIAL POSITION INFORMATION
To measure performance, we focus on net income, an IFRS measure, as well as certain non-IFRS measures, including but not limited to
FFO, AFFO, Adjusted EBITDA and Adjusted Earnings. We define FFO as net income excluding the impact of depreciation and amortization, deferred income taxes, breakage and transaction costs, and non-cash
valuation gains or losses. We define AFFO as FFO less capital expenditures required to maintain the current performance of our operations (maintenance capital expenditures). We define Adjusted EBITDA
as net income excluding the impact of depreciation and amortization, interest expense, current and deferred income taxes, breakage and transaction costs, and non-cash valuation gains or losses. We
define Adjusted Earnings as net income attributable to our partnership, excluding the impact of depreciation and amortization expense from revaluing property, plant and equipment and the effects of
purchase price accounting, mark-to-market on hedging items and disposition gains or losses.
Along
with net income and other IFRS measures, FFO and Adjusted EBITDA are key measures of our financial performance that we use to assess the results and performance of our operations
on a segmented basis. AFFO is also a measure of operating performance, and represents the ability of our businesses to generate sustainable earnings. Adjusted Earnings is a measure of operating
performance used to assess the ability of our businesses to generate recurring earnings which allows users to better understand and evaluate the underlying financial performance of our partnership.
Since
they are not calculated in accordance with, and do not have any standardized meanings prescribed by IFRS, FFO, AFFO, Adjusted EBITDA and Adjusted Earnings are unlikely to be
comparable to similar measures presented by other issuers and have limitations as analytical tools. Specifically, our definition of FFO may differ from the definition used by other organizations, as
well as the definition of funds from operations used by the Real Property Association of Canada ("REALPAC") and the National Association of Real Estate Investment Trusts, Inc. ("NAREIT"), in
part because the NAREIT definition is based on U.S. GAAP, as opposed to IFRS.
98 Brookfield Infrastructure
Table of Contents
For
further details regarding our use of FFO, AFFO, Adjusted EBITDA and Adjusted Earnings, as well as a reconciliation of net income to these measures, see the "Reconciliation of
Non-IFRS Financial Measures" section of this MD&A.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
US$ MILLIONS, EXCEPT PER UNIT INFORMATION
|
|
Key Metrics
|
|
Net income
(1)
|
|
$
|
474
|
|
$
|
298
|
|
$
|
184
|
|
Net income per limited partnership unit
(2)
|
|
|
1.13
|
|
|
0.69
|
|
|
0.45
|
|
Funds from operations (FFO)
|
|
|
944
|
|
|
808
|
|
|
724
|
|
Per unit FFO
(3)
|
|
|
2.72
|
|
|
2.39
|
|
|
2.30
|
|
Adjusted funds from operations (AFFO)
(4)
|
|
|
771
|
|
|
672
|
|
|
593
|
|
Adjusted EBITDA
(5)
|
|
|
1,322
|
|
|
1,177
|
|
|
1,142
|
|
Adjusted earnings
(6)
|
|
|
657
|
|
|
461
|
|
|
350
|
|
Adjusted earnings per unit
(3)
|
|
|
1.66
|
|
|
1.18
|
|
|
0.97
|
|
Distributions per unit
|
|
|
1.55
|
|
|
1.41
|
|
|
1.28
|
|
Payout ratio
(7)
|
|
|
67%
|
|
|
68%
|
|
|
62%
|
|
-
(1)
-
Net income attributable to limited partners, non-controlling interest attributable to redeemable partnership units and the general partner.
-
(2)
-
Average number of limited partnership units outstanding on a time weighted average basis for the year were 244.7 million (2015: 238.9 million
2014: 225.4 million).
-
(3)
-
Average units outstanding during the year of 347.2 million (2015: 337.4 million, 2014: 315.1 million).
-
(4)
-
AFFO is defined as FFO less maintenance capital expenditures. Refer to the "Reconciliation of Non-IFRS Financial Measures" section of this MD&A for a
reconciliation from net income to AFFO.
-
(5)
-
Adjusted EBITDA is defined as net income excluding the impact of depreciation and amortization, interest expense, current and deferred income taxes,
breakage and transaction costs, and non-cash valuation gains or losses. Refer to the "Reconciliation of Non-IFRS Financial Measures" section of this MD&A for a reconciliation from net income to
Adjusted EBITDA.
-
(6)
-
Adjusted Earnings is defined as net income attributable to our partnership, excluding the impact of depreciation and amortization expense from revaluing
property, plant and equipment and the effects of purchase price accounting, mark-to-market on hedging items and disposition gains or losses. Refer to the "Reconciliation of Non-IFRS Financial
Measures" section of this MD&A for a reconciliation from net income to Adjusted Earnings.
-
(7)
-
Payout ratio is defined as distributions paid per unit (inclusive of GP incentive and preferred unit distributions) divided by FFO.
For the year ended December 31, 2016, FFO totaled $944 million ($2.72 per unit) compared to FFO of $808 million ($2.39 per
unit) in 2015 and FFO of $724 million ($2.30 per unit) in 2014. FFO increased by 14% and 18% on a per unit basis compared to 2015 and 2014, respectively as a result of organic growth across
most of our businesses and incremental earnings on capital that we deployed over the past two years partially offset by the impact of foreign exchange. The distributions paid during 2016 represented a
payout ratio of 67%, which is within our long-term target range of 60-70%.
Brookfield Infrastructure 99
Table of Contents
The
following tables present selected statement of operating results and financial position information by operating segment on a proportionate basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
US$ MILLIONS
|
|
Statement of Operating Results
|
|
Net income (loss) by segment
|
|
|
|
|
|
|
|
|
|
|
Utilities
|
|
$
|
162
|
|
$
|
210
|
|
$
|
154
|
|
Transport
|
|
|
206
|
|
|
135
|
|
|
103
|
|
Energy
|
|
|
90
|
|
|
|
|
|
4
|
|
Communications Infrastructure
|
|
|
27
|
|
|
15
|
|
|
|
|
Corporate and other
|
|
|
(11
|
)
|
|
(62
|
)
|
|
(77
|
)
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
474
|
|
$
|
298
|
|
$
|
184
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA by segment
|
|
|
|
|
|
|
|
|
|
|
Utilities
|
|
$
|
524
|
|
$
|
524
|
|
$
|
519
|
|
Transport
|
|
|
597
|
|
|
555
|
|
|
599
|
|
Energy
|
|
|
276
|
|
|
166
|
|
|
139
|
|
Communications Infrastructure
|
|
|
91
|
|
|
66
|
|
|
|
|
Corporate and other
|
|
|
(166
|
)
|
|
(134
|
)
|
|
(115
|
)
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
1,322
|
|
$
|
1,177
|
|
$
|
1,142
|
|
|
|
|
|
|
|
|
|
FFO by segment
|
|
|
|
|
|
|
|
|
|
|
Utilities
|
|
$
|
399
|
|
$
|
387
|
|
$
|
367
|
|
Transport
|
|
|
423
|
|
|
398
|
|
|
392
|
|
Energy
|
|
|
175
|
|
|
90
|
|
|
68
|
|
Communications Infrastructure
|
|
|
77
|
|
|
60
|
|
|
|
|
Corporate and other
|
|
|
(130
|
)
|
|
(127
|
)
|
|
(103
|
)
|
|
|
|
|
|
|
|
|
FFO
|
|
$
|
944
|
|
$
|
808
|
|
$
|
724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
December 31,
2016
|
|
December 31,
2015
|
|
US$ MILLIONS
|
|
Statement of Financial Position
|
|
Total assets by segment
|
|
|
|
|
|
|
|
Utilities
|
|
$
|
4,605
|
|
$
|
4,723
|
|
Transport
|
|
|
6,160
|
|
|
5,338
|
|
Energy
|
|
|
3,032
|
|
|
2,744
|
|
Communications Infrastructure
|
|
|
933
|
|
|
824
|
|
Corporate and other
|
|
|
(510
|
)
|
|
(196
|
)
|
|
|
|
|
|
|
Total assets
|
|
$
|
14,220
|
|
$
|
13,433
|
|
|
|
|
|
|
|
Net debt by segment
|
|
|
|
|
|
|
|
Utilities
|
|
$
|
2,798
|
|
$
|
2,721
|
|
Transport
|
|
|
2,611
|
|
|
2,118
|
|
Energy
|
|
|
1,468
|
|
|
1,735
|
|
Communications Infrastructure
|
|
|
392
|
|
|
386
|
|
Corporate and other
|
|
|
453
|
|
|
1,094
|
|
|
|
|
|
|
|
Net Debt
|
|
$
|
7,722
|
|
$
|
8,054
|
|
|
|
|
|
|
|
Partnership capital by segment
|
|
|
|
|
|
|
|
Utilities
|
|
$
|
1,807
|
|
$
|
2,002
|
|
Transport
|
|
|
3,549
|
|
|
3,220
|
|
Energy
|
|
|
1,564
|
|
|
1,009
|
|
Communications Infrastructure
|
|
|
541
|
|
|
438
|
|
Corporate and other
|
|
|
(963
|
)
|
|
(1,290
|
)
|
|
|
|
|
|
|
Partnership capital
|
|
$
|
6,498
|
|
$
|
5,379
|
|
|
|
|
|
|
|
100 Brookfield Infrastructure
Table of Contents
RECONCILIATION OF NON-IFRS FINANCIAL MEASURES
We focus on FFO to measure operating performance, along with IFRS measures such as net income. In addition, we also assess AFFO,
Adjusted EBITDA and Adjusted Earnings.
These
measures are not calculated in accordance with, and do not have any standardized meanings prescribed by, IFRS and are therefore unlikely to be comparable to similar measures
presented by other issuers.
FFO,
AFFO, Adjusted EBITDA and Adjusted Earnings have limitations as analytical tools. Therefore FFO, AFFO, Adjusted EBITDA and Adjusted Earnings should not be considered as the sole
measures of our performance and should not be considered in isolation from, or as a substitute for, analysis of our results as reported under IFRS.
Net
income attributable to our partnership is the most directly comparable IFRS measure to FFO, AFFO, Adjusted EBITDA and Adjusted Earnings. We urge you to review the IFRS financial
measures within the MD&A and to not rely on any single financial measure to evaluate our partnership.
We
define FFO as net income excluding the impact of depreciation and amortization, deferred income taxes, breakage and transaction costs, and non-cash valuation gains or losses.
FFO
has limitations as an analytical tool:
-
-
FFO does not include depreciation and amortization expense; because we own capital assets with finite lives, depreciation
and amortization expense recognizes the fact that we must maintain or replace our asset base in order to preserve our revenue generating capability;
-
-
FFO does not include deferred income taxes, which may become payable if we own our assets for a long period of
time; and
-
-
FFO does not include breakage and transaction costs or non-cash valuation gains, losses and impairment charges.
FFO
is a key measure that we use to evaluate the performance of our operations and forms the basis for our partnership's distribution policy.
When
viewed along with our IFRS results, we believe that FFO provides a more complete understanding of factors and trends affecting our underlying operations. FFO allows us to evaluate
our businesses on the basis of cash return on invested capital by removing the effect of non-cash and other items.
We
add back depreciation and amortization to remove the implication that our assets decline in value over time since we believe that the value of most of our assets will be sustained
over time, provided we make all necessary maintenance expenditures. We add back deferred income taxes because we do not believe this item reflects the present value of the actual cash tax obligations
we will be required to pay, particularly if our operations are held for a long period of time. We add back non-cash valuation gains or losses recorded in net income as they are non-cash and indicate a
point-in-time approximation of value on items we consider long-term. We also add back breakage and transaction costs as they are capital in nature.
In
addition, we focus on adjusted funds from operations or AFFO, which is defined as FFO less capital expenditures required to maintain the current performance of our operations
(maintenance capital expenditures). While FFO provides a basis for assessing current operating performance, it does not take into consideration the cost to sustain the operating performance of our
partnership's asset base. In order to assess the long-term, sustainable operating performance of our businesses, we observe that in addition to FFO, investors use AFFO by taking into account the
impact of maintenance capital expenditures.
Brookfield Infrastructure 101
Table of Contents
We
also focus on Adjusted EBITDA which we define as net income excluding the impact of depreciation and amortization, interest expense, current and deferred income taxes, breakage and
transaction costs and non-cash valuation gains or losses. Adjusted EBITDA provides a supplemental understanding of the performance of our business and enhanced comparability across periods and
relative to our peers. Adjusted EBITDA excludes the impact of interest expense and current income taxes to remove the effect of the current capital structure and tax profile in assessing the operating
performance of our businesses.
Adjusted
Earnings is a measure that can be used to evaluate the performance of our operations, defined as net income attributable to our partnership, excluding any incremental
depreciation and amortization expense associated with the revaluation of our property, plant and equipment and the impact of purchase price accounting, mark-to-market on hedging items and disposition
gains or losses. While we believe that maintenance capital expenditures are the best measure of the cost to preserve our revenue generating capability, we acknowledge that investors may view
historical depreciation as a more relevant proxy. Adjusted Earnings also excludes mark-to-market on hedging items recorded in net income or disposition gains or losses as we believe these items are
not reflective of the ongoing performance of our underlying operations.
When
viewed with our IFRS results, we believe that Adjusted Earnings provides a supplemental understanding of the performance of our underlying operations and also gives users enhanced
comparability of our ongoing performance relative to peers in certain jurisdictions and across periods.
The
following table reconciles net income attributable to our partnership, the most directly comparable IFRS measure, to FFO and AFFO, non-IFRS financial metrics:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
US$ MILLIONS, EXCEPT PER UNIT AMOUNTS
(1)
|
|
2016
|
|
2015
|
|
2014
|
|
Net income attributable to partnership
(2)
|
|
$
|
474
|
|
$
|
298
|
|
$
|
184
|
|
Add back or deduct the following:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
609
|
|
|
506
|
|
|
481
|
|
Deferred income taxes
|
|
|
(5
|
)
|
|
(53
|
)
|
|
(2
|
)
|
Mark-to-market on hedging items
|
|
|
(17
|
)
|
|
(63
|
)
|
|
(39
|
)
|
Valuation (gains) losses and other
|
|
|
(117
|
)
|
|
120
|
|
|
100
|
|
|
|
|
|
|
|
|
|
FFO
|
|
|
944
|
|
|
808
|
|
|
724
|
|
Maintenance capital expenditures
|
|
|
(173
|
)
|
|
(136
|
)
|
|
(131
|
)
|
|
|
|
|
|
|
|
|
AFFO
|
|
$
|
771
|
|
$
|
672
|
|
$
|
593
|
|
|
|
|
|
|
|
|
|
-
(1)
-
See Item 5 "Operating and Financial Review and ProspectsManagement's Discussion and Analysis of Financial Condition and Results of
OperationsOther Relevant MeasuresReconciliation of Operating Segments" for a detailed reconciliation of Brookfield Infrastructure's proportionate results to our partnership's
consolidated statements of operating results.
-
(2)
-
Net income attributable to partnership includes net income attributable to non-controlling interestRedeemable Partnership Units held by
Brookfield, general partner and limited partners.
The difference between net income attributable to partnership and FFO is primarily due to depreciation and amortization expenses of
$609 million (2015: $506 million, 2014: $481 million), deferred tax recovery of $5 million (2015: $53 million, 2014: $2 million), mark-to-market gains on
hedging items of $17 million (2015: $63 million, $39 million) and valuation gains of $117 million (2015: losses of $120 million, 2014: losses of
$100 million).
The
difference between net income attributable to partnership and AFFO is mostly due to the aforementioned items in addition to maintenance capital expenditures of $173 million
(2015: $136 million, 2014: $131 million).
102 Brookfield Infrastructure
Table of Contents
The
following table reconciles net income attributable to our partnership, the most directly comparable IFRS measure, to Adjusted EBITDA, a non-IFRS measure. Adjusted EBITDA is presented
based on our proportionate share of results in operations accounted for using the consolidation and the equity methods.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
US$ MILLIONS
(1)
|
|
2016
|
|
2015
|
|
2014
|
|
Net income attributable to partnership
(2)
|
|
$
|
474
|
|
$
|
298
|
|
$
|
184
|
|
Add back or deduct the following:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
609
|
|
|
506
|
|
|
481
|
|
Deferred income taxes
|
|
|
(5
|
)
|
|
(53
|
)
|
|
(2
|
)
|
Mark-to-market on hedging items
|
|
|
(17
|
)
|
|
(63
|
)
|
|
(39
|
)
|
Reversal of impairment charge and other
|
|
|
(117
|
)
|
|
120
|
|
|
100
|
|
Interest expense
|
|
|
456
|
|
|
396
|
|
|
416
|
|
Other (income) expense
|
|
|
(78
|
)
|
|
(27
|
)
|
|
2
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
1,322
|
|
$
|
1,177
|
|
$
|
1,142
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Please see Item 5 "Operating and Financial Review and ProspectsManagement's Discussion and Analysis of Financial Condition and Results
of OperationsOther Relevant MeasuresReconciliation of Operating Segments" for a detailed reconciliation of Brookfield Infrastructure's proportionate results to our
partnership's consolidated statements of operating results.
-
(2)
-
Net income attributable to partnership includes net income attributable to non-controlling interestRedeemable Partnership Units held by
Brookfield, general partner and limited partners.
The difference between net income attributable to partnership and Adjusted EBITDA is primarily due to depreciation and amortization expenses of
$609 million (2015: $506 million, 2014: $481 million) and interest expense of $456 million (2015: $396 million, 2014: $416 million).
The
following table reconciles net income attributable to our partnership, the most directly comparable IFRS measure, to Adjusted Earnings, a non-IFRS financial metric:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
US$ MILLIONS
|
|
2016
|
|
2015
|
|
2014
|
|
Net income attributable to partnership
(1)
|
|
$
|
474
|
|
$
|
298
|
|
$
|
184
|
|
Add back or deduct the following:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense due to application of revaluation model and acquisition accounting
|
|
|
300
|
|
|
248
|
|
|
205
|
|
Mark-to-market on hedging items
|
|
|
(17
|
)
|
|
(63
|
)
|
|
(39
|
)
|
Gain on sale of subsidiaries or ownership changes
|
|
|
(100
|
)
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted earnings
|
|
$
|
657
|
|
$
|
461
|
|
$
|
350
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Net income attributable to partnership includes net income attributable to non-controlling interestRedeemable Partnership Units held by
Brookfield, general partner and limited partners.
The difference between net income attributable to partnership and Adjusted Earnings is due to depreciation and amortization expense attributable
to application of the revaluation model and acquisition accounting of $300 million (2015: $248 million, 2014: $205 million), mark-to-market gains on hedging items of
$17 million (2015: $63 million, 2014: $39 million) and gains on the sale of subsidiaries or changes in ownership of $100 million (2015: $22 million,
2014: $nil).
Net
income per limited partnership unit is the most directly comparable IFRS measure for per unit FFO and Adjusted Earnings per unit.
Brookfield Infrastructure 103
Table of Contents
The
following table reconciles net income per limited partnership unit, the most directly comparable IFRS measure, to FFO per unit, a non-IFRS financial metric:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
US$ MILLIONS, EXCEPT PER UNIT AMOUNTS
(1)
|
|
2016
|
|
2015
|
|
2014
|
|
Net income per limited partnership unit
(2)
|
|
$
|
1.13
|
|
$
|
0.69
|
|
$
|
0.45
|
|
Add back or deduct the following:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1.75
|
|
|
1.50
|
|
|
1.53
|
|
Deferred income taxes
|
|
|
(0.01
|
)
|
|
(0.16
|
)
|
|
(0.01
|
)
|
Mark-to-market on hedging items
|
|
|
(0.05
|
)
|
|
(0.19
|
)
|
|
(0.12
|
)
|
Valuation losses (gains) and other
|
|
|
(0.10
|
)
|
|
0.55
|
|
|
0.45
|
|
|
|
|
|
|
|
|
|
Per unit FFO
(3)
|
|
$
|
2.72
|
|
$
|
2.39
|
|
$
|
2.30
|
|
|
|
|
|
|
|
|
|
-
(1)
-
See Item 5 "Operating and Financial Review and ProspectsManagement's Discussion and Analysis of Financial Condition and Results of
OperationsOther Relevant MeasuresReconciliation of Operating Segments" for a detailed reconciliation of Brookfield Infrastructure's proportionate results to our partnership's
consolidated statements of operating results.
-
(2)
-
During 2016, on average there were 244.7 million limited partnership units outstanding (2015: 238.9 million, 2014: 225.4 million).
-
(3)
-
During 2016, on average there were 347.2 million units outstanding (2015: 337.4 million, 2014: 315.1 million).
The following table reconciles net income per limited partnership unit, the most directly comparable IFRS measure, to Adjusted Earnings per unit,
a non-IFRS financial metric:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
US$ MILLIONS, EXCEPT PER UNIT AMOUNTS
|
|
2016
|
|
2015
|
|
2014
|
|
Net income per limited partnership unit
(1)
|
|
$
|
1.13
|
|
$
|
0.69
|
|
$
|
0.45
|
|
Add back or deduct the following:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense due to application of revaluation model & acquisition accounting
|
|
|
0.86
|
|
|
0.74
|
|
|
0.65
|
|
Mark-to-market on hedging items
|
|
|
(0.05
|
)
|
|
(0.18
|
)
|
|
(0.13
|
)
|
Gains on sale of subsidiaries or ownership changes
|
|
|
(0.28
|
)
|
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted earnings per unit
(2)
|
|
$
|
1.66
|
|
$
|
1.18
|
|
$
|
0.97
|
|
|
|
|
|
|
|
|
|
-
(1)
-
During 2016, on average there were 244.7 million limited partnership units outstanding (2015: 238.9 million, 2014: 225.4 million).
-
(2)
-
During 2016, on average there were 347.2 million units outstanding (2015: 337.4 million, 2014: 315.1 million).
104 Brookfield Infrastructure
Table of Contents
OTHER RELEVANT MEASURES
The following section contains information to assist users in the calculation of the enterprise value of our partnership.
Enterprise Value
We define Enterprise Value as the market value of our partnership plus preferred units and proportionate debt, net of
proportionate cash.
The
following table presents Enterprise Value as of December 31, 2016, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
US$ MILLIONS
|
|
2016
|
|
2015
|
|
2014
|
|
Partnership units outstanding, end of period
(1),(2)
|
|
|
369.5
|
|
|
345.1
|
|
|
315.2
|
|
Price
(3)
|
|
$
|
33.4719
|
|
$
|
25.2876
|
|
$
|
27.9141
|
|
|
|
|
|
|
|
|
|
Market capitalization
|
|
|
12,368
|
|
|
8,727
|
|
|
8,799
|
|
Preferred units
(4)
|
|
|
375
|
|
|
189
|
|
|
|
|
Proportionate net debt
(5)
|
|
|
7,722
|
|
|
8,054
|
|
|
6,657
|
|
|
|
|
|
|
|
|
|
Enterprise value
|
|
$
|
20,465
|
|
$
|
16,970
|
|
$
|
15,456
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Adjusted for 3-for-2 unit split effective September 14, 2016.
-
(2)
-
Includes limited partner, general partner and redeemable partnership units held by Brookfield.
-
(3)
-
Market value of our partnership is calculated based on the price per unit referencing the volume weighted average of the trading price of our units on the
New York Stock Exchange for the last five trading days of a period.
-
(4)
-
Preferred units on Brookfield Infrastructure's Consolidated Statement of Financial Position.
-
(5)
-
Please see Item 5.B "Liquidity and Capital Resources" for a detailed reconciliation of Brookfield Infrastructure's proportionate net debt to our
partnership's consolidated debt on the Consolidated Statement of Financial Position.
Reconciliation of Operating Segments
Adjusted EBITDA, FFO and AFFO are presented based on our proportionate share of results in operations accounted for using consolidation
and the equity method whereby we either control or exercise significant influence over the investment respectively, in order to demonstrate the impact of key value drivers of each of these operating
segments on our overall performance. As a result, segment depreciation and amortization, deferred income taxes, breakage and transaction costs, and non-cash valuation gains or losses are reconciling
items that will differ from results presented in accordance with IFRS as these reconciling items (1) include our proportionate share of earnings from investments in associates attributable to
each of the above-noted items, and (2) exclude the proportionate share of earnings (loss) of consolidated investments not held by us apportioned to each of the above-noted items.
Brookfield Infrastructure 105
Table of Contents
The following tables present each segment's results in the format that management organizes its segments to make operating decisions and assess performance. Each
segment is presented on a proportionate basis, taking into account our ownership in operations accounted for using the consolidation and equity method whereby we either control or exercise significant
influence over the investment, respectively. These tables reconcile our proportionate results to our partnership's consolidated statements of operating results on a line by line basis by aggregating
the components comprising the earnings from our investments in associates and reflecting the portion of each line item attributable to non-controlling interests. See "Discussion of Segment Reconciling
Items" on page 108 for a reconciliation of segment results to our statement of operating results in accordance with IFRS.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total attributable to Brookfield Infrastructure
|
|
|
|
|
|
|
|
|
|
Contribution
from
investments
in associates
|
|
Attributable
to non-
controlling
interest
|
|
As per
IFRS
financials
on F-6
(1)
|
|
FOR THE YEAR ENDED
DECEMBER 31, 2016
US$ MILLIONS
|
|
Utilities
|
|
Transport
|
|
Energy
|
|
Comm.
Infrastructure
|
|
Other
|
|
Total
|
|
Revenues
|
|
$
|
684
|
|
$
|
1,247
|
|
$
|
496
|
|
$
|
163
|
|
$
|
|
|
$
|
2,590
|
|
$
|
(1,311
|
)
|
$
|
836
|
|
$
|
2,115
|
|
Costs attributed to revenues
|
|
|
(160
|
)
|
|
(650
|
)
|
|
(220
|
)
|
|
(72
|
)
|
|
|
|
|
(1,102
|
)
|
|
651
|
|
|
(612
|
)
|
|
(1,063
|
)
|
General and administrative costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(166
|
)
|
|
(166
|
)
|
|
|
|
|
|
|
|
(166
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
|
524
|
|
|
597
|
|
|
276
|
|
|
91
|
|
|
(166
|
)
|
|
1,322
|
|
|
(660
|
)
|
|
224
|
|
|
|
|
Other income (expense)
|
|
|
5
|
|
|
(17
|
)
|
|
8
|
|
|
(2
|
)
|
|
84
|
|
|
78
|
|
|
16
|
|
|
1
|
|
|
95
|
|
Interest expense
|
|
|
(130
|
)
|
|
(157
|
)
|
|
(109
|
)
|
|
(12
|
)
|
|
(48
|
)
|
|
(456
|
)
|
|
190
|
|
|
(126
|
)
|
|
(392
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO
|
|
|
399
|
|
|
423
|
|
|
175
|
|
|
77
|
|
|
(130
|
)
|
|
944
|
|
|
(454
|
)
|
|
99
|
|
|
|
|
Depreciation and amortization
|
|
|
(154
|
)
|
|
(253
|
)
|
|
(128
|
)
|
|
(74
|
)
|
|
|
|
|
(609
|
)
|
|
328
|
|
|
(166
|
)
|
|
(447
|
)
|
Deferred taxes
|
|
|
5
|
|
|
26
|
|
|
(38
|
)
|
|
29
|
|
|
(17
|
)
|
|
5
|
|
|
9
|
|
|
4
|
|
|
18
|
|
Mark-to-market on hedging items and other
|
|
|
(88
|
)
|
|
10
|
|
|
81
|
|
|
(5
|
)
|
|
136
|
|
|
134
|
|
|
(131
|
)
|
|
117
|
|
|
120
|
|
Share of earnings from associates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
248
|
|
|
|
|
|
248
|
|
Net income attributable to non-controlling interest and preferred unitholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(54
|
)
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to partnership
(2)
|
|
$
|
162
|
|
$
|
206
|
|
$
|
90
|
|
$
|
27
|
|
$
|
(11
|
)
|
$
|
474
|
|
$
|
|
|
$
|
|
|
$
|
474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total attributable to Brookfield Infrastructure
|
|
|
|
|
|
|
|
|
|
Contribution
from
investments
in associates
|
|
Attributable
to non-
controlling
interest
|
|
As per
IFRS
financials
on F-6
(1)
|
|
FOR THE YEAR ENDED
DECEMBER 31, 2015
US$ MILLIONS
|
|
Utilities
|
|
Transport
|
|
Energy
|
|
Comm.
Infrastructure
|
|
Other
|
|
Total
|
|
Revenues
|
|
$
|
698
|
|
$
|
1,143
|
|
$
|
349
|
|
$
|
123
|
|
$
|
|
|
$
|
2,313
|
|
$
|
(1,044
|
)
|
$
|
586
|
|
$
|
1,855
|
|
Costs attributed to revenues
|
|
|
(174
|
)
|
|
(588
|
)
|
|
(183
|
)
|
|
(57
|
)
|
|
|
|
|
(1,002
|
)
|
|
546
|
|
|
(342
|
)
|
|
(798
|
)
|
General and administrative costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(134
|
)
|
|
(134
|
)
|
|
|
|
|
|
|
|
(134
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
|
524
|
|
|
555
|
|
|
166
|
|
|
66
|
|
|
(134
|
)
|
|
1,177
|
|
|
(498
|
)
|
|
244
|
|
|
|
|
Other income (expense)
|
|
|
5
|
|
|
(15
|
)
|
|
3
|
|
|
|
|
|
34
|
|
|
27
|
|
|
13
|
|
|
(4
|
)
|
|
36
|
|
Interest expense
|
|
|
(142
|
)
|
|
(142
|
)
|
|
(79
|
)
|
|
(6
|
)
|
|
(27
|
)
|
|
(396
|
)
|
|
144
|
|
|
(115
|
)
|
|
(367
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO
|
|
|
387
|
|
|
398
|
|
|
90
|
|
|
60
|
|
|
(127
|
)
|
|
808
|
|
|
(341
|
)
|
|
125
|
|
|
|
|
Depreciation and amortization
|
|
|
(153
|
)
|
|
(217
|
)
|
|
(90
|
)
|
|
(46
|
)
|
|
|
|
|
(506
|
)
|
|
246
|
|
|
(115
|
)
|
|
(375
|
)
|
Deferred taxes
|
|
|
(8
|
)
|
|
21
|
|
|
14
|
|
|
14
|
|
|
12
|
|
|
53
|
|
|
(41
|
)
|
|
14
|
|
|
26
|
|
Mark-to-market on hedging items and other
|
|
|
(16
|
)
|
|
(67
|
)
|
|
(14
|
)
|
|
(13
|
)
|
|
53
|
|
|
(57
|
)
|
|
67
|
|
|
66
|
|
|
76
|
|
Share of earnings from associates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
|
|
|
|
|
|
69
|
|
Net income attributable to non-controlling interest and preferred unitholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(90
|
)
|
|
(90
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to partnership
(2)
|
|
$
|
210
|
|
$
|
135
|
|
$
|
|
|
$
|
15
|
|
$
|
(62
|
)
|
$
|
298
|
|
$
|
|
|
$
|
|
|
$
|
298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106 Brookfield Infrastructure
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total attributable to Brookfield Infrastructure
|
|
Contribution
from
investments
in associates
|
|
Attributable
to non-
controlling
interest
|
|
As per
IFRS
financials
on F-6
(1)
|
|
FOR THE YEAR ENDED
DECEMBER 31, 2014
US$ MILLIONS
|
|
|
Utilities
|
|
Transport
|
|
Energy
|
|
Other
|
|
Total
|
|
Revenues
|
|
$
|
736
|
|
$
|
1,238
|
|
$
|
311
|
|
$
|
|
|
$
|
2,285
|
|
$
|
(958
|
)
|
$
|
597
|
|
$
|
1,924
|
|
Costs attributed to revenues
|
|
|
(217
|
)
|
|
(639
|
)
|
|
(172
|
)
|
|
|
|
|
(1,028
|
)
|
|
486
|
|
|
(304
|
)
|
|
(846
|
)
|
General and administrative costs
|
|
|
|
|
|
|
|
|
|
|
|
(115
|
)
|
|
(115
|
)
|
|
|
|
|
|
|
|
(115
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
|
519
|
|
|
599
|
|
|
139
|
|
|
(115
|
)
|
|
1,142
|
|
|
(472
|
)
|
|
293
|
|
|
|
|
Other income (expense)
|
|
|
6
|
|
|
(34
|
)
|
|
|
|
|
26
|
|
|
(2
|
)
|
|
23
|
|
|
(10
|
)
|
|
11
|
|
Interest expense
|
|
|
(158
|
)
|
|
(173
|
)
|
|
(71
|
)
|
|
(14
|
)
|
|
(416
|
)
|
|
160
|
|
|
(106
|
)
|
|
(362
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO
|
|
|
367
|
|
|
392
|
|
|
68
|
|
|
(103
|
)
|
|
724
|
|
|
(289
|
)
|
|
177
|
|
|
|
|
Depreciation and amortization
|
|
|
(155
|
)
|
|
(250
|
)
|
|
(76
|
)
|
|
|
|
|
(481
|
)
|
|
212
|
|
|
(111
|
)
|
|
(380
|
)
|
Deferred taxes
|
|
|
(27
|
)
|
|
8
|
|
|
5
|
|
|
16
|
|
|
2
|
|
|
(37
|
)
|
|
(14
|
)
|
|
(49
|
)
|
Mark-to-market on hedging items and other
|
|
|
(31
|
)
|
|
(47
|
)
|
|
7
|
|
|
10
|
|
|
(61
|
)
|
|
64
|
|
|
(7
|
)
|
|
(4
|
)
|
Share of earnings from associates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
58
|
|
Income from discontinued operations, net of income tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
Net income attributable to non-controlling interest and preferred unitholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(45
|
)
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to partnership
(2)
|
|
$
|
154
|
|
$
|
103
|
|
$
|
4
|
|
$
|
(77
|
)
|
$
|
184
|
|
$
|
|
|
$
|
|
|
$
|
184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
The above table provides each segment's results in the format that management organizes its segments to make operating decisions and assess performance.
Each segment is presented on a proportionate basis, taking into account our ownership in operations accounted for using the consolidation and equity methods under IFRS. The above table reconciles our
proportionate results to our consolidated statements of operating results on a line by line basis by aggregating the components comprising the earnings from our investments in associates and
reflecting the portion of each line item attributable to non-controlling interests.
-
(2)
-
Net income (loss) attributable to our partnership includes net income (loss) attributable to non-controlling interestsRedeemable Partnership
Units held by Brookfield, general partners and limited partners.
The following tables provide each segment's assets in the format that management organizes its segments to make operating decisions and assess
performance. Each segment is presented on a proportionate basis, taking into account our ownership in operations using consolidation and the equity method whereby we either control or exercise
significant influence over the investment respectively. These tables reconcile our proportionate assets to total assets presented on our consolidated statements of financial position by removing net
liabilities contained within investments in associates and reflecting the assets attributable to non-controlling interests, and adjusting for working capital assets which are netted against working
capital liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Attributable to Brookfield Infrastructure
|
|
|
|
|
|
|
|
|
|
|
|
Contribution
from
investments
in associates
|
|
Attributable
to non-
controlling
interest
|
|
Working
capital
adjustment
and other
|
|
As per
IFRS
financials
on F-4
(1)
|
|
AS AT
DECEMBER 31, 2016
US$ MILLIONS
|
|
Utilities
|
|
Transport
|
|
Energy
|
|
Comm.
Infrastructure
|
|
Other
|
|
Brookfield
Infrastructure
|
|
Total assets
|
|
$
|
4,605
|
|
$
|
6,160
|
|
$
|
3,032
|
|
$
|
933
|
|
$
|
(510
|
)
|
$
|
14,220
|
|
$
|
(2,996
|
)
|
$
|
6,496
|
|
$
|
3,555
|
|
$
|
21,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Attributable to Brookfield Infrastructure
|
|
|
|
|
|
|
|
|
|
|
|
Contribution
from
investments
in associates
|
|
Attributable
to non-
controlling
interest
|
|
Working
capital
adjustment
and other
|
|
As per
IFRS
financials
on F-4
(1)
|
|
AS AT
DECEMBER 31, 2015
US$ MILLIONS
|
|
Utilities
|
|
Transport
|
|
Energy
|
|
Comm.
Infrastructure
|
|
Other
|
|
Brookfield
Infrastructure
|
|
Total assets
|
|
$
|
4,723
|
|
$
|
5,338
|
|
$
|
2,744
|
|
$
|
824
|
|
$
|
(196
|
)
|
$
|
13,433
|
|
$
|
(3,795
|
)
|
$
|
4,298
|
|
$
|
3,799
|
|
$
|
17,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
The above tables provide each segment's assets in the format that management organizes its segments to make operating decisions and assess performance. Each
segment is presented on a proportionate basis, taking into account our ownership in operations using consolidation and the equity method whereby we either control or exercise significant influence
over the investment respectively. The above table reconciles our proportionate assets to total assets presented on our consolidated statements of financial position by removing net liabilities
contained within investments in associates and reflecting the assets attributable to non-controlling interests, and adjusting for working capital assets which are netted against working capital
liabilities.
Brookfield Infrastructure 107
Table of Contents
Discussion of Segment Reconciling Items
The following tables detail and provide discussion, where applicable, of material changes between reporting periods for each operating
segment, the reconciliation of contributions from investments in associates and attribution of non-controlling interest in the determination of Adjusted EBITDA, FFO and net income attributable to our
partnership in order to facilitate the understanding of the nature of and changes to reconciling items.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOR THE YEAR ENDED
DECEMBER 31, 2016
US$ MILLIONS
|
|
Utilities
|
|
Transport
|
|
Energy
|
|
Comm.
Infrastructure
|
|
Other
|
|
Total
|
|
Adjustments to items comprising Adjusted EBITDA
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions from investment in associates
|
|
$
|
(117
|
)
|
$
|
(267
|
)
|
$
|
(185
|
)
|
$
|
(91
|
)
|
$
|
|
|
$
|
(660
|
)
|
Attribution to non-controlling interest
|
|
|
149
|
|
|
109
|
|
|
88
|
|
|
|
|
|
(122
|
)
|
|
224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
|
32
|
|
|
(158
|
)
|
|
(97
|
)
|
|
(91
|
)
|
|
(122
|
)
|
|
(436
|
)
|
Adjustments to items comprising FFO
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions from investments in associates
|
|
|
27
|
|
|
77
|
|
|
88
|
|
|
14
|
|
|
|
|
|
206
|
|
Attribution to non-controlling interest
|
|
|
(50
|
)
|
|
(42
|
)
|
|
(22
|
)
|
|
|
|
|
(11
|
)
|
|
(125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO
|
|
|
9
|
|
|
(123
|
)
|
|
(31
|
)
|
|
(77
|
)
|
|
(133
|
)
|
|
(355
|
)
|
Adjustments to items comprising net income attributable to partnership
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions from investment in associates
|
|
|
90
|
|
|
190
|
|
|
97
|
|
|
77
|
|
|
|
|
|
454
|
|
Attribution to non-controlling interest
|
|
|
(99
|
)
|
|
(67
|
)
|
|
(66
|
)
|
|
|
|
|
133
|
|
|
(99
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to partnership
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOR THE YEAR ENDED
DECEMBER 31, 2015
US$ MILLIONS
|
|
Utilities
|
|
Transport
|
|
Energy
|
|
Comm.
Infrastructure
|
|
Other
|
|
Total
|
|
Adjustments to items comprising Adjusted EBITDA
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions from investment in associates
|
|
$
|
(115
|
)
|
$
|
(224
|
)
|
$
|
(93
|
)
|
$
|
(66
|
)
|
$
|
|
|
$
|
(498
|
)
|
Attribution to non-controlling interest
|
|
|
162
|
|
|
63
|
|
|
51
|
|
|
|
|
|
(32
|
)
|
|
244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
|
47
|
|
|
(161
|
)
|
|
(42
|
)
|
|
(66
|
)
|
|
(32
|
)
|
|
(254
|
)
|
Adjustments to items comprising FFO
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions from investments in associates
|
|
|
25
|
|
|
62
|
|
|
63
|
|
|
7
|
|
|
|
|
|
157
|
|
Attribution to non-controlling interest
|
|
|
(56
|
)
|
|
(32
|
)
|
|
(22
|
)
|
|
|
|
|
(9
|
)
|
|
(119
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO
|
|
|
16
|
|
|
(131
|
)
|
|
(1
|
)
|
|
(59
|
)
|
|
(41
|
)
|
|
(216
|
)
|
Adjustments to items comprising net income attributable to partnership
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions from investment in associates
|
|
|
90
|
|
|
162
|
|
|
30
|
|
|
59
|
|
|
|
|
|
341
|
|
Attribution to non-controlling interest
|
|
|
(106
|
)
|
|
(31
|
)
|
|
(29
|
)
|
|
|
|
|
41
|
|
|
(125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to partnership
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108 Brookfield Infrastructure
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOR THE YEAR ENDED
DECEMBER 31, 2014
US$ MILLIONS
|
|
Utilities
|
|
Transport
|
|
Energy
|
|
Other
|
|
Total
|
|
Adjustments to items comprising Adjusted EBITDA
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions from investment in associates
|
|
$
|
(116
|
)
|
$
|
(268
|
)
|
$
|
(88
|
)
|
$
|
|
|
$
|
(472
|
)
|
Attribution to non-controlling interest
|
|
|
198
|
|
|
62
|
|
|
33
|
|
|
|
|
|
293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
|
82
|
|
|
(206
|
)
|
|
(55
|
)
|
|
|
|
|
(179
|
)
|
Adjustments to items comprising FFO
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions from investments in associates
|
|
|
23
|
|
|
106
|
|
|
58
|
|
|
(4
|
)
|
|
183
|
|
Attribution to non-controlling interest
|
|
|
(66
|
)
|
|
(32
|
)
|
|
(16
|
)
|
|
(2
|
)
|
|
(116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO
|
|
|
39
|
|
|
(132
|
)
|
|
(13
|
)
|
|
(6
|
)
|
|
(112
|
)
|
Adjustments to items comprising net income attributable to partnership
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions from investment in associates
|
|
|
93
|
|
|
162
|
|
|
30
|
|
|
4
|
|
|
289
|
|
Attribution to non-controlling interest
|
|
|
(132
|
)
|
|
(30
|
)
|
|
(17
|
)
|
|
2
|
|
|
(177
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to partnership
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Revenues, costs attributed to revenues, general and administrative costs.
-
(2)
-
Other income, interest expense and current income taxes.
-
(3)
-
Depreciation and amortization, deferred taxes, fair value adjustments, other expenses, share of earnings from associates, net income attributable to
non-controlling interest.
2016 vs. 2015
Contributions from investments in associates and joint ventures increased compared to 2015 as additions to rate base and inflation
indexation at our Chilean electricity transmission system along with contributions from the increased investment in our Brazilian toll road operation and our North American natural gas transmission
operation were partially offset by the impact of foreign exchange associated with the depreciation of the Brazilian reais and Chilean peso.
Attribution
to non-controlling interest decreased compared to 2015 as the Australian dollar, British pound and euro depreciated against the U.S. dollar relative to the
prior year.
2015 vs. 2014
Contributions from investments in associates and joint ventures increased compared to 2014 as additions to rate base and inflation
indexation at our South American transmission operation along with contributions from the acquisition of our Brazilian rail operation midway through the third quarter of 2014 and European
telecommunications business in March 2015 were partially offset by the impact of foreign exchange associated with the depreciation of the Brazilian reais and Chilean peso.
Attribution
to non-controlling interest decreased compared to 2014 as contributions from acquisitions completed over the past 12 months in our district energy and gas storage
businesses were more than offset by the impact of foreign exchange and the sale of our New England electricity transmission system.
Brookfield Infrastructure 109
Table of Contents
5.B LIQUIDITY AND CAPITAL RESOURCES
The nature of our asset base and the quality of our associated cash flows enable us to maintain a stable and low cost capital
structure. We attempt to maintain sufficient financial liquidity at all times so that we are able to participate in attractive opportunities as they arise, better withstand sudden adverse changes in
economic circumstances and maintain a relatively high distribution of our FFO to unitholders. Our principal sources of liquidity are cash flows from our operations, undrawn credit facilities and
access to public and private capital markets. We also structure the ownership of our assets to enhance our ability to monetize them to provide additional liquidity, if necessary. Certain subsidiaries
may be subject to limitations on their ability to declare and pay dividends to our partnership. Any limitations existing at December 31, 2016 and 2015 were insignificant and would not adversely
impact our ability to meet cash obligations.
Our
group-wide liquidity at December 31, 2016 was $3,895 million and was comprised of the following:
|
|
|
|
|
|
|
|
|
|
As of
|
|
US$ MILLIONS
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Corporate cash and cash equivalents
|
|
$
|
549
|
|
$
|
286
|
|
Committed corporate credit facility
|
|
|
1,975
|
|
|
1,875
|
|
Subordinate corporate credit facility
|
|
|
500
|
|
|
|
|
Draws under corporate credit facility
|
|
|
|
|
|
(407
|
)
|
Commitments under corporate credit facility
|
|
|
(46
|
)
|
|
(83
|
)
|
Proportionate cash retained in businesses
|
|
|
283
|
|
|
257
|
|
Proportionate availability under subsidiary credit facilities
|
|
|
634
|
|
|
472
|
|
|
|
|
|
|
|
Group-wide liquidity
|
|
$
|
3,895
|
|
$
|
2,400
|
|
|
|
|
|
|
|
At December 31, 2016, we believe that the sources of group-wide liquidity are sufficient for Brookfield Infrastructure's present
requirements. We finished the year with group-wide liquidity of approximately $3,895 million, up from $2,400 million at December 31, 2015 primarily as a result of capital raised
during the year offset by funds deployed for acquisitions and growth capital expenditures. At the corporate level, we ended the year with $2,978 million of liquidity, an increase of
$1,307 million compared to the prior year.
110 Brookfield Infrastructure
Table of Contents
We
finance our assets principally at the operating company level with debt that generally has long-term maturities, few restrictive covenants and no recourse to either Brookfield
Infrastructure or our other operations. On a proportionate basis as of December 31, 2016, scheduled principal repayments over the next five years are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US$ MILLIONS
|
|
Average Term
(years)
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
Beyond
|
|
Total
|
|
Recourse borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate borrowings
|
|
|
3
|
|
$
|
295
|
|
$
|
93
|
|
$
|
|
|
$
|
279
|
|
$
|
|
|
$
|
335
|
|
$
|
1,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recourse borrowings
|
|
|
3
|
|
|
295
|
|
|
93
|
|
|
|
|
|
279
|
|
|
|
|
|
335
|
|
|
1,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-recourse borrowings
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulated Distribution
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
40
|
|
|
|
|
|
1,098
|
|
|
1,138
|
|
Electricity Transmission
|
|
|
12
|
|
|
31
|
|
|
4
|
|
|
5
|
|
|
4
|
|
|
4
|
|
|
679
|
|
|
727
|
|
Regulated Terminal
|
|
|
5
|
|
|
|
|
|
|
|
|
53
|
|
|
152
|
|
|
296
|
|
|
477
|
|
|
978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
31
|
|
|
4
|
|
|
58
|
|
|
196
|
|
|
300
|
|
|
2,254
|
|
|
2,843
|
|
Transport
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rail
|
|
|
7
|
|
|
37
|
|
|
13
|
|
|
22
|
|
|
91
|
|
|
112
|
|
|
753
|
|
|
1,028
|
|
Toll Roads
|
|
|
9
|
|
|
228
|
|
|
108
|
|
|
114
|
|
|
81
|
|
|
58
|
|
|
701
|
|
|
1,290
|
|
Ports
|
|
|
5
|
|
|
60
|
|
|
20
|
|
|
95
|
|
|
172
|
|
|
57
|
|
|
65
|
|
|
469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
325
|
|
|
141
|
|
|
231
|
|
|
344
|
|
|
227
|
|
|
1,519
|
|
|
2,787
|
|
Energy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy Transmission, Distribution & Storage
|
|
|
5
|
|
|
630
|
|
|
75
|
|
|
378
|
|
|
|
|
|
|
|
|
229
|
|
|
1,312
|
|
District Energy
|
|
|
11
|
|
|
38
|
|
|
2
|
|
|
2
|
|
|
2
|
|
|
|
|
|
156
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
668
|
|
|
77
|
|
|
380
|
|
|
2
|
|
|
|
|
|
385
|
|
|
1,512
|
|
Communications Infrastructure
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Telecommunications Infrastructure
|
|
|
7
|
|
|
|
|
|
37
|
|
|
|
|
|
62
|
|
|
|
|
|
311
|
|
|
410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
37
|
|
|
|
|
|
62
|
|
|
|
|
|
311
|
|
|
410
|
|
Total non-recourse borrowings
(1)
|
|
|
8
|
|
|
1,024
|
|
|
259
|
|
|
669
|
|
|
604
|
|
|
527
|
|
|
4,469
|
|
|
7,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings
(2)
|
|
|
8
|
|
$
|
1,319
|
|
$
|
352
|
|
$
|
669
|
|
$
|
883
|
|
$
|
527
|
|
$
|
4,804
|
|
$
|
8,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash retained in businesses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
45
|
|
Transport
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
176
|
|
Energy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
|
|
Communications Infrastructure
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash retained
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,798
|
|
Transport
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,611
|
|
Energy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,468
|
|
Communications Infrastructure
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
392
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,722
|
|
Total net debt
|
|
|
|
|
|
15%
|
|
|
4%
|
|
|
8%
|
|
|
10%
|
|
|
6%
|
|
|
57%
|
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Represents non-recourse debt to Brookfield Infrastructure as the holders have recourse only to the underlying operations.
-
(2)
-
As of December 31, 2016, approximately 16% has been issued as floating rate debt. Brookfield Infrastructure and its subsidiaries have entered into
interest rate swaps whereby the floating rate debt has been converted to fixed rate debt, effectively reducing floating rate debt maturities to approximately 15% of our total borrowings. Excluding
working capital and capital expenditure facilities, floating rate debt maturities approximate 14% of our total borrowings, inclusive of the impact of interest rate swaps.
Brookfield Infrastructure 111
Table of Contents
Our debt has an average term of 8 years. On a proportionate basis, our net debt-to-capitalization ratio as of December 31, 2016 was
54%. The weighted average cash interest rate is 5.3% for the overall business (December 31, 2015: 5.8%), in which our utilities, transport, energy, communications infrastructure and corporate
segments were 4.0%, 7.4%, 7.0%, 2.6% and 3.4%, respectively (December 31, 2015: 5.3%, 6.6%, 6.9%, 2.1% and 3.2%, respectively).
Proportionate
debt can be reconciled to consolidated debt as follows:
|
|
|
|
|
|
|
|
|
|
As of December 31
|
|
US$ MILLIONS
|
|
2016
|
|
2015
|
|
Consolidated debt
|
|
$
|
8,236
|
|
$
|
7,232
|
|
Add: proportionate share of debt of investments in associates:
|
|
|
|
|
|
|
|
Utilities
|
|
|
727
|
|
|
643
|
|
Transport
|
|
|
1,083
|
|
|
764
|
|
Energy
|
|
|
1,146
|
|
|
1,462
|
|
Communications Infrastructure
|
|
|
410
|
|
|
423
|
|
Add: proportionate share of debt directly associated with assets held for sale
|
|
|
|
|
|
206
|
|
Less: borrowings attributable to non-controlling interest
|
|
|
(2,619
|
)
|
|
(1,662
|
)
|
Premium on debt and cross currency swaps
|
|
|
(429
|
)
|
|
(471
|
)
|
|
|
|
|
|
|
Proportionate debt
|
|
$
|
8,554
|
|
$
|
8,597
|
|
|
|
|
|
|
|
FINANCIAL INSTRUMENTS
Foreign Currency Hedging Strategy
To the extent that we believe it is economic to do so, our strategy is to hedge a portion of our equity investments and/or cash flows
exposed to foreign currencies. The following key principles form the basis of our foreign currency hedging strategy:
-
-
We leverage any natural hedges that may exist within our operations
-
-
We utilize local currency debt financing to the extent possible
-
-
We may utilize derivative contracts to the extent that natural hedges are insufficient
The
following table presents our hedged position in foreign currencies as of December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investment Hedges
|
|
US$ MILLIONS
|
|
USD
|
|
AUD
|
|
GBP
|
|
BRL
|
|
CLP
|
|
CAD
|
|
EUR
|
|
COP
|
|
PEN
|
|
INR
|
|
Equity InvestmentUS$
|
|
$
|
1,476
|
|
$
|
1,532
|
|
$
|
1,019
|
|
$
|
1,724
|
|
$
|
95
|
|
$
|
(288
|
)
|
$
|
725
|
|
$
|
64
|
|
$
|
114
|
|
$
|
37
|
|
FX contractsUS$
|
|
|
3,251
|
|
|
(1,532
|
)
|
|
(1,019
|
)
|
|
|
|
|
|
|
|
(87
|
)
|
|
(613
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unhedgedUS$
|
|
$
|
4,727
|
|
$
|
|
|
$
|
|
|
$
|
1,724
|
|
$
|
95
|
|
$
|
(375
|
)
|
$
|
112
|
|
$
|
64
|
|
$
|
114
|
|
$
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of equity investment hedged
|
|
|
N/A
|
|
|
100%
|
|
|
100%
|
|
|
%
|
|
|
%
|
|
|
N/A
|
|
|
85%
|
|
|
%
|
|
|
%
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2016, we had hedges in place to convert a total of 73% of our net equity investment to U.S. dollars. For the
12 months ended December 31, 2016, we recorded gains in other comprehensive income of $169 million related to these contracts (2015: $89 million).
For
additional information, see Note 6, "Fair Value of Financial Instruments", Note 33, "Derivative Financial Instruments" and Note 34, "Financial Risk Management"
in our financial statements included in this annual report on Form 20-F.
112 Brookfield Infrastructure
Table of Contents
OTHER MARKET RISKS
Inflation Risk
Certain of our subsidiaries and associates are subject to inflation risk. Most significantly, our South American electricity
transmission operations and a portion of our toll road operations in Chile are subject to inflation risk as these debt portfolios are denominated in Unidad de Fomento which is an inflation indexed
Chilean peso monetary unit that is set daily, on the basis of the prior month's inflation rate. However, we believe this is offset by the nature of our revenues which are in large part indexed to
Chilean inflation.
Commodity Risk
Some of our operations are critically linked to the transport or production of key commodities. For example, in the long-term, our
Australian regulated terminal operation relies on demand for coal exports, our Australian rail operation relies on demand for iron ore exports and our North American natural gas transmission operation
relies on demand for natural gas and benefits from higher gas prices. While we endeavour to protect against short to medium term commodity demand risk wherever possible by structuring our contracts in
a way that minimizes volume risk (e.g. minimum guaranteed volumes and 'take-or-pay' arrangements), these contract terms are not always able to be achieved and in any event the contract terms
are finite and may include suspension or termination rights in favour of the customer. Accordingly, a long-term and sustained downturn in the demand for or price of a key commodity linked to one of
our operations may have a material adverse impact on the financial performance or growth prospects of that particular operation, notwithstanding the use of take-or-pay contracts wherever possible. See
Item 4.B "Business Overview" for more information.
Revenues
from our South American transmission operation are adjusted by a multi-factor inflation index that is designed to approximate changes in prices of the underlying components of
the replacement cost of our transmission system. See Item 4.B "Business Overview". Due to the construction of the system, metals, such as aluminum, are a material percentage of replacement
cost. Thus, changes in the price of these metals will impact our revenues.
CAPITAL REINVESTMENT
Our financing plan is to fund our recurring growth capital expenditures with cash flow generated by our operations, as well as debt
financing that is sized to maintain our credit profile. To fund large scale development projects and acquisitions, we will evaluate a variety of capital sources including proceeds from selling
non-core assets, equity and debt financing. We will seek to raise additional equity if we believe that we can earn returns on these investments in excess of the cost of the incremental equity.
Brookfield Infrastructure 113
Table of Contents
The
following table highlights the sources and uses of cash for the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
US$ MILLIONS
|
|
2016
|
|
2015
|
|
2014
|
|
Funds from operations (FFO)
|
|
$
|
944
|
|
$
|
808
|
|
$
|
724
|
|
Maintenance capital expenditures
|
|
|
(173
|
)
|
|
(136
|
)
|
|
(131
|
)
|
|
|
|
|
|
|
|
|
Funds available for distribution (AFFO)
|
|
|
771
|
|
|
672
|
|
|
593
|
|
Distributions paid
|
|
|
(628
|
)
|
|
(546
|
)
|
|
(448
|
)
|
|
|
|
|
|
|
|
|
Funds available for reinvestment
|
|
|
143
|
|
|
126
|
|
|
145
|
|
|
|
|
|
|
|
|
|
Growth capital expenditures
|
|
|
(843
|
)
|
|
(597
|
)
|
|
(611
|
)
|
Debt funding of growth capex
|
|
|
460
|
|
|
364
|
|
|
339
|
|
Asset level financings (repayments)
|
|
|
33
|
|
|
(243
|
)
|
|
77
|
|
Disposals, net of new investments
|
|
|
(159
|
)
|
|
(1,669
|
)
|
|
(310
|
)
|
(Repayments) draws on corporate credit facility
|
|
|
(407
|
)
|
|
161
|
|
|
246
|
|
Partnership unit issuances, net of repurchases
|
|
|
749
|
|
|
889
|
|
|
|
|
Proceeds from debt issuance
|
|
|
|
|
|
738
|
|
|
|
|
Proceeds from preferred units issuance
|
|
|
186
|
|
|
189
|
|
|
|
|
Changes in working capital and other
|
|
|
127
|
|
|
(112
|
)
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
Change in proportionate cash
|
|
|
289
|
|
|
(154
|
)
|
|
(156
|
)
|
Opening, proportionate cash
|
|
|
543
|
|
|
697
|
|
|
853
|
|
|
|
|
|
|
|
|
|
Closing, proportionate cash
|
|
$
|
832
|
|
$
|
543
|
|
$
|
697
|
|
|
|
|
|
|
|
|
|
The following table presents the components of growth capital expenditures by operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
US$ MILLIONS
|
|
2016
|
|
2015
|
|
2014
|
|
Growth capital expenditures by segment
|
|
|
|
|
|
|
|
|
|
|
Utilities
|
|
$
|
428
|
|
$
|
258
|
|
$
|
242
|
|
Transport
|
|
|
319
|
|
|
297
|
|
|
332
|
|
Energy
|
|
|
67
|
|
|
27
|
|
|
37
|
|
Communications Infrastructure
|
|
|
29
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
843
|
|
$
|
597
|
|
$
|
611
|
|
|
|
|
|
|
|
|
|
Growth capital expenditures for the year ended December 31, 2016 were $843 million, an increase of $246 million or 41% versus
2015. The increase in growth capital expenditures is associated with higher connections activity and the investment in our smart meter program at our U.K. regulated distribution business,
increased ownership in our South American toll road business and capital deployed at our Australian district energy business. These items were partially offset by the depreciation of most foreign
currencies in which we operate versus the U.S. dollar relative to the prior year.
114 Brookfield Infrastructure
Table of Contents
The
following table presents the components of maintenance capital expenditures by operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
Estimated
Maintenance
Capex
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
US$ MILLIONS
|
|
Low
|
|
High
|
|
Maintenance capital expenditures by segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilities
|
|
$
|
10
|
|
$
|
15
|
|
$
|
15
|
|
$
|
13
|
|
$
|
14
|
|
Transport
|
|
|
115
|
|
|
125
|
|
|
88
|
|
|
72
|
|
|
80
|
|
Energy
|
|
|
65
|
|
|
75
|
|
|
61
|
|
|
45
|
|
|
37
|
|
Communications Infrastructure
|
|
|
5
|
|
|
10
|
|
|
9
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
195
|
|
$
|
225
|
|
$
|
173
|
|
$
|
136
|
|
$
|
131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We estimate annual maintenance capital expenditures to be $10-15 million, $115-125 million, $65-75 million, and
$5-10 million for our utilities, transport, energy, and communication infrastructure segments, respectively, for a total range between $195-225 million.
PARTNERSHIP CAPITAL
Our partnership's capital structure is comprised of three classes of partnership units: our units, preferred units and general
partnership units. Our units entitle the holder to their proportionate share of distributions. Preferred units entitle the holder to cumulative preferential cash distributions in accordance with their
terms. General partnership units entitle the holder the right to govern our financial and operating policies. Our partnership controls the Holding LP, which in turn is the indirect shareholder
of our operating entities, through a 70.2% managing general partner interest. As of December 31, 2016, Brookfield holds a 29.3% interest in the Holding LP through Redeemable Partnership
Units and an additional 0.4% interest in the Holding LP through Special Limited Partner Units. The Redeemable Partnership Units, at the request of the holder, require the Holding LP to
redeem all or a portion of the holder's units for cash in an amount equal to the market value of our units multiplied by the number of units to be redeemed. This right is subject to our partnership's
right of first refusal which entitles it, at its sole discretion, to elect to acquire any Reedemable Partnership Unit so presented to the Holding LP in exchange for one of our partnership's
units (subject to certain customary adjustments). Both the units issued by our partnership and the Redeemable Partnership Units issued by the Holding LP have the same economic attributes in all
respects, except for the redemption right described above. The Redeemable Partnership Units participate in earnings and distributions on a per unit basis equivalent to the per unit participation of
the units of our partnership. Our partnership reflects the Redeemable Partnership Units issued to Brookfield by the Holding LP as a separate component of non-controlling interest, within
consolidated equity, as Brookfield Infrastructure can, at its sole discretion, elect to satisfy a redemption request by Brookfield of the Redeemable Partnership Units by issuing an equal number of
units. Based on the number of units outstanding as of December 31, 2016, Brookfield's aggregate limited partnership interest in our partnership would be approximately 29.5%, if Brookfield fully
exercised its redemption right and our partnership fully exercised its right of first refusal.
Brookfield Infrastructure 115
Table of Contents
Brookfield's
0.4% interest in the Holding LP through Special Limited Partner Units entitles it to incentive distribution rights which are based on the amount by which quarterly
distributions on the Holding LP's units (other than Holding LP Class A Preferred Units) exceed specified target levels. To the extent distributions on the Holding LP's units (other than
Holding LP Class A Preferred Units) exceed $0.203 per quarter, the incentive distribution rights entitle Infrastructure Special LP to 15% of incremental distributions above this threshold. To
the extent that distributions on the Holding LP's units (other than Holding LP Class A Preferred Units) exceed $0.22 per quarter, the incentive distribution rights entitle Infrastructure
Special LP to 25% of incremental distributions above this threshold. During the year ended December 31, 2016, the Holding LP paid incentive distributions of $80 million
(2015: $64 million, 2014: $44 million). Infrastructure Special LP may elect to reinvest any of the incentive distributions from its Special Limited Partner Units in additional
Redeemable Partnership Units.
On
September 14, 2016, we completed a three-for-two split of our units by way of a subdivision of units, whereby unitholders received an additional one-half of a unit for each
unit held, resulting in the issuance of approximately 115 million additional units. Any fractional units otherwise issuable to registered holders as a result of the Unit Split were rounded up
to the nearest whole unit. Our preferred units were not affected by the Unit Split. The Managing General Partner Units, Special Limited Partner Units and Redeemable Partnership Units of the
Holding LP were concurrently split to reflect the Unit Split. All historical per unit disclosures have been adjusted to effect for the change in units due to the Unit Split.
On
November 8, 2016, we announced that we renewed our normal course issuer bid for outstanding units and our Class A Preferred Units. Under the normal course issuer bid,
the board of directors of our General Partner authorized us to repurchase up to 5% of the issued and outstanding units, or 12,181,987 units, and up to 10% of the public float of each series of
the Class A Preferred Units that were issued and outstanding. Repurchases were authorized to commence on November 10, 2016 and will terminate on November 9, 2017, or earlier
should we complete our repurchases prior to such date. All purchases will be made through the facilities of the TSX or the NYSE, and all units and Class A Preferred Units acquired under the
normal course issuer bid will be cancelled.
In
December 2016, we issued approximately 15.6 million units at $32 per unit in public offerings in the U.S. and Canada. In total, $500 million of gross proceeds
were raised through the issuance and $20 million in equity issuance costs were incurred. Concurrently, we issued 8.1 million Redeemable Partnership Units at the public offering price,
net of commissions, to Brookfield in a private placement for additional proceeds of $250 million. After giving effect to the public offering and concurrent private placement to Brookfield, our
partnership's ownership interest in the Holding LP decreased slightly from 70.5% to 70.2% without resulting in a loss of control. The difference between the proportionate amount by which the
non-controlling interest in Holding LP was increased and the proceeds of the Redeemable Partnership Unit offering resulted in a gain of $16 million that was recognized directly
in equity.
Our
partnership has established a distribution reinvestment plan ("Plan"), that allows eligible holders of our units to purchase additional units by reinvesting their cash distributions.
Under the Plan, units are acquired at a price per unit calculated by reference to the volume weighted average of the trading price for our units on the NYSE for the five trading days immediately
preceding the relevant distribution date. During the period, our partnership issued 791,183 units (2015: 266,127 units).
116 Brookfield Infrastructure
Table of Contents
The
total number of partnership units in the Holding LP outstanding was comprised of the following:
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Redeemable Partnership Units, held by Brookfield
|
|
|
108,401,992
|
|
|
100,262,992
|
|
Special Limited Partner Units
|
|
|
1,600,410
|
|
|
1,600,410
|
|
Managing General Partner Units
|
|
|
259,450,045
|
|
|
243,247,458
|
|
|
|
|
|
|
|
Total
|
|
|
369,452,447
|
|
|
345,110,860
|
|
|
|
|
|
|
|
During 2016 and 2015, our outstanding issued Redeemable Partnership Units changed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
MILLIONS, EXCEPT UNIT INFORMATION
|
|
Book Value
|
|
Units
|
|
Book Value
|
|
Units
|
|
Outstanding at beginning of year
|
|
$
|
1,528
|
|
|
100,262,992
|
|
$
|
1,178
|
|
|
88,110,084
|
|
Units issued
|
|
|
250
|
|
|
8,139,000
|
|
|
350
|
|
|
12,152,908
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
$
|
1,778
|
|
|
108,401,992
|
|
$
|
1,528
|
|
|
100,262,992
|
|
|
|
|
|
|
|
|
|
|
|
During 2016 and 2015, our outstanding issued Special Limited Partner Units changed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
MILLIONS, EXCEPT UNIT INFORMATION
|
|
Book Value
|
|
Units
|
|
Book Value
|
|
Units
|
|
Outstanding at beginning of year
|
|
$
|
19
|
|
|
1,600,410
|
|
$
|
19
|
|
|
1,600,410
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
$
|
19
|
|
|
1,600,410
|
|
$
|
19
|
|
|
1,600,410
|
|
|
|
|
|
|
|
|
|
|
|
During 2016 and 2015, our outstanding issued Managing General Partner Units changed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
MILLIONS, EXCEPT UNIT INFORMATION
|
|
Book Value
|
|
Units
|
|
Book Value
|
|
Units
|
|
Outstanding at beginning of year
|
|
$
|
3,716
|
|
|
243,247,458
|
|
$
|
3,201
|
|
|
225,479,916
|
|
Units issued
|
|
|
505
|
|
|
16,418,289
|
|
|
582
|
|
|
20,268,845
|
|
Units purchased and cancelled
|
|
|
(6
|
)
|
|
(215,702
|
)
|
|
(67
|
)
|
|
(2,501,303
|
)
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
$
|
4,215
|
|
|
259,450,045
|
|
$
|
3,716
|
|
|
243,247,458
|
|
|
|
|
|
|
|
|
|
|
|
The total number of preferred partnership units in the Holding LP outstanding was comprised of the following:
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Holding LP Series 1 Preferred Units
|
|
|
5,000,000
|
|
|
5,000,000
|
|
Holding LP Series 3 Preferred Units
|
|
|
5,000,000
|
|
|
5,000,000
|
|
Holding LP Series 5 Preferred Units
|
|
|
10,000,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
20,000,000
|
|
|
10,000,000
|
|
|
|
|
|
|
|
Brookfield Infrastructure 117
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Our preferred units were not affected by the Unit Split.
During
2016 and 2015, our outstanding issued Preferred Units changed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
MILLIONS, EXCEPT UNIT INFORMATION
|
|
Book Value
|
|
Units
|
|
Book Value
|
|
Units
|
|
Outstanding at beginning of year
|
|
$
|
189
|
|
|
10,000,000
|
|
$
|
|
|
|
|
|
Units issued
|
|
|
186
|
|
|
10,000,000
|
|
|
189
|
|
|
10,000,000
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
$
|
375
|
|
|
20,000,000
|
|
$
|
189
|
|
|
10,000,000
|
|
|
|
|
|
|
|
|
|
|
|
In August 2016, our Limited Partnership Agreement was amended to create the Series 5 Preferred Units and Series 6 Preferred
Units. The limited partnership agreement of the Holding LP was also amended to create the Holding LP Series 5 Preferred Units and Holding LP Series 6 Preferred Units
with terms substantially mirroring the Series 5 Preferred Units and Series 6 Preferred Units, respectively. Our Partnership issued 10 million Series 5 Preferred Units at an
offering price of C$25.00 per Series 5 Preferred Unit under its shelf registration in Canada and acquired 10 million Holding LP Series 5 Preferred Units at the
offering price.
5.C RESEARCH AND DEVELOPMENT
Not applicable.
5.D TREND INFORMATION
We will seek to increase the cash flows from our operations through acquisitions and organic growth opportunities as described below.
In particular, we focus on consortiums and partnerships where Brookfield has sufficient influence or control to deploy our operations oriented approach and Brookfield has a strong track record of
leading such transactions, which provides the opportunity to expand cash flows through acquisitions. In addition, we have a substantial capital backlog to be commissioned in the next two to three
years and we believe that notwithstanding increasing political uncertainty, most of our markets have favourable outlooks, which we believe provides an opportunity for increased organic growth in cash
flows. Our beliefs as to the opportunities for our partnership to increase cash flows through acquisitions and organic growth are based on assumptions about our business and markets that management
believes are reasonable in the circumstances. There can be no assurance as to growth in or cash flows, or capital deployed for acquisitions or organic growth. See page 4, "Forward-Looking
Statements".
We
believe our global scale and best-in-class operating groups provide us with a unique competitive advantage as we are able to efficiently allocate capital around the world toward those
sectors and geographies where we see the greatest returns. We actively recycle assets on our balance sheet as they mature and reinvest the proceeds into higher yielding investment strategies, further
enhancing returns.
Given
the small amount of new infrastructure development that occurred over the last decade compared to the infrastructure requirements of the regions in which we operate, we see an
opportunity to deploy significant capital in the near term in response to demand we are seeing in our major markets. Specifically, we plan to commission over $1 billion of our capital backlog
over the next 12-18 months and continue the build-out of our gas and electricity transmission businesses in Brazil.
118 Brookfield Infrastructure
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Additionally,
our strategy is to take a long-term perspective on the regions where the business has an established presence, and to invest further during periods of market weakness.
Recently, we have taken a long-term view on Brazil by pursuing transactions involving a number of large-scale assets. In 2016, the focus was on executing transactions while the country was in a severe
recession and lost its investment grade status. It is possible that a similar situation may be developing in Mexico. Due to the protectionist sentiment garnering considerable momentum in the U.S., the
level of uncertainty and anxiety related to Mexico's future economic performance has not been worse in over 20 years. The peso has dropped to its lowest level since 1994 and the country's
foreign direct investment is likely to slow down as capital sits on the sidelines. We believe that concerns over the country may overshoot and as a result, our business development efforts have
increased to capitalize on opportunities that may arise.
In
India, the government has made strides in making the operating and legal environments more investor friendly and the expected GDP growth rate over the foreseeable future is far in
excess of many developed countries, making it an attractive market in invest in for the long-term.
To
fund future growth, we will also be focused on executing the next phase of our capital recycling program. With the maturing profile of a number of our businesses, proceeds from asset
sales are expected to generate between $1.5 billion and $2.0 billion over the next few years.
5.E OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our
financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
We,
on behalf of our subsidiaries, provide letters of credit, which include, but are not limited to, guarantees for debt service reserves, capital reserves, construction completion and
performance. As at December 31, 2016, letters of credit issued by our subsidiaries amounted to $46 million (December 31, 2015: $83 million).
In
the normal course of operations, we execute agreements that provide for indemnification and guarantees to third parties in transactions such as business dispositions and acquisitions,
construction projects, capital projects, and sales and purchases of assets and services. We have also agreed to indemnify our directors and certain of our officers and employees. The nature of
substantially all of the indemnification undertakings prevents us from making a reasonable estimate of the maximum potential amount that we could be required to pay third parties, as many of the
agreements do not specify a maximum amount and the amounts are dependent upon the outcome of future contingent events, the nature and likelihood of which cannot be determined at this time.
Historically, we have made no significant payments under such indemnification agreements.
Brookfield Infrastructure 119
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5.F TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The table below outlines Brookfield Infrastructure's contractual obligations as at December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
US$ MILLIONS
|
|
Less than
1 year
|
|
1-2 years
|
|
2-5 years
|
|
5+ years
|
|
Total
contractual
cash flows
|
|
Accounts payable and other liabilities
|
|
$
|
540
|
|
$
|
34
|
|
$
|
26
|
|
$
|
186
|
|
$
|
786
|
|
Corporate borrowing
|
|
|
295
|
|
|
93
|
|
|
279
|
|
|
335
|
|
|
1,002
|
|
Non-Recourse borrowing
|
|
|
286
|
|
|
233
|
|
|
1,708
|
|
|
5,109
|
|
|
7,336
|
|
Financial liabilities
|
|
|
229
|
|
|
29
|
|
|
49
|
|
|
74
|
|
|
381
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate borrowing
|
|
|
40
|
|
|
29
|
|
|
64
|
|
|
14
|
|
|
147
|
|
Non-Recourse borrowing
|
|
|
361
|
|
|
342
|
|
|
871
|
|
|
1,450
|
|
|
3,024
|
|
In addition, pursuant to the Master Services Agreement, on a quarterly basis we pay a base management fee to Brookfield equal to 0.3125% (1.25%
annually) of the market value of our partnership plus net recourse debt. This fee is estimated to be approximately $168 million per year based on our market capitalization and unit price as at
December 31, 2016.
An
integral part of our partnership's strategy is to participate with institutional investors in Brookfield-sponsored private infrastructure funds that target acquisitions that suit
Brookfield Infrastructure's profile. In the normal course of business, our partnership has made commitments to Brookfield-sponsored private infrastructure funds to participate in these target
acquisitions in the future, if and when identified.
5.G SAFE HARBOUR
See "Forward-Looking Statements" in the forepart of this Form 20-F.
ITEM 10. ADDITIONAL INFORMATION
10.A SHARE CAPITAL
Not applicable.
10.B MEMORANDUM AND ARTICLES OF ASSOCIATION
DESCRIPTION OF OUR UNITS, PREFERRED UNITS AND OUR LIMITED PARTNERSHIP AGREEMENT
The following is a description of the material terms of our units and our Limited Partnership Agreement and is qualified in its
entirety by reference to all of the provisions of our Limited Partnership Agreement. Because this description is only a summary of the terms of our units and our Limited Partnership Agreement, it does
not contain all of the information that you may find useful. For more complete information, you should read our Limited Partnership Agreement which is available electronically on the website of the
Securities and Exchange Commission at www.sec.gov and our Canadian System for Electronic Document Analysis and Retrieval ("SEDAR") profile at www.sedar.com and will be made available to our holders as
described under Item 10.C "Material Contracts" and Item 10.H "Documents on display."
See
also the information contained in this annual report on Form 20-F under Item 3.D "Risk FactorsRisk Relating to Our Relationship with Brookfield,"
Item 4.C "Organizational Structure," Item 6.A "Directors and Senior Management" and Item 7.B "Related Party Transactions."
Formation and Duration
Our partnership is a Bermuda exempted limited partnership registered under the Bermuda Limited Partnership Act and the Bermuda Exempted
Partnerships Act. Our partnership has a perpetual existence and will continue as a limited liability partnership unless our partnership is terminated or dissolved in accordance with our Limited
Partnership Agreement. Our partnership interests consist of our units and preferred units, which represent limited partnership interests in our partnership, and any additional partnership interests
representing limited partnership interests that we may issue in the future as described below under "Issuance of Additional Partnership Interests." In this description, references to
"holders of our partnership interests", our "preferred unitholders" and our "unitholders" are to our limited partners and references to our limited partners include holders of our units and preferred
units.
Brookfield Infrastructure 149
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Nature and Purpose
Under section 2.2 of our Limited Partnership Agreement, the purpose of our partnership is to: acquire and hold interests in the
Holding LP and, subject to the approval of our General Partner, interests in any other entity; engage in any activity related to the capitalization and financing of our partnership's interests
in such entities; serve as the managing general partner of the Holding LP; and engage in any other activity that is incidental to or in furtherance of the foregoing and that is approved by our
General Partner and that lawfully may be conducted by a limited partnership organized under the Bermuda Limited Partnership Act, the Exempted Partnerships Act, and our Limited Partnership Agreement.
Holders of Units or Preferred Units
Our units and preferred units are limited partnership interests in our partnership. Holders of our units or preferred units are not
entitled to the withdrawal or return of capital contributions in respect of our units or preferred units, except to the extent, if any, that distributions are made to such holders pursuant to our
Limited Partnership Agreement or upon the liquidation of our partnership as described below under "Liquidation and Distribution of Proceeds" or as otherwise required by applicable law.
Except to the extent expressly provided in our Limited Partnership Agreement, a holder of our units or preferred units does not have priority over any other unitholder or preferred unitholder, either
as to the return of capital contributions or as to profits, losses or distributions. Unitholders and preferred unitholders will not be granted any preemptive or other similar right to acquire
additional interests in our partnership. In addition, unitholders and preferred unitholders do not have any right to have their units or preferred units redeemed by our partnership.
Our Preferred Units
The Class A Preferred Units rank senior to the units with respect to priority in the payment of distributions and in the
distribution of the assets in the event of the liquidation, dissolution or winding-up of our partnership, whether voluntary or involuntary. Each series of Class A Preferred Units ranks on a
parity with every other series of the Class A Preferred Units with respect to priority in the payment of distributions and in the distribution of the assets in the event of the liquidation,
dissolution or winding-up of our partnership, whether voluntary or involuntary.
150 Brookfield Infrastructure
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The
Series 1 Preferred Units are redeemable by our partnership on June 30, 2020 and on June 30 every five years thereafter for C$25.00 per Series 1 Preferred
Unit, together with all accrued and unpaid distributions. Holders of the Series 1 Preferred Units will have the right, at their option, to reclassify their Series 1 Preferred Units into
Series 2 Preferred Units, subject to certain conditions, on June 30, 2020 and on June 30 every five years thereafter. The Series 3 Preferred Units are redeemable by our
partnership on December 31, 2020 and on December 31 every five years thereafter for C$25.00 per Series 3 Preferred Unit, together with all accrued and unpaid distributions.
Holders of the Series 3 Preferred Units will have the right, at their option, to reclassify their Series 3 Preferred Units into Series 4 Preferred Units, subject to certain
conditions, on December 31, 2020 and on December 31 every five years thereafter. The Series 5 Preferred Units are redeemable by our partnership on September 30, 2021 and on
September 30 every five years thereafter for C$25.00 per Series 5 Preferred Unit, together with all accrued and unpaid distributions. Holders of the Series 5 Preferred Units will
have the right, at their option, to reclassify their Series 5 Preferred Units into Series 6 Preferred Units, subject to certain conditions, on September 30, 2021 and on
September 30 every five years thereafter. The Series 7 Preferred Units are redeemable by our partnership on March 31, 2022 and on March 31 every five years thereafter for
C$25.00 per Series 7 Preferred Unit, together with all accrued and unpaid distributions. Holders of the Series 7 Preferred Units will have the right, at their option, to reclassify their
Series 7 Preferred Units into Series 8 Preferred Units, subject to certain conditions, March 31, 2022 and on March 31 every five years thereafter. Our preferred units do
not have a fixed maturity date and are not redeemable at the option of preferred unitholders.
Issuance of Additional Partnership Interests
Subject to the rights of the holders of Class A Preferred Units to approve issuances of additional partnership interests ranking
senior to the Class A Preferred Units with respect to priority in the payment of distributions and in the distribution of the assets in the event of the liquidation, dissolution or winding-up
of our partnership, whether voluntary or involuntary, our General Partner has broad rights to cause our partnership to issue additional partnership interests and may cause our partnership to issue
additional partnership interests (including new classes of partnership interests and options, rights, warrants and appreciation rights relating to such interests) for any partnership purpose, at any
time and on such terms and conditions as it may determine without the approval of any limited partners. Any additional partnership interests may be issued in one or more classes, or one or more series
of classes, with such designations, preferences, rights, powers and duties (which may be senior to existing classes and series of partnership interests) as may be determined by our General Partner in
its sole discretion, all without approval of our limited partners.
Investments in the Holding LP
If and to the extent that our partnership raises funds by way of the issuance of equity or debt securities, or otherwise, pursuant to a
public offering, private placement or otherwise, an amount equal to the proceeds will be invested in the Holding LP, unless otherwise agreed by our partnership and the Holding LP.
Capital Contributions
Brookfield and our General Partner each contributed $1 to the capital of our partnership in order to form our partnership. Thereafter,
Brookfield contributed to our partnership limited partnership interests of the Holding LP in exchange for Redeemable Partnership Units and our units, the latter of which was distributed by
Brookfield Asset Management in the spin-off.
Brookfield Infrastructure 151
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Distributions
Subject to the rights of holders of Class A Preferred Units to receive cumulative preferential cash distributions in accordance
with their terms, distributions to partners of our partnership will be made only as determined by our General Partner in its sole discretion. However, our General Partner will not be permitted to
cause our partnership to make a distribution if it does not have sufficient cash on hand to make the distribution, the distribution would render it insolvent or if, in the opinion of our General
Partner, the distribution would leave it with insufficient funds to meet any future or contingent obligations. In addition, our partnership will not be permitted to make a distribution on our units
unless all accrued distributions have been paid in respect of the Class A Preferred Units and all other units of our partnership ranking prior to or on a parity with the Class A
Preferred Units with respect to the payment of distributions.
Holders
of the Series 1 Preferred Units will be entitled to receive a cumulative quarterly fixed distribution at a rate of 4.50% annually for the initial period ending
June 30, 2020. Thereafter, the distribution rate will be reset every five years at a rate equal to the 5-year Government of Canada bond yield plus 3.56%. Holders of Series 2 Preferred
Units will be entitled to receive a cumulative quarterly floating distribution at a rate equal to the 90-day Canadian Treasury Bill yield plus 3.56%. Holders of the Series 3 Preferred Units
will be entitled to receive a cumulative quarterly fixed distribution at a rate of 5.50% annually for the initial period ending December 31, 2020. Thereafter, the distribution rate will be
reset every five years at a rate equal to the greater of: (i) the 5-year Government of Canada bond yield plus 4.53%, and (ii) 5.50%. Holders of Series 4 Preferred Units will be
entitled to receive a cumulative quarterly floating distribution at a rate equal to the 90-day Canadian Treasury Bill yield plus 4.53%. Holders of the Series 5 Preferred Units will be entitled
to receive a cumulative quarterly fixed distribution at a rate of 5.35% annually for the initial period ending September 30, 2021. Thereafter, the distribution rate will be reset every five
years at a rate equal to the greater of: (i) the 5 year Government of Canada bond yield plus 4.64%, and (ii) 5.35%. Holders of Series 6 Preferred Units will be entitled to
receive a cumulative quarterly floating distribution at a rate equal to the 90 day Canadian Treasury Bill yield plus 4.64%. Holders of the Series 7 Preferred Units will be entitled to
receive a cumulative quarterly fixed distribution at a rate of 5.00% annually for the initial period ending March 31, 2022. Thereafter, the distribution rate will be reset every five years at a
rate equal to the greater of: (i) the 5 year Government of Canada bond yield plus 3.78%, and (ii) 5.00%. Holders of Series 8 Preferred Units will be entitled to receive a
cumulative quarterly floating distribution at a rate equal to the 90 day Canadian Treasury Bill yield plus 3.78%. Subject to the terms of any preferred units outstanding at the time, any
distributions from our partnership will be made to the limited partners holding units as to 99.99% and to our General Partner as to 0.01%. Distributions to holders of Class A Preferred Units in
accordance with their terms rank higher in priority than distributions to holders of our units. Each holder of units or preferred units will receive a pro rata share of distributions made to
all holders of units or preferred units, as applicable, in accordance with the proportion of all units or preferred units held by that holder. See Item 8.A "Consolidated Statements and Other
Financial Information."
Allocations of Income and Losses
Net income and net loss for U.S. federal income tax purposes will be allocated for each taxable year or other relevant period
among our partners (other than our partners holding preferred units) using a monthly, quarterly or other permissible convention pro rata on a per unit basis, except to the extent otherwise
required by law or pursuant to tax elections made by our partnership. The source and character of items of income and loss so allocated to a partner of our partnership (other than a partner holding
preferred units) will be the same source and character as the income earned or loss incurred by our partnership.
152 Brookfield Infrastructure
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The
income for Canadian federal income tax purposes of our partnership for a given fiscal year of our partnership will be allocated to each partner in an amount calculated by multiplying
such income by a fraction, the numerator of which is the sum of the distributions received by such partner with respect to such fiscal year and the denominator of which is the aggregate amount of the
distributions made by our partnership to partners with respect to such fiscal year, provided that the numerator and denominator will not include any distributions on the preferred units that are in
satisfaction of accrued distributions on the preferred units that were not paid in a previous fiscal year of our partnership where our General Partner determines that the inclusion of such
distributions would result in a preferred unitholder being allocated more income than it would have been if the distributions were paid in the fiscal year of our partnership in which they were
accrued. Generally, the source and character of items of income so allocated to a partner with respect to a fiscal year of our partnership will be the same source and character as the distributions
received by such partner with respect to such fiscal year. To such end, any person who was a partner at any time during such fiscal year but who has disposed of all of their units (including any
preferred units) before the last day of that fiscal year may be deemed to be a partner on the last day of such fiscal year for the purposes of subsection 96(1) of the Tax Act. Our
General Partner may adjust allocations of items that would otherwise be made pursuant to the terms of our Limited Partnership Agreement to the extent necessary to avoid an adverse effect on our
partnership's limited partners, subject to the approval of a committee of the board of directors of our General Partner made up of independent directors.
If,
with respect to a given fiscal year, no distribution is made by our partnership or our partnership has a loss for Canadian federal income tax purposes, one quarter of the income or
loss, as the case may be, for Canadian federal income tax purposes for such fiscal year, will be allocated to the partners of record at the end of each quarter ending in such fiscal year as follows:
(i) to the preferred unitholders in respect of preferred units held by them on each such date, such amount of the income or the loss, as the case may be, for Canadian federal income tax
purposes as our General Partner determines is reasonable in the circumstances having regard to such factors as our General Partner considers to be relevant, including, without limitation, the relative
amount of capital contributed to our partnership on the issuance of preferred units as compared to all other units and the relative fair market value of the preferred units as compared to all other
units, and (ii) to the partners, other than in respect of preferred units, the remaining amount of the income or the loss, as the case may be, for Canadian federal income tax purposes
pro rata to their respective percentage interests on each such date.
Limited Liability
Assuming that a limited partner does not participate in the control or management of our partnership or conduct the affairs of, sign or
execute documents for or otherwise bind our partnership within the meaning of the Bermuda Limited Partnership Act and otherwise acts in conformity with the provisions of our limited partnership
agreement, such partner's liability under the Bermuda Limited Partnership Act and our limited partnership agreement will be limited to the amount of capital such partner is obligated to contribute to
our partnership for its limited partner interest plus its share of any undistributed profits and assets, except as described below.
Brookfield Infrastructure 153
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If
it were determined, however, that a limited partner was participating in the control or management of our partnership or conducting the affairs of, signing or executing documents for
or otherwise binding our partnership (or purporting to do any of the foregoing) within the meaning of the Bermuda Limited Partnership Act or the Bermuda Exempted Partnerships Act, such limited
partner would be liable as if it were a general partner of our partnership in respect of all debts of our partnership incurred while that limited partner was so acting or purporting to act. Neither
our limited partnership agreement nor the Bermuda Limited Partnership Act specifically provides for legal recourse against our General Partner if a limited partner were to lose limited liability
through any fault of our General Partner. While this does not mean that a limited partner could not seek legal recourse, we are not aware of any precedent for such a claim in Bermuda case law.
No Management or Control
Our partnership's limited partners, in their capacities as such, may not take part in the management or control of the activities and
affairs of our partnership and do not have any right or authority to act for or to bind our partnership or to take part or interfere in the conduct or management of our partnership. Limited partners
are not entitled to vote on matters relating to our partnership, although holders of units are entitled to consent to certain matters as described under "Amendment of Our Limited
Partnership Agreement," "Opinion of Counsel and Limited Partner Approval," "Merger, Sale or Other Disposition of Assets," and "Withdrawal of Our General Partner"
which may be effected only with the consent of the holders of the percentages of our outstanding units specified below. In addition, limited partners have consent rights with respect to certain
fundamental matters and on any other matters that require their approval in accordance with applicable securities laws and stock exchange rules. Each unit shall entitle the holder thereof to one vote
for the purposes of any approvals of holders of units. Except as otherwise provided by law or as set out in the provisions attached to any series of Class A Preferred Units and except for
meetings of the holders of Class A Preferred Units as a class or meetings of the holders of a series thereof, the holders of a series of Class A Preferred Units are not entitled to
receive notice of, attend, or vote at any meeting of holders of units, unless and until our partnership shall have failed to pay eight quarterly distributions in respect of such series of
Class A Preferred Units, whether or not consecutive and whether or not such distributions have been declared and whether or not there are any monies of our partnership properly applicable to
the payment of distributions. In the event of such non-payment, and for only so long as any such distributions remain in arrears, such holders will be entitled to receive notice of and to attend each
meeting of holders of units (other than any meetings at which only holders of another specified class or series are entitled to vote) and such holders shall have the right, at any such meeting, to one
vote for each such Class A Preferred Unit held. Upon payment of the entire amount of all such distributions in arrears, the voting rights of such holders of Class A Preferred Units shall
forthwith cease (unless and until the same default shall again arise as described herein).
Meetings
Our General Partner may call special meetings of partners at a time and place outside of Canada determined by our General Partner on a
date not less than 10 days nor more than 60 days after the mailing of notice of the meeting. The limited partners do not have the ability to call a special meeting. Only holders of
record on the date set by our General Partner (which may not be less than 10 days nor more than 60 days, before the meeting) are entitled to notice of any meeting.
Written
consents may be solicited only by or on behalf of our General Partner. Any such consent solicitation may specify that any written consents must be returned to our partnership
within the time period, which may not be less than 20 days, specified by our General Partner.
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For purposes of determining holders of partnership interests entitled to provide consents to any action described above, our General Partner may set a record
date, which may be not less than 10 nor more than 60 days before the date by which record holders are requested in writing by our General Partner to provide such consents. Only those
holders of partnership interests on the record date established by our General Partner will be entitled to provide consents with respect to matters as to which a consent right applies.
Amendment of Our Limited Partnership Agreement
Amendments to our Limited Partnership Agreement may be proposed only by or with the consent of our General Partner. To adopt a proposed
amendment, other than the amendments that do not require limited partner approval discussed below, our General Partner must seek approval of a majority of our outstanding units required to approve the
amendment or call a meeting of the limited partners to consider and vote upon the proposed amendment.
Notwithstanding
the above, in addition to any other approvals required by law, the approval of all amendments to the rights, privileges, restrictions and conditions attaching to the
Class A Preferred Units as a class and any other approval to be given by the holders of the Class A Preferred Units may be (i) given by a resolution signed by the holders of
Class A Preferred Units owning not less than the percentage of the Class A Preferred Units that would be necessary to authorize such action at a meeting of the holders of the
Class A Preferred Units at which all holders of the Class A Preferred Units were present and voted or were represented by proxy, or (ii) passed by an affirmative vote of at least
66
2
/
3
% of the votes cast at a meeting of holders of the Class A Preferred Units duly called for that purpose and at which the holders of at least 25% of the outstanding
Class A Preferred Units are present or represented by proxy or, if no quorum is present at such meeting, at an adjourned meeting at which the holders of Class A Preferred Units then
present would form the necessary quorum. At any meeting of holders of Class A Preferred Units as a class, each such holder shall be entitled to one vote in respect of each Class A
Preferred Unit held.
Further,
in addition to any other approvals required by law, the approval of all amendments to the rights, privileges, restrictions and conditions attaching to each series of
Class A Preferred Units, as a series, and any other approval to be given by the holders of each series of Class A Preferred Units, as a series, may be (i) given by a resolution
signed by the holders of the applicable series of Class A Preferred Units owning not less than the percentage of such series of Class A Preferred Units that would be necessary to
authorize such action at a meeting of the holders of the applicable series of Class A Preferred Units at which all holders of the applicable series of Class A Preferred Units were
present and voted or were represented by proxy, or (ii) passed by an affirmative vote of at least 66
2
/
3
% of the votes cast at a meeting of holders of the applicable series of
Class A Preferred Units duly called for that purpose and at which the holders of at least 25% of the outstanding applicable series of Class A Preferred Units are present or represented
by proxy or, if no quorum is present at such meeting, at an adjourned meeting at which the holders of the applicable series of Class A Preferred Units then present would form the necessary
quorum. At any meeting of holders of a series of Class A Preferred Units, as a series, each such holder shall be entitled to one vote in respect of the applicable Class A Preferred
Unit held.
Prohibited Amendments
No amendment may be made that would:
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enlarge the obligations of any limited partner without its consent, except that any amendment that would have a material
adverse effect on the rights or preferences of any class of partnership interests in relation to other classes of partnership interests may be approved by at least a majority of the type or class of
partnership interests so affected; or
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enlarge the obligations of, restrict in any way any action by or rights of, or reduce in any way the amounts
distributable, reimbursable or otherwise payable by our partnership to our General Partner or any of its affiliates without the consent of our General Partner, which may be given or withheld in its
sole discretion.
The
provision of our Limited Partnership Agreement preventing the amendments having the effects described directly above can be amended upon the approval of the holders of at least 90%
of the outstanding units.
No Limited Partner Approval
Subject to applicable law, our General Partner may generally make amendments to our limited partnership agreement without the approval
of any limited partner to reflect:
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a change in the name of our partnership, the location of our partnership's registered office, or our partnership's
registered agent;
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the admission, substitution or withdrawal of partners in accordance with our Limited Partnership Agreement;
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a change that our General Partner determines is necessary or appropriate for our partnership to qualify or to continue our
partnership's qualification as a limited partnership or a partnership in which the limited partners have limited liability under the laws of any jurisdiction or to ensure that our partnership will not
be treated as an association taxable as a corporation or otherwise taxed as an entity for tax purposes;
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an amendment that our General Partner determines to be necessary or appropriate to address certain changes in tax
regulations, legislation or interpretation;
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an amendment that is necessary, in the opinion of our counsel, to prevent our partnership or our General Partner or its
directors, officers, agents or trustees, from having a material risk of being in any manner being subjected to the provisions of the Investment Company Act or similar legislation in other
jurisdictions;
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an amendment that our General Partner determines in its sole discretion to be necessary or appropriate for the creation,
authorization or issuance of any class or series of partnership interests or options, rights, warrants or appreciation rights relating to partnership securities;
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any amendment expressly permitted in our Limited Partnership Agreement to be made by our General Partner
acting alone;
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an amendment effected, necessitated or contemplated by an agreement of merger, consolidation or other combination
agreement that has been approved under the terms of our Limited Partnership Agreement;
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-
any amendment that in the sole discretion of our General Partner is necessary or appropriate to reflect and account for
the formation by our partnership of, or its investment in, any corporation, partnership, joint venture, limited liability company or other entity, as otherwise permitted by our Limited Partnership
Agreement;
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a change in our partnership's fiscal year and related changes; or
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any other amendments substantially similar to any of the matters described directly above.
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In
addition, our General Partner may make amendments to our Limited Partnership Agreement without the approval of any limited partner if those amendments, in the discretion of our
General Partner:
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do not adversely affect our partnership's limited partners considered as a whole (including any particular class of
partnership interests as compared to other classes of partnership interests) in any material respect;
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are necessary or appropriate to satisfy any requirements, conditions or guidelines contained in any opinion, directive,
order, ruling or regulation of any governmental agency or judicial authority;
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-
are necessary or appropriate to facilitate the trading of our units or preferred units or to comply with any rule,
regulation, guideline or requirement of any securities exchange on which our units or preferred units are or will be listed for trading;
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are necessary or appropriate for any action taken by our General Partner relating to splits or combinations of units or
preferred units under the provisions of our Limited Partnership Agreement; or
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are required to effect the intent expressed in the provisions of our Limited Partnership Agreement or are otherwise
contemplated by our Limited Partnership Agreement.
Opinion of Counsel and Limited Partner Approval
Our General Partner will not be required to obtain an opinion of counsel that an amendment will not result in a loss of limited
liability to the limited partners if one of the amendments described above under "No Limited Partner Approval" should occur. No other amendments to our limited partnership agreement will
become effective without the approval of holders of at least 90% of our units, unless our partnership obtains an opinion of counsel to the effect that the amendment will not cause our partnership to
be treated as an association taxable as a corporation or otherwise taxable as an entity for tax purposes (provided that for U.S. tax purposes our General Partner has not made the election
described below under "Election to be Treated as a Corporation") or affect the limited liability of any of our partnership's limited partners under the Bermuda Limited Partnership Act or
the Bermuda Exempted Partnerships Act.
Subject
to the terms of any preferred units outstanding, in addition to the above restrictions, any amendment that would have a material adverse effect on the rights or preferences of
any type or class of partnership interests in relation to other classes of partnership interests will also require the approval of the holders of at least a majority of the outstanding partnership
interests of the class so affected.
In
addition, any amendment that reduces the voting percentage required to take any action must be approved by the affirmative vote of limited partners whose aggregate outstanding voting
units constitute not less than the voting requirement sought to be reduced.
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Merger, Sale or Other Disposition of Assets
Any merger, consolidation or other combination of our partnership requires the prior approval of our General Partner who has no duty or
obligation to provide any such approval. Our limited partnership agreement generally prohibits our General Partner, without the prior approval of the holders of a majority of our units, from causing
our partnership to, among other things, sell, exchange or otherwise dispose of all or substantially all of our partnership's assets in a single transaction or a series of related transactions,
including by way of merger, consolidation or other combination, or approving on our partnership's behalf the sale, exchange or other disposition of all or substantially all of the assets of our
partnership's subsidiaries. However, our General Partner in its sole discretion may mortgage, pledge, hypothecate or grant a security interest in all or substantially all of our partnership's assets
(including for the benefit of persons other than our partnership or our partnership's subsidiaries) without that approval. Our General Partner may also sell all or substantially all of our
partnership's assets under any forced sale of any or all of our partnership's assets pursuant to the foreclosure or other realization upon those encumbrances without that approval.
If
conditions specified in our Limited Partnership Agreement are satisfied, our General Partner may convert or merge our partnership into, or convey some or all of our partnership's
assets to, a newly formed entity if the sole purpose of that merger or conveyance is to effect a mere change in our partnership's legal form into another limited liability entity. Holders of
partnership interests are not entitled to dissenters' rights of appraisal under our Limited Partnership Agreement or the Bermuda Limited Partnership Act or the Bermuda Exempted Partnerships Act in the
event of a merger or consolidation, a sale of substantially all of our assets or any other transaction or event.
Election to be Treated as a Corporation
If our General Partner determines that it is no longer in our partnership's best interests to continue as a partnership for
U.S. federal income tax purposes, our General Partner may elect to treat our partnership as an association or as a publicly traded partnership taxable as a corporation for U.S. federal
(and applicable state) income tax purposes.
Termination and Dissolution
Our partnership will terminate upon the earlier to occur of (i) the date on which all of our partnership's assets have been
disposed of or otherwise realized by our partnership and the proceeds of such disposals or realizations have been distributed to partners, (ii) the service of notice by our General Partner,
with the special approval of a majority of its independent directors, that in its opinion the coming into force of any law, regulation or binding authority has or will render illegal or impracticable
the continuation of our partnership, and (iii) at the election of our General Partner, if our partnership, as determined by our General Partner, is required to register as an "investment
company" under the Investment Company Act or similar legislation in other jurisdictions.
Our
partnership will be dissolved upon the withdrawal of our General Partner as the general partner of our partnership (unless Brookfield becomes the general partner as described in the
following sentence or the withdrawal is effected in compliance with the provisions of our Limited Partnership Agreement that are described below under "Withdrawal of Our General Partner")
or the entry by a court of competent jurisdiction of a decree of judicial dissolution of our partnership or an order to wind up or liquidate our General Partner. Our partnership will be reconstituted
and continue without dissolution if within 30 days of the date of dissolution (and so long as a notice of dissolution has not been filed with the Bermuda Monetary Authority), Brookfield
executes a transfer deed pursuant to which it becomes the general partner and assumes the rights and undertakes the obligations of the general partner and our partnership receives an opinion of
counsel that the admission of Brookfield as general partner will not result in the loss of the limited liability of any limited partner.
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Liquidation and Distribution of Proceeds
Upon our dissolution, unless our partnership is continued as a new limited partnership, the liquidator authorized to wind up our
partnership's affairs will, acting with all of the powers of our General Partner that the liquidator deems necessary or appropriate in its judgment, liquidate our partnership's assets and apply the
proceeds of the liquidation first, to discharge our partnership's liabilities as provided in our Limited Partnership Agreement and by law, second to holders of any Class A Preferred Units in
accordance with the terms of such units and thereafter to the partners holding units pro rata according to the percentages of their respective partnership interests as of a record date selected
by the liquidator. The liquidator may defer liquidation of our partnership's assets for a reasonable period of time or distribute assets to partners in kind if it determines that an immediate sale or
distribution of all or some of our partnership's assets would be impractical or would cause undue loss to the partners.
Withdrawal of Our General Partner
Our General Partner may withdraw as general partner without first obtaining approval of our unitholders and preferred unitholders by
giving 90 days' advance notice, and that withdrawal will not constitute a violation of our Limited Partnership Agreement.
Upon
the withdrawal of our General Partner, the holders of a majority of the voting power of our outstanding units may select a successor to that withdrawing general partner. If a
successor is not elected, or is elected but an opinion of counsel regarding limited liability, tax matters and the Investment Company Act (and similar legislation in other jurisdictions) cannot
be obtained, our partnership will be dissolved, wound up and liquidated. See "Termination and Dissolution" above.
In
the event of withdrawal of a general partner where that withdrawal violates our Limited Partnership Agreement, a successor general partner will have the option to purchase the general
partnership interest of the departing general partner for a cash payment equal to its fair market value. Under all other circumstances where a general partner withdraws, the departing general partner
will have the option to require the successor general partner to purchase the general partnership interest of the departing general partner for a cash payment equal to its fair market value. In each
case, this fair market value will be determined by agreement between the departing general partner and the successor general partner. If no agreement is reached within 30 days of the general
partner's departure, an independent investment banking firm or other independent expert selected by the departing general partner and the successor general partner will determine the fair market
value. If the departing general partner and the successor general partner cannot agree upon an expert within 45 days of the general partner's departure, then an expert chosen by agreement of
the experts selected by each of them will determine the fair market value.
If
the option described above is not exercised by either the departing general partner or the successor general partner, the departing general partner's general partnership interests
will automatically convert into units pursuant to a valuation of those interests as determined by an investment banking firm or other independent expert selected in the manner described in the
preceding paragraph.
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Transfer of the General Partnership Interest
Our General Partner may transfer all or any part of its general partnership interests without first obtaining approval of any
unitholder or preferred unitholder. As a condition of this transfer, the transferee must assume the rights and duties of our General Partner to whose interest that transferee has succeeded, agree to
be bound by the provisions of our Limited Partnership Agreement and furnish an opinion of counsel regarding limited liability, tax matters, and the Investment Company Act (and similar
legislation in other jurisdictions). Any transfer of the general partnership interest is subject to prior notice to and approval of the relevant Bermuda regulatory authorities. At any time, the
members of our General Partner may sell or transfer all or part of their shares in our General Partner without the approval of the unitholders or preferred unitholders.
Partnership Name
If our General Partner ceases to be the general partner of our partnership and our new general partner is not an affiliate of
Brookfield, our partnership will be required by our Limited Partnership Agreement to change the name of our partnership to a name that does not include "Brookfield" and which could not be capable of
confusion in any way with such name. Our Limited Partnership Agreement explicitly provides that this obligation shall be enforceable and waivable by our General Partner notwithstanding that it may
have ceased to be the general partner of our partnership.
Transactions with Interested Parties
Our General Partner, the Service Provider and their respective partners, members, shareholders, directors, officers, employees and
shareholders, which we refer to as "interested parties," may become limited partners or beneficially interested in limited partners and may hold, dispose of or otherwise deal with our units or
preferred units with the same rights they would have if our General Partner was not a party to our Limited Partnership Agreement. An interested party will not be liable to account either to other
interested parties or to our partnership, our partnership's partners or any other persons for any profits or benefits made or derived by or in connection with any such transaction.
Our
Limited Partnership Agreement permits an interested party to sell investments to, purchase assets from, vest assets in and enter into any contract, arrangement or transaction with
our partnership, the Holding LP, any of the Holding Entities, any operating entity or any other holding vehicle established by our partnership and may be interested in any such contract,
transaction or arrangement and shall not be liable to account either to our partnership, the Holding LP, any of the Holding Entities, any operating entity or any other holding vehicle
established by our partnership or any other person in respect of any such contract, transaction or arrangement, or any benefits or profits made or derived therefrom, by virtue only of the relationship
between the parties concerned, subject to any approval requirements that are contained in our conflicts protocol. See Item 7.B "Related Party TransactionsConflicts of Interest and
Fiduciary Duties."
Outside Activities of Our General Partner; Conflicts of Interest
Under our Limited Partnership Agreement, our General Partner is required to maintain as its sole activity the role of general partner
of our partnership. Our General Partner is not permitted to engage in any activity or incur or guarantee any debts or liabilities except in connection with or incidental to its performance as general
partner or incurring, guaranteeing, acquiring, owning or disposing of debt or equity securities of the Holding LP, a Holding Entity or any other holding vehicle established by our partnership.
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Our
Limited Partnership Agreement provides that each person who is entitled to be indemnified by our partnership (other than our General Partner), as described below under
"Indemnification; Limitation on Liability," has the right to engage in businesses of every type and description and other activities for profit, and to engage in and possess interests in
business ventures of any and every type or description, irrespective of whether (i) such activities are similar to our affairs or activities or (ii) such affairs and activities directly
compete with, or disfavour or exclude, our General Partner, our partnership, the Holding LP, any Holding Entity, any operating entity or any other holding vehicle established by our
partnership. Such business interests, activities and engagements will be deemed not to constitute a breach of our Limited Partnership Agreement or any duties stated or implied by law or equity,
including fiduciary duties, owed to any of our General Partner, our partnership, the Holding LP, any Holding Entity, any operating entity and any other holding vehicle established by our
partnership (or any of their respective investors), and shall be deemed not to be a breach of our General Partner's fiduciary duties or any other obligation of any type whatsoever of our
General Partner. None of our General Partner, our partnership, the Holding LP, any Holding Entity, any operating entity, any other holding vehicle established by our partnership or any other
person shall have any rights by virtue of our Limited Partnership Agreement or the partnership relationship established thereby or otherwise in any business ventures of any person who is entitled to
be indemnified by our partnership as described below under "Indemnification; Limitation on Liability."
Our
General Partner and the other indemnified persons described in the preceding paragraph do not have any obligation under our Limited Partnership Agreement or as a result of any duties
stated or implied by law or equity, including fiduciary duties, to present business or investment opportunities to our partnership, the Holding LP, any Holding Entity, any operating entity or
any other holding vehicle established by our partnership. These provisions will not affect any obligation of an indemnified person to present business or investment opportunities to our partnership,
the Holding LP, any Holding Entity, any operating entity or any other holding vehicle established by our partnership pursuant to a separate written agreement between such persons.
Any
conflicts of interest and potential conflicts of interest that are approved by a majority of our General Partner's independent directors from time-to-time will be deemed approved by
all partners. Pursuant to our conflicts protocol, independent directors may grant approvals for any of the transactions described above in the form of general guidelines, policies or procedures in
which case no further special approval will be required in connection with a particular transaction or matter permitted thereby. See Item 7.B "Related Party TransactionsConflicts
of Interest and Fiduciary Duties."
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Indemnification; Limitations on Liability
Under our Limited Partnership Agreement, our partnership is required to indemnify to the fullest extent permitted by law our General
Partner, the Service Provider and any of their respective affiliates (and their respective officers, directors, agents, shareholders, partners, members and employees), any person who serves on
a governing body of the Holding LP, a Holding Entity, operating entity or any other holding vehicle established by our partnership and any other person designated by our General Partner as an
indemnified person, in each case, against all losses, claims, damages, liabilities, costs or expenses (including legal fees and expenses), judgments, fines, penalties, interest, settlements or other
amounts arising from any and all claims, demands, actions, suits or proceedings, incurred by an indemnified person in connection with our investments and activities or by reason of their holding such
positions, except to the extent that the claims, liabilities, losses, damages, costs or expenses are determined to have resulted from the indemnified person's bad faith, fraud or willful misconduct,
or in the case of a criminal matter, action that the indemnified person knew to have been unlawful. In addition, under our Limited Partnership Agreement, (i) the liability of such persons has
been limited to the fullest extent permitted by law, except to the extent that their conduct involves bad faith, fraud or willful misconduct, or in the case of a criminal matter, action that the
indemnified person knew to have been unlawful and (ii) any matter that is approved by the independent directors of our General Partner will not constitute a breach of our Limited Partnership
Agreement or any duties stated or implied by law or equity, including fiduciary duties. Our Limited Partnership Agreement requires us to advance funds to pay the expenses of an indemnified person in
connection with a matter in which indemnification may be sought until it is determined that the indemnified person is not entitled to indemnification.
Accounts, Reports and Other Information
Our partnership prepares its financial statements in accordance with IFRS. Our partnership's financial statements must be made publicly
available together with a statement of the accounting policies used in their preparation, such information as may be required by applicable laws and regulations and such information as our General
Partner deems appropriate. Our partnership's annual financial statements must be audited by an independent accountant firm of international standing and made publicly available within such period of
time as is required to comply with applicable laws and regulations, including any rules of any applicable securities exchange. Our partnership's quarterly financial statements may be unaudited and are
made available publicly as and within the time period required by applicable laws and regulations.
Our
General Partner is also required to use commercially reasonable efforts to prepare and send to the limited partners of our partnership on an annual basis, additional information
regarding our partnership, including Schedule K-1 (or equivalent) and information related to the passive foreign investment company status of any non-U.S. corporation that we
control and, where reasonably possible, any other non-U.S. corporation in which we hold an interest. However, unitholders and preferred unitholders that do not ordinarily have
U.S. federal tax filing requirements will not receive a Schedule K-1 and related information unless such unitholders and preferred unitholders request it within 60 days
after the close of each calendar year. Our General Partner will, where reasonably possible, prepare and send information required by the non-U.S. limited partners of our partnership for
U.S. federal income tax reporting purposes, including information related to investments in "U.S. real property interests," as that term is defined in Section 897 of the
U.S. Internal Revenue Code. Our General Partner will also, where reasonably possible and applicable, prepare and send information required by limited partners of our partnership for Canadian
federal income tax purposes.
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Governing Law; Submission to Jurisdiction
Our Limited Partnership Agreement is governed by and will be construed in accordance with the laws of Bermuda. Under our Limited
Partnership Agreement, each of our partnership's partners (other than governmental entities prohibited from submitting to the jurisdiction of a particular jurisdiction) will submit to the
non-exclusive jurisdiction of any court in Bermuda in any dispute, suit, action or proceeding arising out of or relating to our Limited Partnership Agreement. Each partner waives, to the fullest
extent permitted by law, any immunity from jurisdiction of any such court or from any legal process therein and further waives, to the fullest extent permitted by law, any claim of inconvenient forum,
improper venue or that any such court does not have jurisdiction over the partner. Any final judgment against a partner in any proceedings brought in a court in Bermuda will be conclusive and binding
upon the partner and may be enforced in the courts of any other jurisdiction of which the partner is or may be subject, by suit upon such judgment. The foregoing submission to jurisdiction and waivers
will survive the dissolution, liquidation, winding up and termination of our partnership.
Transfers of Units
We are not required to recognize any transfer of our units or preferred units until certificates, if any, evidencing such units are
surrendered for registration of transfer. Each person to whom a unit or preferred unit is transferred (including any nominee holder or an agent or representative acquiring such unit for the account of
another person) will be admitted to our partnership as a partner with respect to the unit or preferred unit so transferred subject to and in accordance with the terms of our Limited Partnership
Agreement. Any transfer of a unit or preferred unit will not entitle the transferee to share in the profits and losses of our partnership, to receive distributions, to receive allocations of income,
gain, loss, deduction or credit or any similar item or to any other rights to which the transferor was entitled until the transferee becomes a partner and a party to our Limited Partnership Agreement.
By
accepting a unit or preferred unit for transfer in accordance with our Limited Partnership Agreement, each transferee will be deemed
to have:
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executed our Limited Partnership Agreement and become bound by the terms thereof;
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granted an irrevocable power of attorney to our General Partner and any officer thereof to act as such partner's agent and
attorney-in-fact to execute, swear to, acknowledge, deliver, file and record in the appropriate public offices all (i) all agreements, certificates, documents and other instruments relating to
the existence or qualification of our partnership as an exempted limited partnership (or a partnership in which the limited partners have limited liability) in Bermuda and in all jurisdictions
in which our partnership may conduct activities and affairs or own property; any amendment, change, modification or restatement of our Limited Partnership Agreement, subject to the requirements of our
Limited Partnership Agreement; the dissolution and liquidation of our partnership; the admission, withdrawal or removal of any partner of our partnership or any capital contribution of any partner of
our partnership; the determination of the rights, preferences and privileges of any class or series of units or other partnership interests of our partnership, and to a merger or consolidation of our
partnership; and (ii) subject to the requirements of our Limited Partnership Agreement, all ballots, consents, approvals, waivers, certificates, documents and other instruments necessary or
appropriate, in the sole discretion of our General Partner or the liquidator of our partnership, to make, evidence, give, confirm or ratify any voting consent, approval, agreement or other action that
is made or given by our partnership's partners or is consistent with the terms of our Limited Partnership Agreement or to effectuate the terms or intent of our Limited Partnership Agreement;
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made the consents and waivers contained in our Limited Partnership Agreement, including with respect to the approval of
the transactions and agreements entered into in connection with our formation and the spin-off; and
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ratified and confirmed all contracts, agreements, assignments and instruments entered into on behalf of the partnership in
accordance with our Limited Partnership Agreement.
The
transfer of any unit or preferred unit and the admission of any new partner to our partnership will not constitute any amendment to our Limited Partnership Agreement.
Transfer Agent and Registrar
Computershare Inc. in Canton, Massachusetts, U.S.A. and Computershare Investor Services Inc. in Toronto, Ontario, Canada
have been appointed to act as transfer agent and registrar for the purpose of registering our units and Class A Preferred Units, respectively, and transfers of our units and Class A
Preferred Units, respectively, as provided in our Limited Partnership Agreement.
Description of the Holding LP's Limited Partnership Agreement
The following is a description of the material terms of the Holding LP's limited partnership agreement, as amended, and is
qualified in its entirety by reference to all of the provisions of such agreement, as amended from time to time. Holders of units in our partnership are not partners of the Holding LP and do
not have any rights under its limited partnership agreement. However, our partnership is the managing general partner of the Holding LP and is responsible for the management and control of the
Holding LP.
Because
this description is only a summary of the terms of the agreement, it does not necessarily contain all of the information that you may find useful. For more complete information,
you should read the Holding LP's limited partnership agreement, as amended from time to time, which is available electronically on the website of the Securities and Exchange Commission at
www.sec.gov and on our SEDAR profile at www.sedar.com and will be made available to our unitholders and preferred unitholders as described under Item 10.C "Material Contracts" and
Item 10.H "Documents on display."
Formation and Duration
The Holding LP is a Bermuda exempted limited partnership registered under the Bermuda Limited Partnership Act and the Bermuda
Exempted Partnerships Act. The Holding LP has a perpetual existence and will continue as a limited liability partnership unless the partnership is terminated or dissolved in accordance with its
limited partnership agreement.
Nature and Purpose
Under its limited partnership agreement, the purpose of the Holding LP is to: acquire and hold interests in the Holding Entities
and, subject to the approval of our partnership in its capacity as managing general partner of the Holding LP, any other entity; engage in any activity related to the capitalization and
financing of the Holding LP's interests in such entities; and engage in any other activity that is incidental to or in furtherance of the foregoing and that is approved by our partnership in
its capacity as managing general partner of the Holding LP and that lawfully may be conducted by a limited partnership organized under the Bermuda Limited Partnership Act and our Limited
Partnership Agreement.
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Units
As of the date of this annual report on Form 20-F, the Holding LP has four classes of units: Special Limited Partner
Units, Redeemable Partnership Units, Managing General Partner Units and Holding LP Class A Preferred Units. Holders of units are not entitled to the withdrawal or return of capital
contributions in respect of their units, except to the extent, if any, that distributions are made to such holders pursuant to the Holding LP's limited partnership agreement or upon the
liquidation of the Holding LP or as otherwise required by applicable law. Except to the extent expressly provided in the Holding LP's limited partnership agreement, as amended from time
to time, a holder of units does not have priority over any other holder of units, either as to the return of capital contributions or as to profits, losses or distributions. The Holding LP
Class A Preferred Units rank senior to the other Holding LP units with respect to priority in the payment of distributions and in the distribution of the assets in the event of the
liquidation, dissolution or winding-up of the Holding LP, whether voluntary or involuntary. Each series of Holding LP Class A Preferred Units ranks on a parity with every other
series of the Holding LP Class A Preferred Units with respect to priority in the payment of distributions and in the distribution of the assets in the event of the liquidation,
dissolution or winding-up of the Holding LP, whether voluntary or involuntary.
Issuance of Additional Partnership Interests
Subject to the rights of the holders of Holding LP Class A Preferred Units to approve issuances of additional partnership
interests ranking senior to the Holding LP Class A Preferred Units with respect to priority in the payment of distributions and in the distribution of the assets in the event of the
liquidation, dissolution or winding-up of the Holding LP, whether voluntary or involuntary, the Holding LP may issue additional partnership interests (including new classes of
partnership interests and options, rights, warrants and appreciation rights relating to such interests) for any partnership purpose, at any time and on such terms and conditions as its managing
general partner may determine. Any additional partnership interests may be issued in one or more classes, or one or more series of classes, with such designations, preferences, rights, powers and
duties (which may be senior to existing classes and series of partnership interests) as our partnership in its capacity as managing general partner of the Holding LP may determine in its sole
discretion.
Redemption-Exchange Mechanism
At any time, one or more wholly-owned subsidiaries of Brookfield Asset Management that hold Redeemable Partnership Units will have the
right to require the Holding LP to redeem for cash all or a portion of the Redeemable Partnership Units held by such subsidiary, subject to our partnership's right of first refusal, as
described below. Any such redeeming subsidiary may exercise its right of redemption by delivering a notice of redemption to the Holding LP and our partnership. After presentation for
redemption, such redeeming subsidiary will receive, subject to our partnership's right of first refusal, as described below, for each unit that is presented, cash in an amount equal to the market
value of one of our units multiplied by the number of units to be redeemed (as determined by reference to the five day volume weighted average of the trading price of our units and subject to
certain customary adjustments). Upon its receipt of the redemption notice, our partnership will have a right of first refusal entitling it, at its sole discretion, to elect to acquire all
(but not less than all) units described in such notice and presented to the Holding LP for redemption in exchange for units on a one for one basis (subject to certain customary
adjustments). Upon a redemption for cash, the holder's right to receive distributions with respect to the Holding LP's units so redeemed will cease.
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Brookfield's
aggregate limited partnership interest in our partnership would be approximately 29.5% if it exercised its redemption right in full and our partnership exercised its right
of first refusal on the Holding LP's units redeemed (including the approximately 249,645 issued and outstanding units that Brookfield currently also owns). Brookfield's total percentage
interest in our partnership would be increased if it participates in the Holding LP's distribution reinvestment plan.
Distributions
Subject to the rights of holders of Holding LP Class A Preferred Units to receive cumulative preferential cash
distributions in accordance with their terms, distributions by the Holding LP will be made in the sole discretion of our partnership in its capacity as managing general partner of the
Holding LP. The holders of a series of Holding LP Class A Preferred Units will be entitled to receive the same distribution as the holders of the corresponding series of
Class A Preferred Units. However, our partnership will not be permitted to cause the Holding LP to make a distribution if the Holding LP does not have sufficient cash on hand to
make the distribution, the distribution would render the Holding LP insolvent or if, in the opinion of its managing general partner, the distribution would leave the Holding LP with
insufficient funds to meet any future or contingent obligations.
Except
as set forth below, prior to the dissolution of the Holding LP, distributions of available cash (if any) in any given quarter will be made by the Holding LP
as follows (being the "Regular Distribution Waterfall"):
-
-
first, 100% of any available cash to our partnership until our partnership has been distributed an amount equal to our
partnership's expenses and outlays for the quarter properly incurred;
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-
second, 100% to the owners of the Holding LP's preferred units, in proportion to their respective relative
percentage of Holding LP preferred units held (determined by reference to the aggregate value of the issue price of the Holding LP preferred units held by each holder relative to the
aggregate value of the issue price of all Holding LP preferred units then outstanding) until there has been distributed to such holder an amount equal to all preferential distributions to which
the holder are entitled under the terms of the Holding LP preferred units then outstanding and any outstanding accrued and unpaid preferential distributions from prior periods;
-
-
third, 100% of any available cash then remaining to the owners of the Holding LP's partnership interests, other
than holders of Holding LP preferred units, pro rata to their percentage interests, until each holder of a partnership unit of the Holding LP, other than a holder of a
Holding LP preferred unit, has received distributions during such quarter in an amount equal to $0.203, referred to as the First Distribution Threshold;
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-
fourth, 85% of any available cash then remaining to the owners of the Holding LP's partnership interests, other
than holders of Holding LP preferred units, pro rata to their percentage interests, and 15% to the holder of Special Limited Partner Units, until each holder of a partnership unit of the
Holding LP, other than a holder of a Holding LP preferred unit, has received distributions during such quarter in an amount equal to $0.22, referred to as the Second Distribution
Threshold; and
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thereafter, 75% of any available cash then remaining to the owners of the Holding LP's partnership interests, other
than holders of Holding LP preferred units, pro rata to their percentage interests, and 25% to the holder of Special Limited Partner Units.
166 Brookfield Infrastructure
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On
September 14, 2016, concurrent with completion of the Unit Split, the Managing General Partner Units, Special Limited Partner Units and Redeemable Partnership Units of the
Holding LP were concurrently split to reflect the Unit Split. The limited partnership agreement was also amended on such date to adjust the First Distribution Threshold from $0.305 to $0.203
and the Second Distribution Threshold from $0.33 to $0.22 to reflect the Unit Split.
Set
forth below is an example of how the incentive distributions described above are calculated on a quarterly and annualized basis going forward. The figures used below are for
illustrative purposes only and are not indicative of Brookfield Infrastructure's expectations.
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|
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|
|
|
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|
|
Quarterly
|
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Annually
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Incentive Distribution Calculation
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Units (m)
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Per Unit ($)
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Total ($m)
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Per Unit ($)
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Total ($m)
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|
Illustrative distribution
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|
|
|
$
|
0.435
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|
|
|
|
$
|
1.740
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|
|
|
|
First distribution threshold
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|
|
|
|
$
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0.203
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|
|
|
|
$
|
0.812
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|
|
|
|
Total units of Holding LP
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|
|
369
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|
|
|
|
|
|
|
|
|
|
|
|
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Total first distribution
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|
|
|
|
|
|
|
$
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75
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|
|
|
|
$
|
300
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|
Distribution in excess of first distribution threshold
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|
|
|
|
$
|
0.017
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|
|
|
|
$
|
0.068
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|
|
|
|
Total units of Holding LP
|
|
|
369
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|
|
|
|
|
|
|
|
|
|
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|
|
Second distribution to partners
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|
|
|
|
|
|
|
$
|
6
|
|
|
|
|
$
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24
|
|
15% incentive distribution to the holder of Special Limited Partner Units
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|
|
|
|
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|
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1
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|
|
|
|
|
4
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Total second distribution
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|
|
|
|
|
|
|
$
|
7
|
|
|
|
|
$
|
28
|
|
Distribution in excess of second distribution threshold
|
|
|
|
|
$
|
0.215
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|
|
|
|
$
|
0.860
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|
|
|
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Total units Holding LP
|
|
|
369
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|
|
|
|
|
|
|
|
|
|
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Third distribution to partners
|
|
|
|
|
|
|
|
$
|
79
|
|
|
|
|
$
|
316
|
|
25% incentive distribution to the holder of Special Limited Partner Units
|
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
104
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total third distribution
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|
|
|
|
|
|
|
$
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105
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|
|
|
|
$
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420
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions to partners (including incentive distributions)
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|
|
|
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|
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$
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187
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|
|
|
|
$
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748
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total incentive distributions to the holder of Special Limited Partner Units
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|
|
|
|
|
|
|
$
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27
|
|
|
|
|
$
|
108
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|
|
|
|
|
|
|
|
|
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|
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The table below sets forth the incentive distributions for the years ended December 31, 2016, 2015 and 2014 paid to Infrastructure
Special LP.
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Year ended December 31
|
|
MILLIONS
|
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2016
|
|
2015
|
|
2014
|
|
Incentive Distributions
|
|
$
|
80
|
|
$
|
64
|
|
$
|
44
|
|
Subject to the terms of any Holding LP preferred units outstanding, if, prior to the dissolution of the Holding LP, available cash
is deemed by its managing general partner, in its sole discretion, to be (i) attributable to sales or other dispositions of the Holding LP's assets and (ii) representative of
unrecovered capital, then such available cash shall be distributed to the partners of the Holding LP, other than holders of Holding LP preferred units, in proportion to the unreturned
capital attributable to the Holding LP's partnership interests held by such partners until such time as the unreturned capital attributable to each such partnership interest is equal to zero.
Thereafter, distributions of available cash made by the Holding LP (to the extent made prior to dissolution) will be made in accordance with the Regular Distribution Waterfall.
Brookfield Infrastructure 167
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Upon the occurrence of an event resulting in the dissolution of the Holding LP, all cash and property of the Holding LP in excess of that required
to discharge the Holding LP's liabilities will be distributed as follows: (i) to the extent such cash and/or property is attributable to a realization event occurring prior to the event
of dissolution, such cash and/or property will be distributed in accordance with the Regular Distribution Waterfall and/or the distribution waterfall applicable to unrecovered capital; and
(ii) all other cash and/or property will be distributed in the manner set forth below.
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first, 100% to our partnership until our partnership has received an amount equal to the excess of (i) the amount
of our partnership's outlays and expenses incurred during the term of the Holding LP, over (ii) the aggregate amount of distributions received by our partnership pursuant to the first
tier of the Regular Distribution Waterfall during the term of the Holding LP;
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-
second, 100% to the preferred unitholders pro rata in proportion to their respective relative percentage of
Holding LP preferred units held (determined by reference to the aggregate value of the issue price of the Holding LP preferred units held by each preferred unitholder relative to the
aggregate value of the issue price of all Holding LP preferred units then outstanding) until there has been distributed in respect of each Holding LP preferred unit outstanding an amount
equal to any preferential distributions to which the preferred unitholders are entitled in the event of dissolution, liquidation, or winding-up of Holding LP under the terms of the
Holding LP preferred units then outstanding (including any outstanding accrued and unpaid preferential distributions from prior periods);
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-
third, if there are Holding LP preferred units outstanding, an amount equal to the amount of cash or property held
by the Holding LP at such time, that is attributable to a realization event occurring prior to the date of a dissolution event and that has been deemed by our partnership as capital surplus
shall be distributed as though such amount has been deemed by our partnership to be (i) attributable to sales or other dispositions of the Holding LP's assets and
(ii) representative of unrecovered capital;
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fourth, 100% to the owners of the Holding LP's partnership interests, other than holders of Holding LP
preferred units, in proportion to their respective amounts of unrecovered capital in the Holding LP;
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-
fifth, 100% to the owners of the Holding LP's partnership interests, other than holders of Holding LP
preferred units, pro rata to their percentage interests, until each holder of a Holding LP partnership unit, other than a Holding LP preferred unit, has received an amount equal
to the excess of (i) the First Distribution Threshold for each quarter during the term of the Holding LP (subject to adjustment upon the subsequent issuance of additional partnership
interests in the Holding LP), over (ii) the aggregate amount of distributions made in respect of the Holding LP's partnership units, other than Holding LP preferred units,
pursuant to the third tier of the Regular Distribution Waterfall during the term of the Holding LP (subject to adjustment upon the subsequent issuance of additional partnership interests in the
Holding LP);
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sixth, 85% to the owners of the Holding LP's partnership interests, other than holders of Holding LP
preferred units, pro rata to their percentage interests, and 15% to the holder of Special Limited Partner Units, until each holder of a partnership unit of the Holding LP, other than
Holding LP preferred units, has received an amount equal to the excess of (i) the Second Distribution Threshold less the First Distribution Threshold for each quarter during the term of
the Holding LP (subject to adjustment upon the subsequent issuance of additional partnership interests in the Holding LP), over (ii) the aggregate amount of distributions made in
respect of the partnership units of the Holding LP pursuant to the fourth tier of the Regular Distribution Waterfall during the term of the Holding LP (subject to adjustment upon the
subsequent issuance of additional partnership interests in the Holding LP); and
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thereafter, 75% to the owners of the Holding LP's partnership interests, other than holders of Holding LP
preferred units, pro rata to their percentage interests, and 25% to the holder of Special Limited Partner Units.
Each
partner's percentage interest is determined by the relative portion of all outstanding partnership interests, other than any Holding LP preferred units, held by that partner
from time to time and is adjusted upon and to reflect the issuance of additional partnership interests of the Holding LP. In addition, the unreturned capital attributable to each of the
partnership interests, as well as certain of the distribution thresholds set forth above, may be adjusted pursuant to the terms of the limited partnership agreement of the Holding LP so as to
ensure the uniformity of the economic rights and entitlements of (i) the previously outstanding partnership interests of the Holding LP, and (ii) the subsequently issued
partnership interests of the Holding LP.
The
limited partnership agreement of the Holding LP provides that, to the extent that any Holding Entity or any operating entity pays to Brookfield any comparable performance or
incentive distribution, the amount of any incentive distributions paid to the holder of Special Limited Partner Units in accordance with the distribution entitlements described above will be reduced
in an equitable manner to avoid duplication of distributions.
The
holder of Special Limited Partner Units may elect, at its sole discretion, to reinvest incentive distributions in Redeemable Partnership Units.
No Management or Control
The Holding LP's limited partners, in their capacities as such, may not take part in the management or control of the activities
and affairs of the Holding LP and do not have any right or authority to act for or to bind the Holding LP or to take part or interfere in the conduct or management of the
Holding LP.
Limited
partners are not entitled to vote on matters relating to the Holding LP, although holders of units are entitled to consent to certain matters as described under
"Amendment of the Holding LP's Limited Partnership Agreement," "Opinion of Counsel and Limited Partner Approval," "Merger, Sale or Other Disposition of
Assets," and "Withdrawal of the General Partner" which may be effected only with the consent of the holders of the percentages of outstanding units specified below. For the purposes of
any approval required from holders of the Holding LP's units, if holders of Redeemable Partnership Units are entitled to vote, they will be entitled to one vote per unit held subject to a
maximum number of votes equal to 49% of the total number of units of the Holding LP then issued and outstanding. Each unit shall entitle the holder thereof to one vote for the purposes of any
approvals of holders of units. Except as otherwise provided by law or as set out in the provisions attached to any series of Holding LP Class A Preferred Units and except for meetings of
the holders of Holding LP Class A Preferred Units as a class or meetings of the holders of a series thereof, the holders of a series of Holding LP Class A Preferred Units
are not entitled to receive notice of, attend, or vote at any meeting of holders of units.
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Meetings
Special meetings of the limited partners of the Holding LP may be called by its managing general partner at a time and place
outside of Canada determined by it on a date not less than 10 days nor more than 60 days after the mailing of notice of the meeting. Special meetings of the limited partners may also be
called by limited partners owning 50% or more of the voting power of the outstanding partnership interests of the class or classes for which a meeting is proposed. For this purpose, the partnership
interests outstanding do not include partnership interests owned by its managing general partner or Brookfield. Only holders of partnership interests of the Holding LP of record on the date set
by its managing general partner (which may not be less than 10 days nor more than 60 days, before the meeting) are entitled to notice of any meeting.
Amendment of the Holding LP's Limited Partnership Agreement
Amendments to the Holding LP's limited partnership agreement may be proposed only by or with the consent of its managing general
partner. To adopt a proposed amendment, other than the amendments that do not require limited partner approval discussed below, the managing general partner must seek approval of a majority of the
Holding LP's outstanding units required to approve the amendment or call a meeting of the limited partners to consider and vote upon the proposed amendment. Notwithstanding the above, in
addition to any other approvals required by law, the approval of all amendments to the rights, privileges, restrictions and conditions attaching to the Holding LP Class A Preferred Units
as a class and any other approval to be given by the holders of the Holding LP Class A Preferred Units may be (i) given by a resolution signed by the holders of Holding LP
Class A Preferred Units owning not less than the percentage of the Holding LP Class A Preferred Units that would be necessary to authorize such action at a meeting of the holders
of the Holding LP Class A Preferred Units at which all holders of the Holding LP Class A Preferred Units were present and voted or were represented by proxy, or
(ii) passed by an affirmative vote of at least 66
2
/
3
% of the votes cast at a meeting of holders of the Holding LP Class A Preferred Units duly called for that
purpose and at which the holders of at least 25% of the outstanding Holding LP Class A Preferred Units are present or represented by proxy or, if no quorum is present at such meeting, at
an adjourned meeting at which the holders of Holding LP Class A Preferred Units then present would form the necessary quorum. At any meeting of holders of Holding LP
Class A Preferred Units as a class, each such holder shall be entitled to one vote in respect of each Holding LP Class A Preferred Unit held.
Further,
in addition to any other approvals required by law, the approval of all amendments to the rights, privileges, restrictions and conditions attaching to each series of
Holding LP Class A Preferred Units, as a series, and any other approval to be given by the holders of each series of Holding LP Class A Preferred Units, as a series, may be
(i) given by a resolution signed by the holders of the applicable series of Holding LP Class A Preferred Units owning not less than the percentage of such series of
Holding LP Class A Preferred Units that would be necessary to authorize such action at a meeting of the holders of the applicable series of Holding LP Class A Preferred
Units at which all holders of the applicable series of Holding LP Class A Preferred Units were present and voted or were represented by proxy, or (ii) passed by an affirmative
vote of at least 66
2
/
3
% of the votes cast at a meeting of holders of the applicable series of Holding LP Class A Preferred Units duly called for that purpose and at which
the holders of at least 25% of the outstanding applicable series of Holding LP Class A Preferred Units are present or represented by proxy or, if no quorum is present at such meeting, at
an adjourned meeting at which the holders of the applicable series of Holding LP Class A Preferred Units then present would form the necessary quorum. At any meeting of holders of a
series of Holding LP Class A Preferred Units, as a series, each such holder shall be entitled to one vote in respect of the applicable Holding LP Class A Preferred
Unit held.
170 Brookfield Infrastructure
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Prohibited Amendments
No amendment may be made that would:
-
-
enlarge the obligations of any limited partner of the Holding LP without its consent, except that any amendment
that would have a material adverse effect on the rights or preferences of any class of partnership interests in relation to other classes of partnership interests may be approved by at least a
majority of the type or class of partnership interests so affected; or
-
-
enlarge the obligations of, restrict in any way any action by or rights of, or reduce in any way the amounts
distributable, reimbursable or otherwise payable by the Holding LP to its managing general partner or any of its affiliates without the consent of the managing general partner which may be
given or withheld in its sole discretion.
The
provision of the Holding LP's limited partnership agreement preventing the amendments having the effects described directly above can be amended upon the approval of the
holders of at least 90% of the outstanding units.
No Limited Partner Approval
Subject to applicable law, the managing general partner may generally make amendments to the Holding LP's limited partnership
agreement without the approval of any limited partner to reflect:
-
-
a change in the name of the partnership, the location of the partnership's registered office or the partnership's
registered agent;
-
-
the admission, substitution, withdrawal or removal of partners in accordance with the limited partnership agreement;
-
-
a change that the managing general partner determines is necessary or appropriate for the partnership to qualify or to
continue its qualification as a limited partnership or a partnership in which the limited partners have limited liability under the laws of any jurisdiction or to ensure that the Holding LP
will not be treated as an association taxable as a corporation or otherwise taxed as an entity for tax purposes;
-
-
an amendment that the managing general partner determines to be necessary or appropriate to address certain changes in tax
regulations, legislation or interpretation;
-
-
an amendment that is necessary, in the opinion of counsel, to prevent the Holding LP or the managing general
partner or its directors, officers, agents or trustees, from having a material risk of being in any manner subjected to the provisions of the Investment Company Act or similar legislation in other
jurisdictions;
-
-
an amendment that the managing general partner determines in its sole discretion to be necessary or appropriate for the
creation, authorization or issuance of any class or series of partnership interests or options, rights, warrants or appreciation rights relating to partnership securities;
-
-
any amendment expressly permitted in the Holding LP's limited partnership agreement to be made by the managing
general partner acting alone;
-
-
an amendment effected, necessitated or contemplated by an agreement of merger, consolidation or other combination
agreement that has been approved under the terms of the Holding LP's limited partnership agreement;
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-
-
any amendment that in the sole discretion of the managing general partner is necessary or appropriate to reflect and
account for the formation by the partnership of, or its investment in, any corporation, partnership, joint venture, limited liability company or other entity, as otherwise permitted by the
Holding LP's limited partnership agreement;
-
-
a change in its fiscal year and related changes;
-
-
any amendment concerning the computation or allocation of specific items of income, gain, expense or loss among the
partners that, in the sole discretion of the managing general partner, is necessary or appropriate to (i) comply with the requirements of applicable law, (ii) reflect the partners'
interests in the Holding LP, or (iii) consistently reflect the distributions made by the Holding LP to the partners pursuant to the terms of the limited partnership agreement of
the Holding LP;
-
-
any amendment that in the sole discretion of the managing general partner, is necessary or appropriate to address any
statute, rule, regulation, notice or announcement that affects or could affect the U.S. federal tax treatment of any allocation or distribution related to any interest of the managing general
partner in the profits of Holding LP; and
-
-
any other amendments substantially similar to any of the matters described directly above.
In
addition, amendments to the Holding LP's limited partnership agreement may be made by the managing general partner without the approval of any limited partner if those
amendments, in the discretion of the managing general partner:
-
-
do not adversely affect the Holding LP's limited partners considered as a whole (including any particular class of
partnership interests as compared to other classes of partnership interests) in any material respect;
-
-
are necessary or appropriate to satisfy any requirements, conditions or guidelines contained in any opinion, directive,
order, ruling or regulation of any governmental agency or judicial authority;
-
-
are necessary or appropriate to comply with any rule, regulation, guideline or requirement of any securities exchange on
which the limited partner interests are or will be listed for trading;
-
-
are necessary or appropriate for any action taken by the managing general partner relating to splits or combinations of
units under the provisions of the Holding LP's limited partnership agreement; or
-
-
are required to effect the intent expressed in the provisions of the Holding LP's limited partnership agreement or
are otherwise contemplated by the Holding LP's limited partnership agreement.
Opinion of Counsel and Limited Partner Approval
The managing general partner of the Holding LP will not be required to obtain an opinion of counsel that an amendment will not
result in a loss of limited liability to the limited partners if one of the amendments described above under "No Limited Partner Approval" should occur. No other amendments to the
Holding LP's limited partnership agreement will become effective without the approval of holders of at least 90% of the Holding LP's units, unless it obtains an opinion of counsel to the
effect that the amendment will not cause the Holding LP to be treated as an association taxable as a corporation or otherwise taxable as an entity for tax purposes (provided that for
U.S. tax purposes its managing general partner has not made the election described below under "Election to be Treated as a Corporation"), or affect the limited liability under the
Bermuda Limited Partnership Act of any of the Holding LP's limited partners.
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Subject
to the terms of any Holding LP preferred units outstanding, in addition to the above restrictions, any amendment that would have a material adverse effect on the rights or
preferences of any type or class of partnership interests in relation to other classes of partnership interests will also require the approval of the holders of at least a majority of the outstanding
partnership interests of the class so affected.
In
addition, any amendment that reduces the voting percentage required to take any action must be approved by the affirmative vote of limited partners whose aggregate outstanding voting
units constitute not less than the voting requirement sought to be reduced.
Election to be Treated as a Corporation
If, in the determination of the managing general partner, it is no longer in the Holding LP's best interests to continue as a
partnership for U.S. federal income tax purposes, the managing general partner may elect to treat the Holding LP as an association or as a publicly traded partnership taxable as a
corporation for U.S. federal (and applicable state) income tax purposes.
Dissolution
The Holding LP shall dissolve and its affairs shall be wound up, upon the earlier of (i) the service of notice by the
managing general partner, with the approval of a majority of the members of the independent directors of our General Partner, that, in the opinion of the managing general partner, the coming into
force of any law, regulation or binding authority renders illegal or impracticable the continuation of the Holding LP; (ii) the election of the managing general partner if the
Holding LP, as determined by the managing general partner, is required to register as an "investment company" under the Investment Company Act or similar legislation in other jurisdictions;
(iii) the date that the managing general partner withdraws from the partnership (unless Brookfield becomes the managing general partner of the Holding LP as described below under
"Withdrawal of the Managing General Partner"); (iv) the date on which any court of competent jurisdiction enters a decree of judicial dissolution of the Holding LP or an
order to wind up or liquidate the managing general partner without the appointment of a successor; and (v) the date on which the managing general partner decides to dispose of, or otherwise
realize proceeds in respect of, all or substantially all of the Holding LP's assets in a single transaction or series of transactions.
The
Holding LP shall not dissolve if within 30 days of the date of dissolution (and provided that a notice of dissolution with respect to the Holding LP has
not been filed with the Bermuda Monetary Authority), a successor managing general partner executes a transfer deed pursuant to which the successor managing general partner assumes the rights and
undertakes the obligations of the original managing general partner, but only if the Holding LP receives an opinion of counsel that the admission of a new managing general partner will not
result in the loss of limited liability of any limited partner of the Holding LP.
Withdrawal of the Managing General Partner
Our partnership may withdraw as managing general partner without first obtaining approval of unitholders or preferred unitholders by
giving 90 days advance notice, and that withdrawal will not constitute a violation of the limited partnership agreement.
Upon
the withdrawal of our partnership, the holders of a majority of the voting power of Special Limited Partner Units may select a successor to our partnership to act as managing
general partner. If a successor is not elected, or is elected but an opinion of counsel regarding limited liability, tax matters and the Investment Company Act (and similar legislation in other
jurisdictions) cannot be obtained, the Holding LP will be dissolved, wound up and liquidated. See "Dissolution" above.
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Our
partnership may not be removed as managing general partner by the partners of Holding LP.
In
the event of withdrawal of our partnership as the managing general partner where that withdrawal violates the Holding LP's limited partnership agreement, a successor managing
general partner will have the option to purchase the managing general partnership interest of the our partnership for a cash payment equal to its fair market value. Under all other circumstances where
our partnership withdraws, our partnership will have the option to require the successor managing general partner to purchase the managing general partnership interest of our partnership for a cash
payment equal to its fair market value. In each case, this fair market value will be determined by agreement between our partnership and the successor managing general partner. If no agreement is
reached within 30 days of our partnership's departure, an independent investment banking firm or other independent expert selected by our partnership and the successor managing general partner
will determine the fair market value. If our partnership and the successor managing general partner cannot agree upon an expert within 45 days of our partnership's departure, then an expert
chosen by agreement of the experts selected by each of them will determine the fair market value.
If
the option described above is not exercised by either the departing managing general partner or the successor managing general partner, the departing managing general partner's
managing general partnership interests will automatically convert into either Special Limited Partner Units or Redeemable Partnership Units pursuant to a valuation of those interests as determined by
an investment banking firm or other independent expert selected in the manner described in the preceding paragraph.
Transfer of the Managing General Partnership Interest
Our partnership may transfer all or any part of its managing general partnership interests without first obtaining approval of any
unitholder or preferred unitholder. As a condition of this transfer, the transferee must assume the rights and duties of the managing general partner to whose interest that transferee has succeeded,
agree to be bound by the provisions of the Holding LP's limited partnership agreement and furnish an opinion of counsel regarding limited liability, tax matters and the Investment Company Act
(and similar legislation in other jurisdictions). Any transfer of the managing general partnership interest is subject to prior notice to and approval of the relevant Bermuda regulatory
authority.
Transactions with Interested Parties
The managing general partner of the Holding LP, its affiliates and their respective partners, members, shareholders, directors,
officers, employees and shareholders, which we refer to as "interested parties", may become limited partners or beneficially interested in limited partners and may hold, dispose of or otherwise deal
with units of the Holding LP with the same rights they would have if the managing general partner of the Holding LP were not a party to the limited partnership agreement of the
Holding LP. An interested party will not be liable to account either to other interested parties or to the Holding LP, its partners or any other persons for any profits or benefits made
or derived by or in connection with any such transaction.
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The
limited partnership agreement of the Holding LP permits an interested party to sell investments to, purchase assets from, vest assets in and enter into any contract,
arrangement or transaction with the Holding LP, any of the Holding Entities, any operating entity or any other holding vehicle established by the Holding LP and may be interested in any
such contract, transaction or arrangement and shall not be liable to account either to the Holding LP, any of the Holding Entities, any operating entity or any other holding vehicle established
by the Holding LP or any other person in respect of any such contract, transaction or arrangement, or any benefits or profits made or derived therefrom, by virtue only of the relationship
between the parties concerned, subject to our conflicts protocol.
Outside Activities of the Managing General Partner
In accordance with our limited partnership agreement, our partnership is authorized to: acquire and hold interests in the
Holding LP and, subject to the approval of the General Partner, interests in any other entity; engage in any activity related to the capitalization and financing of our partnership's interests
in such entities; serve as the managing general partner of the Holding LP; and engage in any other activity that is incidental to or in furtherance of the foregoing and that is approved by our
General Partner and that lawfully may be conducted by a limited partnership organized under the Bermuda Limited Partnership Act, the Bermuda Exempted Partnerships Act, and our limited partnership
agreement.
The
Holding LP's limited partnership agreement provides that each person who is entitled to be indemnified by the partnership, as described below under
"Indemnification; Limitations on Liability" will have the right to engage in businesses of every type and description and other activities for profit, and to engage in and possess
interests in business ventures of any and every type or description, irrespective of whether (i) such businesses and activities are similar to our activities, or (ii) such businesses and
activities directly compete with, or disfavour or exclude, the Holding LP, the managing general partner, any Holding Entity, operating entity, or any other holding vehicle established by the
Holding LP. Such business interests, activities and engagements will be deemed not to constitute a breach of the limited partnership agreement or any duties stated or implied by law or equity,
including fiduciary duties, owed to any of the Holding LP, the managing general partner, any Holding Entity, operating entity, and any other holding vehicle established by the Holding LP
(or any of their respective investors), and shall be deemed not to be a breach of the managing general partner's fiduciary duties or any other obligation of any type whatsoever of the managing
general partner. None of the Holding LP, the managing general partner, any Holding Entity, operating entity, any other holding vehicle established by the Holding LP or any other person
shall have any rights by virtue of the Holding LP's limited partnership agreement or the partnership relationship established thereby or otherwise in any business ventures of any person who is
entitled to be indemnified by the Holding LP as described below under "Indemnification; Limitations on Liability."
Our
partnership and the other indemnified persons described in the preceding paragraph will not have any obligation under the Holding LP's limited partnership agreement or as a
result of any duties stated or implied by law or equity, including fiduciary duties, to present business or investment opportunities to the Holding LP, any Holding Entity, operating entity, or
any other holding vehicle established by the Holding LP. These provisions will not affect any obligation of such indemnified person to present business or investment opportunities to the
Holding LP, any Holding Entity, operating entity or any other holding vehicle established by the Holding LP pursuant to a separate written agreement between such persons.
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Account Reports
The Holding LP prepares its financial statements in accordance with IFRS. See also the information contained in this annual
report on Form 20-F under Item 10.B "Memorandum and Articles of AssociationDescription of Our Units, Preferred Units and Our Limited Partnership
AgreementAccounts, Reports and Other Information".
The
managing general partner of the Holding LP is also required to use commercially reasonable efforts to prepare and send to the Holding LP's limited partners on an annual
basis, additional information regarding the Holding LP, including Schedule K-1 (or equivalent) and information related to the passive foreign investment company status of any
non-U.S. corporation that we control and, where reasonably possible, any other non-U.S. corporation in which we hold an interest. The managing general partner of the Holding LP
will also, where reasonably possible, prepare and send information required by the Holding LP's non-U.S. limited partners for U.S. federal income tax reporting purposes, including
information related to investments in "U.S. real property interests," as that term is defined in Section 897 of the U.S. Internal Revenue Code. The managing general partner will
also, where reasonably possible and applicable, prepare and send information required by the Holding LP's limited partners for Canadian federal income tax purposes.
Indemnification; Limitations on Liability
Under the Holding LP's limited partnership agreement, it is required to indemnify to the fullest extent permitted by law the
managing general partner, and any of its respective affiliates (and their respective officers, directors, agents, shareholders, partners, members and employees), any person who serves on a
governing body of the Holding LP, a Holding Entity, operating entity or any other holding vehicle established by our partnership and any other person designated by the managing general partner
as an indemnified person, in each case, against all losses, claims, damages, liabilities, costs or expenses (including legal fees and expenses), judgments, fines, penalties, interest, settlements or
other amounts arising from any and all claims, demands, actions, suits or proceedings, incurred by an indemnified person in connection with its business, investments and activities or by reason of
their holding such positions, except to the extent that the claims, liabilities, losses, damages, costs or expenses are determined to have resulted from the indemnified person's bad faith, fraud or
willful misconduct, or in the case of a criminal matter, action that the indemnified person knew to have been unlawful. In addition, under the Holding LP's limited partnership agreement,
(i) the liability of such persons has been limited to the fullest extent permitted by law, except to the extent that their conduct involves bad faith, fraud or willful misconduct, or in the
case of a criminal matter, action that the indemnified person knew to have been unlawful and (ii) any matter that is approved by the independent directors will not constitute a breach of any
duties stated or implied by law or equity, including fiduciary duties. The Holding LP's limited partnership agreement requires it to advance funds to pay the expenses of an indemnified person
in connection with a matter in which indemnification may be sought until it is determined that the indemnified person is not entitled to indemnification.
Governing Law
The Holding LP's limited partnership agreement is governed by and will be construed in accordance with the laws
of Bermuda.
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10.C MATERIAL CONTRACTS
The following are the only material contracts, other than contracts entered into in the ordinary course of business, to which we have
been a party within the past two years:
-
1.
-
Amended
and Restated Master Services Agreement by and among the Service Recipients, Brookfield Asset Management Inc., the Service Provider and others
described under Item 6.A. "Directors and Senior ManagementOur Master Services Agreement";
-
2.
-
Amended
and Restated Limited Partnership Agreement of our partnership, as amended from time to time, described under Item 10.B. "Description of our
Units, Preferred Units and our Limited Partnership Agreement";
-
3.
-
Amended
and Restated Limited Partnership Agreement of the Holding LP, as amended from time to time, described under Item 10.B. "Description of
the Holding LP's Limited Partnership Agreement";
-
4.
-
Amended
and Restated Relationship Agreement by and among our partnership, the Holding LP, the Holding Entities, the Service Provider and Brookfield
Asset Management Inc. described under Item 7.B. "Related Party TransactionsRelationship Agreement";
-
5.
-
Registration
Rights Agreement, dated December 4, 2007, between Brookfield Infrastructure Partners L.P. and Brookfield Asset Management Inc
described under Item 7.B "Related Party TransactionsRegistration Rights Agreement";
-
6.
-
Indenture
by and among Brookfield Infrastructure Finance ULC, Brookfield Infrastructure Finance LLC, Brookfield Infrastructure Finance Limited,
Brookfield Infrastructure Finance Pty Ltd and Computershare Trust Company of Canada, described in Note 19, "Subsidiary Public Issuers" in our financial statements included in this annual
report on Form 20-F;
-
7.
-
First
Supplemental Indenture dated October 10, 2012 between Brookfield Infrastructure Finance ULC, Brookfield Infrastructure
Finance LLC, Brookfield Infrastructure Finance Limited, Brookfield Infrastructure Finance Pty Ltd and Computershare Trust Company of Canada, described in Note 19, "Subsidiary
Public Issuers" in our financial statements included in this annual report on Form 20-F;
-
8.
-
Guarantee
dated October 10, 2012 by Brookfield Infrastructure Partners L.P., Brookfield Infrastructure L.P., BIP Bermuda Holdings I
Limited, Brookfield Infrastructure Holdings (Canada) Inc. and Brookfield Infrastructure Corporation in favour of Computershare Trust Company of Canada, described in Note 19, "Subsidiary
Public Issuers" in our financial statements included in this annual report on Form 20-F;
-
9.
-
Guarantee
dated November 27, 2013 by Brookfield Infrastructure US Holdings I Corporation in favour of Computershare Trust Company of Canada, described
in Note 19, "Subsidiary Public Issuers" in our financial statements included in this annual report on Form 20-F;
-
10.
-
Second
Supplemental Indenture dated March 11, 2015 between Brookfield Infrastructure Finance ULC, Brookfield Infrastructure
Finance LLC, Brookfield Infrastructure Finance Limited, Brookfield Infrastructure Finance Pty Ltd and Computershare Trust Company of Canada, described in Note 19, "Subsidiary
Public Issuers" in our financial statements included in this annual report on Form 20-F;
-
11.
-
Guarantee
dated March 11, 2015 by Brookfield Infrastructure Partners L.P., Brookfield Infrastructure L.P., BIP Bermuda Holdings I
Limited, Brookfield Infrastructure Holdings (Canada) Inc. and Brookfield Infrastructure US Holdings I Corporation in favour of Computershare Trust Company of Canada, described in
Note 19, "Subsidiary Public Issuers" in our financial statements included in this annual report on Form 20-F;
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-
12.
-
Third
Supplemental Indenture dated October 30, 2015 between Brookfield Infrastructure Finance ULC, Brookfield Infrastructure
Finance LLC, Brookfield Infrastructure Finance Limited, Brookfield Infrastructure Finance Pty Ltd and Computershare Trust Company of Canada, described in Note 19, "Subsidiary
Public Issuers" in our financial statements included in this annual report on Form 20-F;
-
13.
-
Guarantee
dated October 30, 2015 by Brookfield Infrastructure Partners L.P., Brookfield Infrastructure L.P., BIP Bermuda Holdings I
Limited, Brookfield Infrastructure Holdings (Canada) Inc. and Brookfield Infrastructure US Holdings I Corporation in favour of Computershare Trust Company of Canada, described in
Note 19, "Subsidiary Public Issuers" in our financial statements included in this annual report on Form 20-F;
-
14.
-
Fourth
Supplemental Indenture dated October 30, 2015 between Brookfield Infrastructure Finance ULC, Brookfield Infrastructure
Finance LLC, Brookfield Infrastructure Finance Limited, Brookfield Infrastructure Finance Pty Ltd and Computershare Trust Company of Canada, described in Note 19, "Subsidiary
Public Issuers" in our financial statements included in this annual report on Form 20-F;
-
15.
-
Guarantee
dated October 30, 2015 by Brookfield Infrastructure Partners L.P., Brookfield Infrastructure L.P., BIP Bermuda Holdings I
Limited, Brookfield Infrastructure Holdings (Canada) Inc. and Brookfield Infrastructure US Holdings I Corporation in favour of Computershare Trust Company of Canada, described in
Note 19, "Subsidiary Public Issuers" in our financial statements included in this annual report on Form 20-F;
-
16.
-
Fifth
Supplemental Indenture dated February 22, 2017 between Brookfield Infrastructure Finance ULC, Brookfield Infrastructure
Finance LLC, Brookfield Infrastructure Finance Limited, Brookfield Infrastructure Finance Pty Ltd and Computershare Trust Company of Canada, described in Note 19, "Subsidiary
Public Issuers" in our financial statements included in this annual report on Form 20-F; and
-
17.
-
Guarantee
dated February 22, 2017 by Brookfield Infrastructure Partners L.P., Brookfield Infrastructure L.P., BIP Bermuda Holdings I
Limited, Brookfield Infrastructure Holdings (Canada) Inc. and Brookfield Infrastructure US Holdings I Corporation in favour of Computershare Trust Company of Canada, described in
Note 19, "Subsidiary Public Issuers" in our financial statements included in this annual report on Form 20-F.
10.D EXCHANGE CONTROLS
There are currently no governmental laws, decrees, regulations or other legislation of Bermuda or the United States which
restrict the import or export of capital or the remittance of dividends, interest or other payments to non-residents of Bermuda or the United States holding the Company's securities, except as
otherwise described in this annual report on Form 20-F under Item 10.E "Taxation."
10.E TAXATION
The following summary discusses certain material United States, Canadian, Australian and Bermudian tax considerations related to
the holding and disposition of our units as of the date hereof. Holders of our units are advised to consult their own tax advisors concerning the consequences under the tax laws of the country of
which they are resident or in which they are otherwise subject to tax of making an investment in our units.
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CERTAIN MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
This summary discusses certain material United States federal income tax considerations to unitholders relating to the receipt,
holding, and disposition of our units as of the date hereof. This summary is based on provisions of the U.S. Internal Revenue Code, on the regulations promulgated thereunder ("Treasury
Regulations"), and on published administrative rulings, judicial decisions, and other applicable authorities, all as in effect on the date hereof and all of which are subject to change at any time,
possibly with retroactive effect. This summary is necessarily general and may not apply to all categories of investors, some of whom may be subject to special rules, including, without limitation,
persons that own (directly or indirectly, applying certain attribution rules) 5% or more of our units, dealers in securities or currencies, financial institutions or financial services entities,
mutual funds, life insurance companies, persons that hold our units as part of a straddle, hedge, constructive sale or conversion transaction with other investments, persons whose units are loaned to
a short seller to cover a short sale of units, persons whose functional currency is not the U.S. dollar, persons who have elected mark-to-market accounting, persons who hold our units through a
partnership or other entity treated as a pass-through entity for U.S. federal income tax purposes, persons for whom our units are not a capital asset, persons who are liable for the alternative
minimum tax, and certain U.S. expatriates or former long-term residents of the United States. This summary does not address any tax consequences to holders of our preferred units.
Tax-exempt organizations are addressed separately below. The actual tax consequences of the ownership and disposition of our units will vary depending on your individual circumstances.
For
purposes of this discussion, a "U.S. Holder" is a beneficial owner of one or more of our units that is for U.S. federal tax purposes: (i) an individual citizen
or resident of the United States; (ii) a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the
laws of the United States, any state thereof or the District of Columbia; (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source;
or (iv) a trust (a) that is subject to the primary supervision of a court within the United States and all substantial decisions of which one or more U.S. persons have the
authority to control or (b) that has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person.
A
"Non-U.S. Holder" is a beneficial owner of one or more of our units, other than a U.S. Holder or an entity classified as a partnership or other fiscally transparent
entity for U.S. federal tax purposes.
If
a partnership holds our units, the tax treatment of a partner of such partnership generally will depend upon the status of the partner and the activities of the partnership. Partners
of partnerships that hold our units should consult their own tax advisers.
This discussion does not constitute tax advice and is not intended to be a substitute for tax planning. You should consult your own tax adviser concerning the
U.S. federal, state and local income tax consequences particular to your ownership and disposition of our units, as well as any tax consequences under the laws of any other taxing
jurisdiction.
Partnership Status of Our Partnership and the Holding LP
Each of our partnership and the Holding LP has made a protective election to be classified as a partnership for
U.S. federal tax purposes. An entity that is treated as a partnership for U.S. federal tax purposes incurs no U.S. federal income tax liability. Instead, each partner is generally
required to take into account its allocable share of items of income, gain, loss, deduction, or credit of the partnership in computing its U.S. federal income tax liability, regardless of
whether cash distributions are made. Distributions of cash by a partnership to a partner generally are not taxable unless the amount of cash distributed to a partner is in excess of the partner's
adjusted basis in its partnership interest.
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An entity that would otherwise be classified as a partnership for U.S. federal income tax purposes may nonetheless be taxable as a corporation if it is a
"publicly traded partnership", unless an exception applies. Our partnership is publicly traded. However, an exception, referred to as the "Qualifying Income Exception", exists with respect to a
publicly traded partnership if (i) at least 90% of such partnership's gross income for every taxable year consists of "qualifying income" and (ii) the partnership would not be required
to register under the Investment Company Act if it were a U.S. corporation. Qualifying income includes certain interest income, dividends, real property rents, gains from the sale or other
disposition of real property, and any gain from the sale or disposition of a capital asset or other property held for the production of income that otherwise constitutes qualifying income.
Our
General Partner intends to manage the affairs of our partnership and the Holding LP so that our partnership will meet the Qualifying Income Exception in each taxable year.
Accordingly, our General Partner believes that our partnership will be treated as a partnership and not as a corporation for U.S. federal income tax purposes.
If
our partnership fails to meet the Qualifying Income Exception, other than a failure which is determined by the IRS to be inadvertent and which is cured within a reasonable time after
discovery, or if our partnership is required to register under the Investment Company Act, our partnership will be treated as if it had transferred all of its assets, subject to liabilities, to a
newly formed corporation, on the first day of the year in which our partnership fails to meet the Qualifying Income Exception, in return for stock in such corporation, and then distributed the stock
to our unitholders in liquidation. This deemed contribution and liquidation could result in the recognition of gain (but not loss) to U.S. Holders, except that U.S. Holders
generally would not recognize the portion of such gain attributable to stock or securities of non-U.S. corporations held by us. If, at the time of such contribution, our partnership were to
have liabilities in excess of the tax basis of its assets, U.S. Holders generally would recognize gain in respect of such excess liabilities upon the deemed transfer. Thereafter, our
partnership would be treated as a corporation for U.S. federal income tax purposes.
If
our partnership were treated as a corporation in any taxable year, either as a result of a failure to meet the Qualifying Income Exception or otherwise, our partnership's items of
income, gain, loss, deduction, or credit would be reflected only on our partnership's tax return rather than being passed through to our unitholders, and our partnership would be subject to
U.S. corporate income tax and potentially branch profits tax with respect to its income, if any, effectively connected with a U.S. trade or business. Moreover, under certain
circumstances, our partnership might be classified as a PFIC, for U.S. federal income tax purposes, and a U.S. Holder would be subject to the rules applicable to PFICs discussed below.
See "Consequences to U.S. HoldersPassive Foreign Investment Companies". Subject to the PFIC rules, distributions made to U.S. Holders would be treated as
taxable dividend income to the extent of our partnership's current or accumulated earnings and profits. Any distribution in excess of current and accumulated earnings and profits would first be
treated as a tax-free return of capital to the extent of a U.S. Holder's adjusted tax basis in its units. Thereafter, to the extent such distribution were to exceed a U.S. Holder's
adjusted tax basis in its units, the distribution would be treated as gain from the sale or exchange of such units. The amount of a distribution treated as a dividend could be eligible for reduced
rates of taxation, provided certain conditions are met. In addition, dividends, interest and certain other passive income received by our partnership with respect to U.S. investments generally
would be subject to U.S. withholding tax at a rate of 30% (although certain Non-U.S. Holders nevertheless might be entitled to certain treaty benefits in respect of their allocable share
of such income) and U.S. Holders would not be allowed a tax credit with respect to any such tax withheld. In addition, the "portfolio interest" exemption would not apply to certain interest
income of our partnership (although certain Non-U.S. Holders nevertheless might be entitled to certain treaty benefits in respect of their allocable share of such income). Depending on the
composition of our assets, additional adverse U.S. federal income tax consequences could result under the anti-inversion rules described in Section 7874 of the U.S. Internal
Revenue Code, as implemented by the Treasury Regulations and IRS administrative guidance.
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Based
on the foregoing consequences, the treatment of our partnership as a corporation could materially reduce a holder's after-tax return and therefore could result in a substantial
reduction of the value of our units. If the Holding LP were to be treated as a corporation for U.S. federal income tax purposes, consequences similar to those described above would
apply, and additional adverse U.S. federal income tax consequences could result if debt issued by a U.S. subsidiary to the Holding LP were recharacterized as equity under the
Treasury Regulations under Section 385 of the U.S. Internal Revenue Code.
The
remainder of this summary assumes that our partnership and the Holding LP will be treated as partnerships for U.S. federal tax purposes. Our partnership expects that a
substantial portion of the items of income, gain, deduction, loss, or credit realized by our partnership will be realized in the first instance by the Holding LP and allocated to our
partnership for reallocation to our unitholders. Unless otherwise specified, references in this section to realization of our partnership's items of income, gain, loss, deduction, or credit include a
realization of such items by the Holding LP and the allocation of such items to our partnership.
Consequences to U.S. Holders
Holding of Our Units
Income and Loss.
If you are a U.S. Holder, you will be required to take into account, as described below, your allocable
share of our
partnership's items of income, gain, loss, deduction, and credit for each of our partnership's taxable years ending with or within your taxable year. Each item generally will have the same character
and source as though you had realized the item directly. You must report such items without regard to whether any distribution has been or will be received from our partnership. Our partnership
intends to make cash distributions to all unitholders on a quarterly basis in amounts generally expected to be sufficient to permit U.S. Holders to fund their estimated U.S. tax
obligations (including U.S. federal, state, and local income taxes) with respect to their allocable shares of our partnership's net income or gain. However, based upon your particular tax
situation and simplifying assumptions that our partnership will make in determining the amount of such distributions, and depending upon whether you elect to reinvest such distributions pursuant to
the distribution reinvestment plan, your tax liability might exceed cash distributions made to you, in which case any tax liabilities arising from your ownership of our units would need to be
satisfied from your own funds.
With
respect to U.S. Holders who are individuals, certain dividends paid by a corporation (including certain qualified foreign corporations) to our partnership and that are
allocable to such U.S. Holders may qualify for reduced rates of taxation. A qualified foreign corporation includes a foreign corporation that is eligible for the benefits of specified income
tax treaties with the United States. In addition, a foreign corporation is treated as a qualified corporation with respect to its shares that are readily tradable on an established securities
market in the United States. Among other exceptions, U.S. Holders who are individuals will not be eligible for reduced rates of taxation on any dividends if the payer is a PFIC for the
taxable year in which such dividends are paid or for the preceding taxable year. Dividends received by non-corporate U.S. Holders may be subject to an additional Medicare tax on unearned income
of 3.8% (see "Medicare Tax" below). U.S. Holders that are corporations may be entitled to a "dividends received deduction" in respect of dividends paid by
U.S. corporations in which our partnership (through the Holding LP) owns stock. You should consult your own tax adviser regarding the application of the foregoing rules in light of your
particular circumstances.
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For
U.S. federal income tax purposes, your allocable share of our partnership's items of income, gain, loss, deduction, or credit will be governed by our Limited Partnership
Agreement if such allocations have "substantial economic effect" or are determined to be in accordance with your interest in our partnership. Similarly, our partnership's allocable share of items of
income, gain, loss, deduction, or credit of the Holding LP will be governed by the limited partnership agreement of the Holding LP if such allocations have "substantial economic effect"
or are determined to be in accordance with our partnership's interest in the Holding LP. Our General Partner believes that, for U.S. federal income tax purposes, such allocations should
be given effect, and our General Partner intends to prepare and file tax returns based on such allocations. If the IRS were to successfully challenge the allocations made pursuant to either our
limited partnership agreement or the Limited Partnership Agreement of the Holding LP, then the resulting allocations for U.S. federal income tax purposes might be less favourable than
the allocations set forth in such agreements.
Basis.
You will have an initial tax basis in your units equal to the sum of (i) the amount of cash paid for our units (or,
if you received
your units pursuant to the spin-off, the amount of dividend income you recognized pursuant to the spin-off) and (ii) your share of our partnership's liabilities, if any. That basis will be
increased by your share of our partnership's income and by increases in your share of our partnership's liabilities, if any. That basis will be decreased, but not below zero, by distributions you
receive from our partnership, by your share of our partnership's losses, and by any decrease in your share of our partnership's liabilities. Under applicable U.S. federal income tax rules, a
partner in a partnership has a single, or "unitary", tax basis in his or her partnership interest. As a result, any amount you pay to acquire additional units (including through the distribution
reinvestment plan) will be averaged with the adjusted tax basis of units owned by you prior to the acquisition of such additional units.
For
purposes of the foregoing rules, the rules discussed immediately below, and the rules applicable to a sale or exchange of our units, our partnership's liabilities generally will
include our partnership's share of any liabilities of the Holding LP.
Limits on Deductions for Losses and Expenses.
Your deduction of your allocable share of our partnership's losses will be limited
to your tax basis in
our units and, if you are an individual or a corporate holder that is subject to the "at risk" rules, to the amount for which you are considered to be "at risk" with respect to our partnership's
activities, if that is less than your tax basis. In general, you will be at risk to the extent of your tax basis in our units, reduced by (i) the portion of that basis attributable to your
share of our partnership's liabilities for which you will not be personally liable (excluding certain qualified non-recourse financing) and (ii) any amount of money you borrow to acquire or
hold our units, if the lender of those borrowed funds owns an interest in our partnership, is related to you, or can look only to your units for repayment. Your at-risk amount generally will increase
by your allocable share of our partnership's income and gain and decrease by cash distributions you receive from our partnership and your allocable share of losses and deductions. You must recapture
losses deducted in previous years to the extent that distributions cause your at-risk amount to be less than zero at the end of any taxable year. Losses disallowed or recaptured as a result of these
limitations will carry forward and will be allowable to the extent that your tax basis or at-risk amount, whichever is the limiting factor, subsequently increases. Upon the taxable disposition of our
units, any gain recognized by you can be offset by losses that were previously suspended by the at-risk limitation, but may not be offset by losses suspended by the basis limitation. Any excess loss
above the gain previously suspended by the at-risk or basis limitations may no longer be used. You should consult your own tax adviser as to the effects of the at-risk rules.
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Limitations on Deductibility of Organizational Expenses and Syndication Fees.
In general, neither our partnership nor any
U.S. Holder may
deduct organizational or syndication expenses. Similar rules apply to organizational or syndication expenses incurred by the Holding LP. Syndication fees (which would include any sales or
placement fees or commissions) must be capitalized and cannot be amortized or otherwise deducted.
Limitations on Interest Deductions.
Our General Partner intends to use commercially reasonable efforts to structure the
activities of our partnership
and the Holding LP to avoid generating UBTI attributable to debt-financed property. However, to the extent our partnership or the Holding LP incur debt, your share of our partnership's
interest expense, if any, is likely to be treated as "investment interest" expense. For a non-corporate U.S. Holder, the deductibility of "investment interest" expense generally is limited to
the amount of such holder's "net investment income". Your share of our partnership's dividend and interest income will be treated as investment income, although "qualified dividend income" subject to
reduced rates of tax in the hands of an individual will only be treated as investment income if such individual elects to treat such dividend as ordinary income not subject to reduced rates of tax. In
addition, state and local tax laws may disallow deductions for your share of our partnership's interest expense.
Net
investment income includes gross income from property held for investment and amounts treated as portfolio income under the passive loss rules, less deductible expenses, other than
interest, directly connected with the production of investment income, but generally does not include gains attributable to the disposition of property held for investment.
Deductibility of Partnership Investment Expenditures by Individual Partners and by Trusts and Estates.
Subject to certain
exceptions, all
miscellaneous itemized deductions of an individual taxpayer, and certain of such deductions of an estate or trust, are deductible only to the extent that such deductions exceed 2% of the taxpayer's
adjusted gross income. In addition, the otherwise allowable itemized deductions of individuals whose gross income exceeds an applicable threshold amount are subject to reduction by an amount equal to
the lesser of (i) 3% of the excess of the individual's adjusted gross income over the threshold amount and (ii) 80% of the amount of the individual's itemized deductions. The operating
expenses of our partnership, including our partnership's allocable share of the base management fee or any other management fees, may be treated as miscellaneous itemized deductions subject to the
foregoing rule. Accordingly, if you are a non-corporate U.S. Holder, you should consult your own tax adviser regarding the application of these limitations.
Treatment of Distributions
Distributions of cash by our partnership generally will not be taxable to you to the extent of your adjusted tax basis (described
above) in our units. Any cash distributions in excess of your adjusted tax basis generally will be considered to be gain from the sale or exchange of our units (described below). Such gain generally
will be treated as capital gain and will be long-term capital gain if your holding period for our units exceeds one year. A reduction in your allocable share of our liabilities, and certain
distributions of marketable securities by our partnership, if any, will be treated similar to cash distributions for U.S. federal income tax purposes.
Sale or Exchange of Our Units
You will recognize gain or loss on the sale or taxable exchange of our units equal to the difference, if any, between the amount
realized and your tax basis in our units sold or exchanged. Your amount realized will be measured by the sum of the cash or the fair market value of other property received plus your share of our
partnership's liabilities, if any.
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Gain
or loss recognized by you upon the sale or exchange of our units generally will be taxable as capital gain or loss and will be long-term capital gain or loss if our units were held
for more than one year as of the date of such sale or exchange. Assuming you have not elected to treat your share of our partnership's investment in any PFIC as a "qualified electing fund", gain
attributable to such investment in a PFIC would be taxable in the manner described below in "Passive Foreign Investment Companies". In addition, certain gain attributable to our
investment in a "controlled foreign corporation ("CFC") may be characterized as ordinary income, and certain gain attributable to "unrealized receivables" or "inventory items" could be characterized
as ordinary income rather than capital gain. For example, if our partnership were to hold debt acquired at a market discount, accrued market discount on such debt would be treated as "unrealized
receivables". The deductibility of capital losses is subject to limitations.
Each
U.S. Holder who acquires our units at different times and intends to sell all or a portion of our units within a year of the most recent purchase should consult its own tax
adviser regarding the application of certain "split holding period" rules to such sale and the treatment of any gain or loss as long-term or short-term capital gain or loss.
Medicare Tax
U.S. Holders that are individuals, estates, or trusts may be required to pay a 3.8% Medicare tax on the lesser of (i) the
excess of such U.S. Holders' "modified adjusted gross income" (or "adjusted gross income" in the case of estates and trusts) over certain thresholds and (ii) such
U.S. Holders' "net investment income" (or "undistributed net investment income" in the case of estates and trusts). Net investment income generally includes your allocable share of our
partnership's income, as well as gain realized by you from a sale of our units. Special rules relating to the 3.8% Medicare tax may apply to dividends and gain, if any, derived by such
U.S. Holders with respect to our partnership's interest in a PFIC or CFC. See "Passive Foreign Investment Companies" and "Controlled Foreign Corporations" below. You
should consult your own tax adviser regarding the implications of the 3.8% Medicare tax for your ownership and disposition of our units.
Foreign Tax Credit Limitations
If you are a U.S. Holder, you generally will be entitled to a foreign tax credit with respect to your allocable share of
creditable foreign taxes paid on our partnership's income and gains. Complex rules may, depending on your particular circumstances, limit the availability or use of foreign tax credits. Gain from the
sale of our partnership's investments may be treated as U.S.-source gain. Consequently, you may not be able to use the foreign tax credit arising from any foreign taxes imposed on such gain unless the
credit can be applied (subject to applicable limitations) against U.S. tax due on other income treated as derived from foreign sources. Certain losses that our partnership incurs may be treated
as foreign-source losses, which could reduce the amount of foreign tax credits otherwise available.
Section 754 Election
Our partnership and the Holding LP have each made the election permitted by Section 754 of the U.S. Internal
Revenue Code ("Section 754 Election"). The Section 754 Election cannot be revoked without the consent of the IRS. The Section 754 Election generally requires our partnership to
adjust the tax basis in its assets, or inside basis, attributable to a transferee of our units under Section 743(b) of the U.S. Internal Revenue Code to reflect the purchase price paid
by the transferee for our units. This election does not apply to a person who purchases units directly from us. For purposes of this discussion, a transferee's inside basis in our partnership's assets
will be considered to have two components: (i) the transferee's share of our partnership's tax basis in our partnership's assets, or common basis, and (ii) the adjustment under
Section 743(b) of the U.S. Internal Revenue Code to that basis. The foregoing rules would also apply to the Holding LP.
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Generally,
a Section 754 Election would be advantageous to a transferee U.S. Holder if such holder's tax basis in its units were higher than such units' share of the
aggregate tax basis of our partnership's assets immediately prior to the transfer. In that case, as a result of the Section 754 Election, the transferee U.S. Holder would have a higher
tax basis in its share of our partnership's assets for purposes of calculating, among other items, such holder's share of any gain or loss on a sale of our partnership's assets. Conversely, a
Section 754 Election would be disadvantageous to a transferee U.S. Holder if such holder's tax basis in its units were lower than such units' share of the aggregate tax basis of our
partnership's assets immediately prior to the transfer. Thus, the fair market value of our units may be affected either favourably or adversely by the election.
Whether
or not the Section 754 Election is made, if our units are transferred at a time when our partnership has a "substantial built-in loss" in its assets, our partnership will
be obligated to reduce the tax basis in the portion of such assets attributable to such units.
The
calculations involved in the Section 754 Election are complex, and our General Partner advises that it will make such calculations on the basis of assumptions as to the value
of our partnership assets and other matters. Each U.S. Holder should consult its own tax adviser as to the effects of the Section 754 Election.
Uniformity of Our Units
Because we cannot match transferors and transferees of our units, we must maintain the uniformity of the economic and tax
characteristics of our units to a purchaser of our units. In the absence of uniformity, we may be unable to comply fully with a number of U.S. federal income tax requirements. A lack of
uniformity can result from a literal application of certain Treasury Regulations to our partnership's Section 743(b) adjustments, a determination that our partnership's Section 704(c)
allocations are unreasonable, or other reasons. Section 704(c) allocations would be intended to reduce or eliminate the disparity between tax basis and the value of our partnership's assets in
certain circumstances, including on the issuance of additional units. In order to maintain the fungibility of all of our units at all times, we will seek to achieve the uniformity of U.S. tax
treatment for all purchasers of our units which are acquired at the same time and price (irrespective of the identity of the particular seller of our units or the time when our units are issued by our
partnership), through the application of certain tax accounting principles that our General Partner believes are reasonable for our partnership. However, the IRS may disagree with us and may
successfully challenge our application of such tax accounting principles. Any non-uniformity could have a negative impact on the value of our units.
Foreign Currency Gain or Loss
Our partnership's functional currency is the U.S. dollar, and our partnership's income or loss is calculated in
U.S. dollars. It is likely that our partnership will recognize "foreign currency" gain or loss with respect to transactions involving non-U.S. dollar currencies. In general, foreign
currency gain or loss is treated as ordinary income or loss. You should consult your own tax adviser regarding the tax treatment of foreign currency gain or loss.
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Passive Foreign Investment Companies
U.S. Holders may be subject to special rules applicable to indirect investments in foreign corporations, including an investment
through our partnership in a PFIC. A PFIC is defined as any foreign corporation with respect to which (after applying certain look-through rules) either (i) 75% or more of its gross income for
a taxable year is "passive income" or (ii) 50% or more of its assets in any taxable year (generally based on the quarterly average of the value of its assets) produce or are held for the
production of "passive income". There are no minimum stock ownership requirements for PFICs. If you hold an interest in a foreign corporation for any taxable year during which the corporation is
classified as a PFIC with respect to you, then the corporation will continue to be classified as a PFIC with respect to you for any subsequent taxable year during which you continue to hold an
interest in the corporation, even if the corporation's income or assets would not cause it to be a PFIC in such subsequent taxable year, unless an exception applies.
Subject
to certain elections described below, any gain on the disposition of stock of a PFIC owned by you indirectly through our partnership, as well as income realized on certain
"excess distributions" by such PFIC, would be treated as though realized ratably over the shorter of your holding period of our units or our partnership's holding period for the PFIC. Such gain or
income generally would be taxable as ordinary income, and dividends paid by the PFIC would not be eligible for the preferential tax rates for dividends paid to non-corporate U.S. Holders. In
addition, an interest charge would apply, based on the tax deemed deferred from prior years. To the extent reasonably practicable, we intend to make distributions of the earnings of each entity we are
able to identify as a PFIC not less frequently than annually so as to minimize the likelihood that you will have excess distributions with respect to any such entity. However, because we cannot assure
that will be the case, and because any gains on a sale of any such entity would remain subject to the PFIC tax regime, we urge you to consider making any applicable election described below.
If
you were to elect to treat your share of our partnership's interest in a PFIC as a "qualified electing fund" ("QEF Election"), for the first year you were treated as holding
such interest, then in lieu of the tax consequences described in the paragraph immediately above, you would be required to include in income each year a portion of the ordinary earnings and net
capital gains of the PFIC, even if not distributed to our partnership or to you. A QEF Election must be made by you on an entity-by-entity basis. To make a QEF Election, you must, among other things,
(i) obtain a PFIC annual information statement (through an intermediary statement supplied by our partnership) and (ii) prepare and submit IRS Form 8621 with your annual income
tax return. To the extent reasonably practicable, we intend to timely provide you with information related to the PFIC status of each entity we are able to identify as a PFIC, including information
necessary to make a QEF Election with respect to each such entity. Any such election should be made for the first year our partnership holds an interest in such entity or for the first year in which
you hold our units, if later. Under certain circumstances, we may be permitted to make a QEF Election on behalf of all U.S. Holders with respect to a PFIC held indirectly. However, no assurance
can be provided that we will make any such QEF Election, if available.
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Once
you have made a QEF Election for an entity, such election applies to any additional shares of interest in such entity acquired directly or indirectly, including through additional
units acquired after the QEF Election is made (such as units acquired under the distribution reinvestment plan). If you were to make a QEF Election after the first year that you were treated as
holding an interest in a PFIC, the adverse tax consequences relating to PFIC stock would continue to apply with respect to the pre-QEF Election period, unless you were to make a "purging election".
The purging election would create a deemed sale of your previously held share of our partnership's interests in a PFIC. The gain recognized by the purging election would be subject to the special tax
and interest charge rules, which treat the gain as an excess distribution, as described above. As a result of the purging election, you would have a new basis and holding period in your share of our
partnership's interests in the PFIC. U.S. Holders should consult their own tax advisers as to the manner in which such direct inclusions could affect their allocable share of our partnership's
income and their tax basis in our units and the advisability of making a QEF Election or a purging election.
Treasury
Regulations under Section 1411 of the U.S. Internal Revenue Code contain special rules for applying the 3.8% Medicare tax (as described above under
"Medicare Tax") to U.S. persons owning an interest in a PFIC. Under the special rules, if you are a non-corporate U.S. Holder that has made a QEF Election with respect to
our partnership's interest in a PFIC, then you are permitted to make a special election to treat your share of the ordinary earnings and net capital gains of the PFIC as net investment income for
purposes of the 3.8% Medicare tax. If you do not make the special election, then you may be required to calculate your basis in our units for purposes of the 3.8% Medicare tax in a manner that differs
from the calculation of your basis in our units for U.S. federal income tax purposes generally. You should consult your own tax adviser regarding the implications of the special election, as
well as the other implications of the 3.8% Medicare tax and the Treasury Regulations under Section 1411 of the U.S. Internal Revenue Code for your ownership and disposition of
our units.
In
the case of a PFIC that is a publicly traded foreign company, and in lieu of making a QEF Election, an election may be made to "mark to market" the stock of such publicly traded
foreign company on an annual basis. Pursuant to such an election, you would include in each year as ordinary income the excess, if any, of the fair market value of such stock over its adjusted basis
at the end of the taxable year. However, none of the current Holding Entities or operating entities are expected to be publicly traded, although our partnership may in the future acquire interests in
PFICs which are publicly traded foreign companies. Thus the mark-to-market election is not expected to be available to any U.S. Holder in respect of its indirect ownership interest in any of
the current Holding Entities or operating entities.
Based
on our organizational structure, as well as our expected income and assets, our General Partner currently believes that a U.S. Holder is unlikely to be regarded as owning an
interest in a PFIC solely by reason of owning our units for the taxable year ending December 31, 2017. However, our General Partner believes that some of our operating entities may have been
PFICs in prior taxable years. In addition, we may decide to hold an existing or future operating entity through a Holding Entity that would be a PFIC in order to ensure that our partnership satisfies
the Qualifying Income Exception, among other reasons. See "Investment Structure", below. Accordingly, there can be no assurance that a current or future investment will not qualify as
a PFIC.
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Subject
to certain exceptions, a U.S. person who directly or indirectly owns an interest in a PFIC generally is required to file an annual report with the IRS, and the failure to
file such report could result in the imposition of penalties on such U.S. person and in the extension of the statute of limitations with respect to federal income tax returns filed by such
U.S. person. You should consult your own tax adviser regarding the PFIC rules, including the foregoing filing requirements, as well as the advisability of making a QEF Election, a special
election under the Treasury Regulations under Section 1411 of the U.S. Internal Revenue Code, or a mark-to-market election, as applicable, with respect to any PFIC in which you are
treated as owning an interest through our partnership.
Controlled Foreign Corporations
A non-U.S. entity will be treated as a CFC if it is treated as a corporation for U.S. federal income tax purposes and
more than 50% of (i) the total combined voting power of all classes of stock of the non-U.S. entity entitled to vote or (ii) the total value of the stock of the
non-U.S. entity is owned by U.S. Shareholders on any day during the taxable year of such non-U.S. entity. For this purpose, a "U.S. Shareholder" with respect to a
non-U.S. entity means a U.S. person (including a U.S. partnership) that owns 10% or more of the total combined voting power of all classes of stock of the non-U.S. entity
entitled to vote.
If
a U.S. partnership in which we own an interest is a U.S. Shareholder of a CFC, then a U.S. Holder may be required to include in income its allocable share of the
CFC's "Subpart F" income. Subpart F income generally includes dividends, interest, net gain from the sale or disposition of securities, non-actively managed rents, and certain other
generally passive types of income. The aggregate Subpart F income inclusions in any taxable year relating to a particular CFC are limited to such CFC's current earnings and profits. These
inclusions are treated as ordinary income (whether or not such inclusions are attributable to net capital gains). Thus, a U.S. Holder may be required to report as ordinary income its allocable
share of the CFC's Subpart F income without corresponding receipts of cash and may not benefit from capital gain treatment with respect to the portion of any earnings attributable to net
capital gains of the CFC.
Your
tax basis in your units will be increased to reflect any required Subpart F income inclusions. Such income will be treated as income from sources within the
United States, for certain foreign tax credit purposes, to the extent derived by the CFC from U.S. sources. Such income will not be eligible for the reduced rate of tax applicable to
certain dividends paid by qualified foreign corporations to individual U.S. persons. See above under "Consequences to U.S. HoldersHolding of Our
UnitsIncome and Loss". Amounts included as Subpart F income with respect to direct and indirect investments generally will not be taxable again when actually distributed by
the CFC.
Whether
or not any CFC has Subpart F income, any gain allocated to you from our disposition of an equity interest in a CFC will be treated as dividend income to the extent of your
allocable share of the current and/or accumulated earnings and profits of the CFC. In this regard, earnings would not include any amounts previously taxed pursuant to the CFC rules. However, net
losses (if any) of a CFC will not pass through to U.S. Holders.
As
described above under "Passive Foreign Investment Companies", Treasury Regulations under Section 1411 of the U.S. Internal Revenue Code contain special
rules for applying the 3.8% Medicare tax to U.S. persons owning an interest in a PFIC. Similar rules apply to U.S. Shareholders of a CFC. You should consult your own tax adviser
regarding the implications of these special rules.
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If
a non-U.S. entity held by us through a U.S. partnership (treated as a U.S. Shareholder of such non-U.S. entity) is classified as both a CFC and a PFIC,
then you will be required to include amounts in income with respect to such non-U.S. entity under this subheading, and the consequences described under "Passive Foreign Investment
Companies" above will not apply. If such U.S. partnership ceases to be a U.S. Shareholder with respect to such non-U.S. entity, then you may be subject to the PFIC rules.
Based
on our organizational structure, the General Partner currently believes that one or more of our existing Holding Entities and operating entities are likely to be classified as
CFCs. Moreover, we may in the future acquire certain investments or operating entities through one or more Holding Entities treated as corporations for U.S. federal income tax purposes, and
such future Holding Entities or other companies in which we acquire an interest may be treated as CFCs. You should consult your own tax adviser regarding the implications of the CFC rules for your
ownership and disposition of our units.
Investment Structure
To ensure that our partnership meets the Qualifying Income Exception for publicly traded partnerships (discussed above) and complies
with certain requirements in our Limited Partnership Agreement, among other reasons, our partnership may structure certain investments through an entity classified as a corporation for
U.S. federal income tax purposes. Such investments will be structured as determined in the sole discretion of our General Partner generally to be tax efficient for our unitholders. However,
because our unitholders will be located in numerous taxing jurisdictions, no assurance can be given that any such investment structure will benefit all our unitholders to the same extent, and such an
investment structure might even result in additional tax burdens on some unitholders. As discussed above, if any such entity were a non-U.S. corporation, it might be considered a PFIC or CFC.
If any such entity were a U.S. corporation, it would be subject to U.S. federal net income tax on its income, including any gain recognized on the disposition of its investments. In
addition, if the investment were to involve U.S. real property, gain recognized on the disposition of the investment by a corporation generally would be subject to corporate-level tax, whether
the corporation were a U.S. or a non-U.S. corporation.
U.S. Withholding Taxes
Although each U.S. Holder is required to provide us with an IRS Form W-9, we nevertheless may be unable to accurately or
timely determine the tax status of our unitholders for purposes of determining whether U.S. withholding applies to payments made by our partnership to some or all of our unitholders. In such a
case, payments made by our partnership to U.S. Holders might be subject to U.S. "backup" withholding at the applicable rate or other U.S. withholding taxes. You would be able to
treat as a credit your allocable share of any U.S. withholding taxes paid in the taxable year in which such withholding taxes were paid and, as a result, you might be entitled to a refund of
such taxes from the IRS. In the event you transfer or otherwise dispose of some or all of your units, special rules might apply for purposes of determining whether you or the transferee of such units
were subject to U.S. withholding taxes in respect of income allocable to, or distributions made on account of, such units or entitled to refunds of any such taxes withheld. See below
"Administrative MattersCertain Effects of a Transfer of Units". You should consult your own tax adviser regarding the treatment of U.S. withholding taxes.
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Transferor/Transferee Allocations
Our partnership may allocate items of income, gain, loss, and deduction using a monthly convention, whereby any such items recognized
in a given month by our partnership are allocated to our unitholders as of a specified date of such month. As a result, if you transfer your units, you might be allocated income, gain, loss, and
deduction realized by our partnership after the date of the transfer. Similarly, if you acquire additional units, you might be allocated income, gain, loss, and deduction realized by our partnership
prior to your ownership of such units.
Section 706
of the U.S. Internal Revenue Code generally governs allocations of items of partnership income and deductions between transferors and transferees of partnership
interests, and the Treasury Regulations provide a safe harbor allowing a publicly traded partnership to use a monthly simplifying convention for such purposes. However, it is not clear that our
partnership's allocation method complies with the requirements. If our partnership's convention were not permitted, the IRS might contend that our partnership's taxable income or losses must be
reallocated among our unitholders. If such a contention were sustained, your tax liabilities might be adjusted to your detriment. Our General Partner is authorized to revise our partnership's method
of allocation between transferors and transferees (as well as among investors whose interests otherwise vary during a taxable period).
U.S. Federal Estate Tax Consequences
If our units are included in the gross estate of a U.S. citizen or resident for U.S. federal estate tax purposes, then a
U.S. federal estate tax might be payable in connection with the death of such person. Individual U.S. Holders should consult their own tax advisers concerning the potential
U.S. federal estate tax consequences with respect to our units.
Certain Reporting Requirements
A U.S. Holder who invests more than $100,000 in our partnership may be required to file IRS Form 8865 reporting the
investment with such U.S. Holder's U.S. federal income tax return for the year that includes the date of the investment. You may be subject to substantial penalties if you fail to comply
with this and other information reporting requirements with respect to an investment in our units. You should consult your own tax adviser regarding such reporting requirements.
U.S. Taxation of Tax-Exempt U.S. Holders of Our Units
Income recognized by a U.S. tax-exempt organization is exempt from U.S. federal income tax except to the extent of the
organization's UBTI. UBTI is defined generally as any gross income derived by a tax-exempt organization from an unrelated trade or business that it regularly carries on, less the deductions directly
connected with that trade or business. In addition, income arising from a partnership (or other entity treated as a partnership for U.S. federal income tax purposes) that holds operating
assets or is otherwise engaged in a trade or business generally will constitute UBTI. Notwithstanding the foregoing, UBTI generally does not include any dividend income, interest income, certain other
categories of passive income, or capital gains realized by a tax-exempt organization, so long as such income is not "debt-financed", as discussed below. Our General Partner believes that our
partnership should not be regarded as engaged in a trade or business, and anticipates that any operating assets held by our partnership will be held through entities that are treated as corporations
for U.S. federal income tax purposes.
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The
exclusion from UBTI does not apply to income from "debt-financed property", which is treated as UBTI to the extent of the percentage of such income that the average acquisition
indebtedness with respect to the property bears to the average tax basis of the property for the taxable year. If an entity treated as a partnership for U.S. federal income tax purposes incurs
acquisition indebtedness, a tax-exempt partner in such partnership will be deemed to have acquisition indebtedness equal to its allocable portion of such acquisition indebtedness. If any such
indebtedness were used by our partnership or by the Holding LP to acquire property, such property generally would constitute debt-financed property, and any income from or gain from the
disposition of such debt-financed property allocated to a tax-exempt organization generally would constitute UBTI to such tax-exempt organization. In addition, even if such indebtedness were not used
either by our partnership or by the Holding LP to acquire property but were instead used to fund distributions to our unitholders, if a tax-exempt organization subject to taxation in the
United States were to use such proceeds to make an investment outside our partnership, the IRS might assert that such investment constitutes debt-financed property to such unitholder with the
consequences noted above. Our partnership and the Holding LP currently do not have any outstanding indebtedness used to acquire property, and our General Partner does not believe that our
partnership or the Holding LP will generate UBTI attributable to debt-financed property in the future. Moreover, our General Partner intends to use commercially reasonable efforts to structure
our activities to avoid generating UBTI. However, neither our partnership nor the Holding LP is prohibited from incurring indebtedness, and no assurance can be provided that neither our
partnership nor the Holding LP will generate UBTI attributable to debt-financed property in the future. Tax-exempt U.S. Holders should consult their own tax advisers regarding the tax
consequences of an investment in our units.
Consequences to Non-U.S. Holders
Our General Partner intends to use commercially reasonable efforts to structure the activities of our partnership and the
Holding LP, respectively, to avoid the realization by our partnership and the Holding LP, respectively, of income treated as effectively connected with a U.S. trade or business,
including effectively connected income attributable to the sale of a "United States real property interest", as defined in the U.S. Internal Revenue Code. Specifically, our partnership
intends not to make an investment, whether directly or through an entity which would be treated as a partnership for U.S. federal income tax purposes, if our General Partner believes at the
time of such investment that such investment would generate income treated as effectively connected with a U.S. trade or business. If, as anticipated, our partnership is not treated as engaged
in a U.S. trade or business or as deriving income which is treated as effectively connected with a U.S. trade or business, and provided that a Non-U.S. Holder is not itself
engaged in a U.S. trade or business, then such Non-U.S. Holder generally will not be subject to U.S. tax return filing requirements solely as a result of owning our units and
generally will not be subject to U.S. federal income tax on its allocable share of our partnership's interest and dividends from non-U.S. sources or gain from the sale or other
disposition of securities or real property located outside of the United States.
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However,
there can be no assurance that the law will not change or that the IRS will not deem our partnership to be engaged in a U.S. trade or business. If, contrary to our
General Partner's expectations, our partnership is treated as engaged in a U.S. trade or business, then a Non-U.S. Holder generally would be required to file a U.S. federal
income tax return, even if no effectively connected income were allocable to it. If our partnership were to have income treated as effectively connected with a U.S. trade or business, then a
Non-U.S. Holder would be required to report that income and would be subject to U.S. federal income tax at the regular graduated rates. In addition, our partnership might be required to
withhold U.S. federal income tax on such Non-U.S. Holder's distributive share of such income. A corporate Non-U.S. Holder might also be subject to branch profits tax at a rate of
30%, or at a lower treaty rate, if applicable. Finally, if our partnership were treated as engaged in a U.S. trade or business, a portion of any gain realized by a Non-U.S. Holder upon
the sale or exchange of its units could be treated as income effectively connected with a U.S. trade or business and therefore subject to U.S. federal income tax at the regular graduated
rates.
In
general, even if our partnership is not engaged in a U.S. trade or business, and assuming you are not otherwise engaged in a U.S. trade or business, you will nonetheless
be subject to a withholding tax of 30% on the gross amount of certain U.S.-source income which is not effectively connected with a U.S. trade or business. Income subjected to such a flat tax
rate is income of a fixed or determinable annual or periodic nature, including dividends and certain interest income. Such withholding tax may be reduced or eliminated with respect to certain types of
income under an applicable income tax treaty between the United States and your country of residence or under the "portfolio interest" rules or other provisions of the U.S. Internal
Revenue Code, provided that you provide proper certification as to your eligibility for such treatment. Notwithstanding the foregoing, and although each Non-U.S. Holder is required to provide
us with an IRS Form W-8, we nevertheless may be unable to accurately or timely determine the tax status of our investors for purposes of establishing whether reduced rates of withholding apply
to some or all of our investors. In such a case, your allocable share of distributions of U.S.-source dividend and interest income will be subject to U.S. withholding tax at a rate of 30%.
Further, if you would not be subject to U.S. tax based on your tax status or otherwise were eligible for a reduced rate of U.S. withholding, you might need to take additional steps to
receive a credit or refund of any excess withholding tax paid on your account, which could include the filing of a non-resident U.S. income tax return with the IRS. Among other limitations
applicable to claiming treaty benefits, if you reside in a treaty jurisdiction which does not treat our partnership as a pass-through entity, you might not be eligible to receive a refund or credit of
excess U.S. withholding taxes paid on your account. In the event you transfer or otherwise dispose of some or all of your units, special rules may apply for purposes of determining whether you
or the transferee of such units are subject to U.S. withholding taxes in respect of income allocable to, or distributions made on account of, such units or entitled to refunds of any such taxes
withheld. See "Administrative MattersCertain Effects of a Transfer of Units". You should consult your own tax adviser regarding the treatment of U.S. withholding
taxes.
Special
rules may apply to any Non-U.S. Holder (i) that has an office or fixed place of business in the United States; (ii) that is present in the
United States for 183 days or more in a taxable year; or (iii) that is (a) a former citizen or long-term resident of the United States, (b) a foreign
insurance company that is treated as holding a partnership interest in our partnership in connection with its U.S. business, (c) a PFIC, or (d) a corporation that accumulates
earnings to avoid U.S. federal income tax. You should consult your own tax adviser regarding the application of these special rules.
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Taxes in Other Jurisdictions
In addition to U.S. federal income tax consequences, an investment in our partnership could subject you to U.S. state and
local taxes in the U.S. state or locality in which you are a resident for tax purposes. You could also be subject to tax return filing obligations and income, franchise, or other taxes,
including withholding taxes, in non-U.S. jurisdictions in which we invest. We will attempt, to the extent reasonably practicable, to structure our operations and investments so as to avoid
income tax filing obligations by U.S. Holders in non-U.S. jurisdictions. However, there may be circumstances in which we are unable to do so. Income or gain from investments held by our
partnership may be subject to withholding or other taxes in jurisdictions outside the United States, except to the extent an income tax treaty applies. If you wish to claim the benefit of an
applicable income tax treaty, you might be required to submit information to tax authorities in such jurisdictions. You should consult your own tax adviser regarding the U.S. state, local, and
non-U.S. tax consequences of an investment in our partnership.
Administrative Matters
Information Returns and Audit Procedures
We have agreed to use commercially reasonable efforts to furnish to you, within 90 days after the close of each calendar year,
U.S. tax information (including IRS Schedule K-1) which describes on a U.S. dollar basis your share of our partnership's income, gain, loss and deduction for our preceding taxable
year. However, providing this U.S. tax information to our unitholders will be subject to delay in the event of, among other reasons, the late receipt of any necessary tax information from
lower-tier entities. It is therefore possible that, in any taxable year, you will need to apply for an extension of time to file your tax returns. In addition, unitholders that do not ordinarily have
U.S. federal tax filing requirements will not receive a Schedule K-1 and related information unless such unitholders request it within 60 days after the close of each
calendar year. In preparing this U.S. tax information, we will use various accounting and reporting conventions, some of which have been mentioned in the previous discussion, to determine your
share of income, gain, loss and deduction. The IRS may successfully contend that certain of these reporting conventions are impermissible, which could result in an adjustment to your income
or loss.
Our
partnership may be audited by the IRS. Adjustments resulting from an IRS audit could require you to adjust a prior year's tax liability and result in an audit of your own tax return.
Any audit of your tax return could result in adjustments not related to our partnership's tax returns, as well as those related to our partnership's tax returns. Under the Bipartisan Budget Act of
2015, for taxable years beginning after December 31, 2017, if the IRS makes an audit adjustment to our income tax returns, it may assess and collect any taxes (including penalties and interest)
resulting from such audit adjustment directly from our partnership instead of unitholders (as under prior law). We may be permitted to elect to have our General Partner and our unitholders take
such audit adjustment into account in accordance with their interests in us during the taxable year under audit. However, there can be no assurance that we will choose to make such election or that it
will be available in all circumstances. If we do not make the election, and we pay taxes, penalties, or interest as a result of an audit adjustment, then cash available for distribution to our
unitholders might be substantially reduced. As a result, our current unitholders might bear some or all of the cost of the tax liability resulting from such audit adjustment, even if our current
unitholders did not own our units during the taxable year under audit. The foregoing considerations also apply with respect to our partnership's interest in the Holding LP. These rules do not
apply to our partnership or the Holding LP for taxable years beginning on or before December 31, 2017.
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For taxable years beginning on or before December 31, 2017, our General Partner will act as our partnership's "tax matters partner." As the tax matters
partner, our General Partner will have the authority, subject to certain restrictions, to act on behalf of our partnership in connection with any administrative or judicial review of our partnership's
items of income, gain, loss, deduction, or credit. For taxable years beginning after December 31, 2017, a "partnership representative" designated by our partnership will have the sole authority
to act on behalf of our partnership in connection with such administrative or judicial review. In particular, our partnership representative will have the sole authority to bind both our former and
current unitholders and to make certain elections on behalf of our partnership pursuant to the Bipartisan Budget Act of 2015.
The
application of the Bipartisan Budget Act of 2015 to our partnership and our unitholders is uncertain and remains subject to Treasury Regulations and IRS guidance yet to be issued.
You should consult your own tax adviser regarding the implications of the Bipartisan Budget Act of 2015 for an investment in our units.
Tax Shelter Regulations and Related Reporting Requirements
If we were to engage in a "reportable transaction", we (and possibly our unitholders) would be required to make a detailed
disclosure of the transaction to the IRS in accordance with regulations governing tax shelters and other potentially tax-motivated transactions. A transaction may be a reportable transaction based
upon any of several factors, including the fact that it is a type of tax avoidance transaction publicly identified by the IRS as a "listed transaction" or "transaction of interest", or that it
produces certain kinds of losses in excess of $2 million (or, in the case of certain foreign currency transactions, losses in excess of $50,000). An investment in our partnership may be
considered a "reportable transaction" if, for example, our partnership were to recognize certain significant losses in the future. In certain circumstances, a unitholder who disposes of an interest in
a transaction resulting in the recognition by such holder of significant losses in excess of certain threshold amounts may be obligated to disclose its participation in such transaction. Certain of
these rules are unclear, and the scope of reportable transactions can change retroactively. Therefore, it is possible that the rules may apply to transactions other than significant loss transactions.
Moreover,
if we were to participate in a reportable transaction with a significant purpose to avoid or evade tax, or in any listed transaction, you might be subject to significant
accuracy-related penalties with a broad scope, for those persons otherwise entitled to deduct interest on federal tax deficiencies, non-deductibility of interest on any resulting tax liability, and in
the case of a listed transaction, an extended statute of limitations. We do not intend to participate in any reportable transaction with a significant purpose to avoid or evade tax, nor do we intend
to participate in any listed transactions. However, no assurance can be provided that the IRS will not assert that we have participated in such a transaction.
You
should consult your own tax adviser concerning any possible disclosure obligation under the regulations governing tax shelters with respect to the disposition of our units.
Taxable Year
Our partnership uses the calendar year as its taxable year for U.S. federal income tax purposes. Under certain circumstances
which we currently believe are unlikely to apply, a taxable year other than the calendar year may be required for such purposes.
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Constructive Termination
Our partnership will be considered to have been terminated for U.S. federal income tax purposes if there is a sale or exchange
of 50% or more of our units within a 12-month period. A constructive termination of our partnership would result in the close of its taxable year for all unitholders. If a unitholder reports on a
taxable year other than a fiscal year ending on our partnership's year-end, and the unitholder is otherwise subject to U.S. federal income tax, the closing of our partnership's taxable year may
result in more than 12 months of our partnership's taxable income or loss being includable in such unitholder's taxable income for the year of the termination. We would be required to make new
tax elections after a termination, including a new Section 754 Election. A constructive termination could also result in penalties and other adverse tax consequences if we were unable to
determine that the termination had occurred. Moreover, a constructive termination might either accelerate the application of, or subject our partnership to, any tax legislation enacted before the
termination.
Withholding and Backup Withholding
For each calendar year, we will report to you and to the IRS the amount of distributions that we pay, and the amount of tax
(if any) that we withhold on these distributions. The proper application to our partnership of the rules for withholding under Sections 1441 through 1446 of the
U.S. Internal Revenue Code (applicable to certain dividends, interest, and amounts treated as effectively connected with a U.S. trade or business, among other items) is unclear. Because
the documentation we receive may not properly reflect the identities of unitholders at any particular time (in light of possible sales of our units), we may over-withhold or under-withhold with
respect to a particular unitholder. For example, we may impose withholding, remit such amount to the IRS and thus reduce the amount of a distribution paid to a Non-U.S. Holder. It may be the
case, however, that the corresponding amount of our income was not properly allocable to such holder, and the appropriate amount of withholding should have been less than the actual amount withheld.
Such Non-U.S. Holder would be entitled to a credit against the holder's U.S. federal income tax liability for all withholding, including any such excess withholding. However, if the
withheld amount were to exceed the holder's U.S. federal income tax liability, the holder would need to apply for a refund to obtain the benefit of such excess withholding. Similarly, we may
fail to withhold on a distribution, and it may be the case that the corresponding income was properly allocable to a Non-U.S. Holder and that withholding should have been imposed. In such case,
we intend to pay the under-withheld amount to the IRS, and we may treat such under-withholding as an expense that will be borne indirectly by all unitholders on a pro rata basis (since we may
be unable to allocate any such excess withholding tax cost to the relevant Non-U.S. Holder).
Under
the backup withholding rules, you may be subject to backup withholding tax with respect to distributions paid unless: (i) you are an exempt recipient and demonstrate this
fact when required; or (ii) provide a taxpayer identification number, certify as to no loss of exemption from backup withholding tax, and otherwise comply with the applicable requirements of
the backup withholding tax rules. A U.S. Holder that is exempt should certify such status on a properly completed IRS Form W-9. A Non-U.S. Holder may qualify as an exempt
recipient by submitting a properly completed IRS Form W-8. Backup withholding is not an additional tax. The amount of any backup withholding from a payment to you will be allowed as a credit
against your U.S. federal income tax liability and may entitle you to a refund from the IRS, provided you supply the required information to the IRS in a timely manner.
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If
you do not timely provide our partnership, or the applicable nominee, broker, clearing agent, or other intermediary, with IRS Form W-9 or IRS Form W-8, as
applicable, or such form is not properly completed, then our partnership may become subject to U.S. backup withholding taxes in excess of what would have been imposed had our partnership
or the applicable intermediary received properly completed forms from all unitholders. For administrative reasons, and in order to maintain the fungibility of our units, such excess U.S. backup
withholding taxes, and if necessary similar items, may be treated by our partnership as an expense that will be borne indirectly by all unitholders on a pro rata basis (e.g., since it
may be impractical for us to allocate any such excess withholding tax cost to the unitholders that failed to timely provide the proper U.S. tax forms).
Foreign Account Tax Compliance
FATCA imposes a 30% withholding tax on "withholdable payments" made to a "foreign financial institution" or a "non-financial foreign
entity", unless such financial institution or entity satisfies certain information reporting or other requirements. Withholdable payments include certain U.S.-source income, such as interest,
dividends, and other passive income. Beginning January 1, 2019, withholdable payments also include gross proceeds from the sale or disposition of property that can produce U.S.-source interest
or dividends. We intend to comply with FATCA, so as to ensure that the 30% withholding tax does not apply to any withholdable payments received by our partnership, the Holding LP, the Holding
Entities, or the operating entities. Nonetheless, the 30% withholding tax may also apply to your allocable share of distributions attributable to withholdable payments, unless you properly certify
your FATCA status on IRS Form W-8 or IRS Form W-9 (as applicable) and satisfy any additional requirements under FATCA.
In
compliance with FATCA, information regarding certain unitholders' ownership of our units may be reported to the IRS or to a non-U.S. governmental authority. FATCA remains
subject to modification by an applicable intergovernmental agreement between the United States and another country, such as the agreement in effect between the United States and Bermuda
for cooperation to facilitate the implementation of FATCA, or by future Treasury Regulations or guidance. You should consult your own tax adviser regarding the consequences under FATCA of an
investment in our units.
Information Reporting with Respect to Foreign Financial Assets
Under Treasury Regulations, U.S. individuals that own "specified foreign financial assets" with an aggregate fair market value
exceeding either $50,000 on the last day of the taxable year or $75,000 at any time during the taxable year generally are required to file an information report with respect to such assets with their
tax returns. Significant penalties may apply to persons who fail to comply with these rules. Specified foreign financial assets include not only financial accounts maintained in foreign financial
institutions, but also, unless held in accounts maintained by a financial institution, any stock or security issued by a non-U.S. person, any financial instrument or contract held for
investment that has an issuer or counterparty other than a U.S. person, and any interest in a foreign entity. These information reporting requirements also apply to U.S. corporations,
partnerships and trusts formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets. The failure to report information required under the current
regulations could result in substantial penalties and in the extension of the statute of limitations with respect to federal income tax returns filed by you. You should consult your own tax adviser
regarding the possible implications of these Treasury Regulations for an investment in our units.
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Certain Effects of a Transfer of Units
Our partnership may allocate items of income, gain, loss, deduction, and credit using a monthly convention, whereby any such items
recognized in a given month by our partnership are allocated to our unitholders as of a specified date of such month. Any U.S. withholding taxes applicable to dividends received by the
Holding LP (and, in turn, our partnership) generally will be withheld by our partnership only when such dividends are paid. Because our partnership generally intends to distribute amounts
received in respect of dividends shortly after receipt of such amounts, it is generally expected that any U.S. withholding taxes withheld by our partnership on such amounts will correspond to
our unitholders who were allocated income and who received the distributions in respect of such amounts. The Holding LP may invest in debt obligations or other securities for which the accrual
of interest or income thereon is not matched by a contemporaneous receipt of cash. Any such accrued interest or other income would be allocated pursuant to such monthly convention. Consequently, our
unitholders may recognize income in excess of cash distributions received from our partnership, and any income so included by a unitholder would increase the basis such unitholder has in our units and
would offset any gain (or increase the amount of loss) realized by such unitholder on a subsequent disposition of its units. In addition, U.S. withholding taxes generally would be
withheld by our partnership only on the payment of cash in respect of such accrued interest or other income, and, therefore, it is possible that some unitholders would be allocated income which might
be distributed to a subsequent unitholder, and such subsequent unitholder would be subject to withholding at the time of distribution. As a result, the subsequent unitholder, and not the unitholder
who was allocated income, would be entitled to claim any available credit with respect to such withholding.
The
Holding LP has invested and will continue to invest in certain Holding Entities and operating entities organized in non-U.S. jurisdictions, and income and gain from
such investments may be subject to withholding and other taxes in such jurisdictions. If any such non-U.S. taxes were imposed on income allocable to a U.S. Holder, and such holder were
thereafter to dispose of its units prior to the date distributions were made in respect of such income, under applicable provisions of the U.S. Internal Revenue Code and Treasury Regulations,
the unitholder to whom such income was allocated (and not the unitholder to whom distributions were ultimately made) would, subject to other applicable limitations, be the party permitted to
claim a credit for such non-U.S. taxes for U.S. federal income tax purposes. Thus a unitholder may be affected either favourably or adversely by the foregoing rules. Complex rules may,
depending on a unitholder's particular circumstances, limit the availability or use of foreign tax credits, and you are urged to consult your own tax adviser regarding all aspects of foreign
tax credits.
Nominee Reporting
Persons who hold an interest in our partnership as a nominee for another person may be required to furnish
to us:
-
(i)
-
the
name, address and taxpayer identification number of the beneficial owner and the nominee;
-
(ii)
-
whether
the beneficial owner is (a) a person that is not a U.S. person, (b) a foreign government, an international organization, or
any wholly-owned agency or instrumentality of either of the foregoing, or (c) a tax-exempt entity;
-
(iii)
-
the
amount and description of units held, acquired, or transferred for the beneficial owner; and
-
(iv)
-
specific
information including the dates of acquisitions and transfers, means of acquisitions and transfers, and acquisition cost for purchases, as well as
the amount of net proceeds from sales.
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Brokers
and financial institutions may be required to furnish additional information, including whether they are U.S. persons and specific information on units they acquire, hold,
or transfer for their own account. A penalty of $250 per failure (as adjusted for inflation), up to a maximum of $3,000,000 per calendar year (as adjusted for inflation),
generally is imposed by the U.S. Internal Revenue Code for the failure to report such information to us. The nominee is required to supply the beneficial owner of our units with the information
furnished to us.
New Legislation or Administrative or Judicial Action
The U.S. federal income tax treatment of our unitholders depends, in some instances, on determinations of fact and
interpretations of complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available. You should be aware that the U.S. federal income tax
rules, particularly those applicable to partnerships, are constantly under review (including currently) by the Congressional tax-writing committees and other persons involved in the legislative
process, the IRS, the U.S. Treasury Department and the courts, frequently resulting in revised interpretations of established concepts, statutory changes, revisions to regulations and other
modifications and interpretations, any of which could adversely affect the value of our units and be effective on a retroactive basis. For example, changes to the U.S. federal tax laws and
interpretations thereof could make it more difficult or impossible for our partnership to be treated as a partnership that is not taxable as a corporation for U.S. federal income tax purposes,
change the character or treatment of portions of our partnership's income (including changes that recharacterize certain allocations as potentially non-deductible fees), reduce the net amount of
distributions available to our unitholders, or otherwise affect the tax considerations of owning our units. Such changes could also affect or cause our partnership to change the way it conducts its
activities and adversely affect the value of our units.
Our
partnership's organizational documents and agreements permit our General Partner to modify our Limited Partnership Agreement from time to time, without the consent of our
unitholders, to elect to treat our partnership as a corporation for U.S. federal tax purposes, or to address certain changes in U.S. federal income tax regulations, legislation or
interpretation. In some circumstances, such revisions could have a material adverse impact on some or all of our unitholders.
THE
FOREGOING DISCUSSION IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING. THE TAX MATTERS RELATING TO OUR PARTNERSHIP AND UNITHOLDERS ARE COMPLEX AND ARE SUBJECT TO VARYING
INTERPRETATIONS. MOREOVER, THE EFFECT OF EXISTING INCOME TAX LAWS, THE MEANING AND IMPACT OF WHICH IS UNCERTAIN, AND OF PROPOSED CHANGES IN INCOME TAX LAWS WILL VARY WITH THE PARTICULAR CIRCUMSTANCES
OF EACH UNITHOLDER, AND IN REVIEWING THIS ANNUAL REPORT ON FORM 20-F THESE MATTERS SHOULD BE CONSIDERED. EACH UNITHOLDER SHOULD CONSULT ITS OWN TAX ADVISER WITH RESPECT TO THE U.S. FEDERAL,
STATE, LOCAL, AND OTHER TAX CONSEQUENCES OF ANY INVESTMENT IN OUR UNITS.
CERTAIN MATERIAL CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
In the following portion of the summary, references to our "units" are to the limited partnership units in our partnership, including
the preferred units, and references to our "unitholders" are to the holders of our units and preferred units.
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The
following is a summary of the principal Canadian federal income tax consequences under the Tax Act of the holding and disposition of units in our partnership generally
applicable to a holder who, for purposes of the Tax Act and at all relevant times, holds our units as capital property, deals at arm's length with and is not affiliated with our partnership,
the Holding LP, our General Partner or their respective affiliates (a "Holder"). Generally, our units will be considered to be capital property to a Holder, provided that the Holder does
not use or hold our units in the course of carrying on a business of trading or dealing in securities, and has not acquired them in one or more transactions considered to be an adventure or concern in
the nature of trade.
This
summary is not applicable to a Holder: (i) that is a "financial institution" (as defined in the Tax Act) for purposes of the "mark-to-market" property rules;
(ii) that is a "specified financial institution" (as defined in the Tax Act); (iii) who makes or has made a functional currency reporting election pursuant to
section 261 of the Tax Act; (iv) an interest in which would be a "tax shelter investment" (as defined in the Tax Act) or who acquires our units as a "tax shelter
investment" (and this summary assumes that no such persons hold our units); (v) that has, directly or indirectly, a "significant interest" (as defined in subsection 34.2(1)
of the Tax Act) in our partnership; (vi) if any affiliate of our partnership is, or becomes as part of a series of transactions that includes the acquisition of our units, a "foreign
affiliate" (for purposes of the Tax Act) to such Holder or to any corporation that does not deal at arm's length with such Holder for purposes of the Tax Act, or (vii) that
has entered or will enter into a "derivative forward agreement" (as defined in the Tax Act) in respect of our units. Any such Holders should consult their own tax advisors with respect
to an investment in our units.
This
summary is based on the current provisions of the Tax Act, all specific proposals to amend the Tax Act publicly announced by or on behalf of the Minister of Finance
(Canada) prior to the date hereof (the "Tax Proposals"), and the current published administrative and assessing policies and practices of the CRA. This summary assumes that all Tax Proposals
will be enacted in the form proposed but no assurance can be given that the Tax Proposals will be enacted in the form proposed or at all.
This
summary does not otherwise take into account or anticipate any changes in law, whether by judicial, administrative or legislative decision or action, or changes in the CRA's
administrative and assessing policies and practices, nor does it take into account provincial, territorial or foreign income tax legislation or considerations, which may differ significantly from
those described herein. This summary is not exhaustive of all possible Canadian federal income tax consequences that may affect unitholders. Holders should consult their own tax advisors in respect of
the provincial, territorial or foreign income tax consequences to them of holding and disposing of our units.
This
summary also assumes that neither our partnership nor the Holding LP is a "tax shelter" (as defined in the Tax Act) or a "tax shelter investment". However, no
assurance can be given in this regard.
This
summary also assumes that neither our partnership nor the Holding LP will be a "SIFT partnership" at any relevant time for purposes of the SIFT Rules on the basis that
neither our partnership nor the Holding LP will be a "Canadian resident partnership" at any relevant time. However, there can be no assurance that the SIFT Rules will not be revised or amended
such that the SIFT Rules will apply.
This
summary does not address the deductibility of interest on money borrowed to acquire our units.
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This summary is of a general nature only and is not intended to be, nor should it be construed to be, legal or tax advice to any particular Holder, and no
representation with respect to the Canadian federal income tax consequences to any particular Holder is made. Consequently, Holders are advised to consult their own tax advisors with respect to their
particular circumstances. See also Item 3.D "Risk FactorsRisks Related to TaxationCanada".
For
purposes of the Tax Act, all amounts relating to the acquisition, holding or disposition of our units must be expressed in Canadian dollars including any distributions,
adjusted cost base and proceeds of disposition. For purposes of the Tax Act, amounts denominated in a currency other than the Canadian dollar generally must be converted into Canadian dollars
using the appropriate exchange rate determined in accordance with the detailed rules in the Tax Act in that regard.
Holders Resident in Canada
The following portion of the summary is generally applicable to a Holder who, for purposes of the Tax Act and at all relevant
times, is resident or deemed to be resident in Canada ("Canadian Holder").
Computation of Income or Loss
Each Canadian Holder is required to include (or, subject to the "at-risk rules" discussed below, entitled to deduct) in computing his
or her income for a particular taxation year, the Canadian Holder's share of the income (or loss) of our partnership for its fiscal year ending in, or coincidentally with, the Canadian Holder's
taxation year end, whether or not any of that income is distributed to the Canadian Holder in the taxation year and regardless of whether or not our units were held throughout such year.
Our
partnership will not itself be a taxable entity and is not expected to be required to file an income tax return in Canada for any taxation year. However, the income (or loss)
of our partnership for a fiscal period for purposes of the Tax Act will be computed as if it were a separate person resident in Canada and the partners will be allocated a share of that income
(or loss) in accordance with our partnership's Limited Partnership Agreement. The income (or loss) of our partnership will include our partnership's share of the income (or loss)
of the Holding LP for a fiscal year determined in accordance with the Holding LP's limited partnership agreement. For this purpose, our partnership's fiscal year end and that of the
Holding LP will be December 31.
The
income for tax purposes of our partnership for a given fiscal year will be allocated to each Canadian Holder in an amount calculated by multiplying such income that is allocable to
unitholders by a fraction, the numerator of which is the sum of the distributions received by such Canadian Holder with respect to such fiscal year and the denominator of which is the aggregate amount
of the distributions made by our partnership to all partners with respect to such fiscal year, subject to adjustment in respect of distributions on the preferred units that are in satisfaction of
accrued distributions on the preferred units that were not paid in a previous fiscal year of our partnership where our General Partner determines that the allocation to preferred unitholders based on
such distributions would result in a preferred unitholder being allocated more income than it would have been if the distributions were paid in the fiscal year of our partnership in which they
were accrued.
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If,
with respect to a given fiscal year, no distribution is made by our partnership or our partnership has a loss for tax purposes, one quarter of the income, or loss, as the case may
be, for tax purposes of our partnership for such fiscal year that is allocable to unitholders, will be allocated to the Canadian Holders of record at the end of each calendar quarter ending in such
fiscal year as follows: (i) to the holders of preferred units in respect of the preferred units held by them on each such date, such amount of our partnership's income or loss for tax purposes,
as the case may be, as our General Partner determines is reasonable in the circumstances having regard to such factors as our General Partner considers to be relevant, including, without limitation,
the relative amount of capital contributed to our partnership on the issuance of preferred units as compared to all other units and the relative fair market value of the preferred units, as the case
may be, as compared to all other units, and (ii) to the partners other than in respect of the preferred units, the remaining amount of our partnership's income or loss for tax purposes, as the
case may be, pro rata in the proportion that the number of units of our partnership (other than the preferred units) held at each such date by a unitholder is of the total number of units of
our partnership (other than the preferred units) that are issued and outstanding at each such date.
The
income of our partnership as determined for purposes of the Tax Act may differ from its income as determined for accounting purposes and may not be matched by cash
distributions. In addition, for purposes of the Tax Act, all income (or losses) of our partnership and the Holding LP must be calculated in Canadian currency. Where our
partnership (or the Holding LP) holds investments denominated in U.S. dollars or other foreign currencies, gains and losses may be realized by our partnership as a consequence of
fluctuations in the relative values of the Canadian and foreign currencies.
In
computing the income (or loss) of our partnership, deductions may be claimed in respect of reasonable administrative costs, interest and other expenses incurred by our
partnership for the purpose of earning income, subject to the relevant provisions of the Tax Act. Our partnership may also deduct from its income for the year a portion of the reasonable
expenses, if any, incurred by our partnership to issue units. The portion of such issue expenses deductible by our partnership in a taxation year is 20% of such issue expenses, pro-rated where our
partnership's taxation year is less than 365 days.
In
general, a Canadian Holder's share of any income (or loss) from our partnership from a particular source will be treated as if it were income (or loss) of the Canadian
Holder from that source, and any provisions of the Tax Act applicable to that type of income (or loss) will apply to the Canadian Holder. Our partnership will invest in partnership units
of the Holding LP. In computing our partnership's income (or loss) under the Tax Act, the Holding LP will itself be deemed to be a separate person resident in Canada which
computes its income (or loss) and allocates to its partners their respective share of such income (or loss). Accordingly, the source and character of amounts included in
(or deducted from) the income of Canadian Holders on account of income (or loss) earned by the Holding LP generally will be determined by reference to the source and character of
such amounts when earned by the Holding LP.
A
Canadian Holder's share of taxable dividends received or considered to be received by our partnership in a fiscal year from a corporation resident in Canada will be treated as a
dividend received by the Canadian Holder and will be subject to the normal rules in the Tax Act applicable to such dividends, including the enhanced gross-up and dividend tax credit for
"eligible dividends" (as defined in the Tax Act) when the dividend received by the Holding LP is designated as an "eligible dividend".
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Foreign
taxes paid by our partnership or the Holding LP and taxes withheld at source on amounts paid or credited to our partnership or the Holding LP (other than for the
account of a particular partner) will be allocated pursuant to the governing partnership agreement. Each Canadian Holder's share of the "business-income tax" and "non-business-income tax" paid to the
government of a foreign country for a year will be creditable against its Canadian federal income tax liability to the extent permitted by the detailed foreign tax credit rules contained in the
Tax Act. Although the foreign tax credit rules are designed to avoid double taxation, the maximum credit is limited. Because of this, and because of timing differences in recognition of
expenses and income and other factors, the foreign tax credit rules may not provide a full foreign tax credit for the "business-income tax" and "non-business-income tax" paid by our partnership or the
Holding LP to the government of a foreign country. The Tax Act contains anti-avoidance rules to address certain foreign tax credit generator transactions. Under the Foreign Tax Credit
Generator Rules, the foreign "business-income tax" or "non-business-income tax" allocated to a Canadian Holder for the purpose of determining such Canadian Holder's foreign tax credit for any taxation
year may be limited in certain circumstances, including where a Canadian Holder's share of the income of our partnership or the Holding LP under the income tax laws of any country (other than
Canada) under whose laws the income of our partnership or the Holding LP is subject to income taxation (the "Relevant Foreign Tax Law") is less than the Canadian Holder's share of such
income for purposes of the Tax Act. For this purpose, a Canadian Holder is not considered to have a lesser direct or indirect share of the income of our partnership or the Holding LP
under the Relevant Foreign Tax Law than for the purposes of the Tax Act solely because, among other reasons, of a difference between the Relevant Foreign Tax Law and the Tax Act in the
manner of computing the income of our partnership or the Holding LP or in the manner of allocating the income of our partnership or the Holding LP because of the admission or withdrawal
of a partner. No assurance can be given that the Foreign Tax Credit Generator Rules will not apply to any Canadian Holder. If the Foreign Tax Credit Generator Rules apply, the allocation to a Canadian
Holder of foreign "business-income tax" or "non-business-income tax" paid by our partnership or the Holding LP, and therefore such Canadian Holder's foreign tax credits, will be limited.
Our
partnership and the Holding LP will be deemed to be a non-resident person in respect of certain amounts paid or credited or deemed to be paid or credited to them by a person
resident or deemed to be resident in Canada, including dividends or interest. Dividends or interest (other than interest not subject to Canadian federal withholding tax) paid or deemed to be paid by a
person resident or deemed to be resident in Canada to the Holding LP will be subject to withholding tax under Part XIII of the Tax Act at the rate of 25%. However, the CRA's
administrative practice in similar circumstances is to permit the rate of Canadian federal withholding tax applicable to such payments to be computed by looking through the partnership and taking into
account the residency of the partners (including partners who are resident in Canada) and any reduced rates of Canadian federal withholding tax that any non-resident partners may be entitled to under
an applicable income tax treaty or convention, provided that the residency status and entitlement to the treaty benefits can be established. In determining the rate of Canadian federal withholding tax
applicable to amounts paid by the Holding Entities to the Holding LP, our General Partner expects the Holding Entities to look-through the Holding LP and our partnership to the residency
of the partners of our partnership (including partners who are resident in Canada) and to take into account any reduced rates of Canadian federal withholding tax that non-resident partners may be
entitled to under an applicable income tax treaty or convention in order to determine the appropriate amount of Canadian federal withholding tax to withhold from dividends or interest paid to the
Holding LP. However, there can be no assurance that the CRA will apply its administrative practice in this context. Under the Treaty, a Canadian-resident payer is required in certain
circumstances to look-through fiscally transparent partnerships, such as our partnership and the Holding LP, to the residency and Treaty entitlements of their partners and to take into account
the reduced rates of Canadian federal withholding tax that such partners may be entitled to under the Treaty.
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If
our partnership incurs losses for tax purposes, each Canadian Holder will be entitled to deduct in the computation of income for tax purposes the Canadian Holder's share of any net
losses for tax purposes of our partnership for its fiscal year to the extent that the Canadian Holder's investment is "at-risk" within the meaning of the Tax Act. The Tax Act contains
"at-risk rules" which may, in certain circumstances, restrict the deduction of a limited partner's share of any losses of a limited partnership. Our General Partner does not anticipate that our
partnership or the Holding LP will incur losses but no assurance can be given in this regard. Accordingly, Canadian Holders should consult their own tax advisors for specific advice with
respect to the potential application of the "at-risk rules".
Section 94.1
of the Tax Act contains rules relating to interests held by a taxpayer in Non-Resident Entities that could, in certain circumstances, cause income to be
imputed to Canadian Holders, either directly or by way of allocation of such income imputed to our partnership or the Holding LP. These rules would apply if it is reasonable to conclude, having
regard to all the circumstances, that one of the main reasons for the Canadian Holder, our partnership or the Holding LP acquiring, holding or having an investment in a Non-Resident Entity is
to derive a benefit from "portfolio investments" in certain assets from which the Non-Resident Entity may reasonably be considered to derive its value in such a manner that taxes under the
Tax Act on income, profits and gains from such assets for any year are significantly less than they would have been if such income, profits and gains had been earned directly. In determining
whether this is the case, section 94.1 of the Tax Act provides that consideration must be given to, among other factors, the extent to which the income, profits and gains for any fiscal
period are distributed in that or the immediately following fiscal period. No assurance can be given that section 94.1 of the Tax Act will not apply to a Canadian Holder, our partnership
or the Holding LP. If these rules apply to a Canadian Holder, our partnership or the Holding LP, income, determined by reference to a prescribed rate of interest plus two percent applied
to the "designated cost" (as defined in section 94.1 of the Tax Act) of the interest in the Non-Resident Entity, will be imputed directly to the Holder or to our partnership or
the Holding LP and allocated to the Canadian Holder in accordance with the rules in section 94.1 of the Tax Act. The rules in section 94.1 of the Tax Act are complex
and Canadian Holders should consult their own tax advisors regarding the application of these rules to them in their particular circumstances.
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Certain
of the Non-Resident Subsidiaries in which the Holding LP directly invests are expected to be CFAs of the Holding LP. Dividends paid to the Holding LP by a
CFA of the Holding LP will be included in computing the income of the Holding LP. To the extent that any CFA or Indirect CFA of the Holding LP earns income that is characterized
as FAPI in a particular taxation year of the CFA or Indirect CFA, the FAPI allocable to the Holding LP under the rules in the Tax Act must be included in computing the income of the
Holding LP for Canadian federal income tax purposes for the fiscal period of the Holding LP in which the taxation year of that CFA or Indirect CFA ends, whether or not the
Holding LP actually receives a distribution of that FAPI. Our partnership will include its share of such FAPI of the Holding LP in computing its income for Canadian federal income tax
purposes and Canadian Holders will be required to include their proportionate share of such FAPI allocated from our partnership in computing their income for Canadian federal income tax purposes. As a
result, Canadian Holders may be required to include amounts in their income even though they have not and may not receive an actual cash distribution of such amounts. If an amount of FAPI is included
in computing the income of the Holding LP for Canadian federal income tax purposes, an amount may be deductible in respect of the "foreign accrual tax" applicable to the FAPI. Any amount of
FAPI included in income net of the amount of any deduction in respect of "foreign accrual tax" will increase the adjusted cost base to the Holding LP of its shares of the particular CFA in
respect of which the FAPI was included. At such time as the Holding LP receives a dividend of this type of income that was previously included in the Holding LP's income as FAPI, such
dividend will effectively not be included in computing the income of the Holding LP and there will be a corresponding reduction in the adjusted cost base to the Holding LP of the
particular CFA shares. Under the Foreign Tax Credit Generator Rules, the "foreign accrual tax" applicable to a particular amount of FAPI included in the Holding LP's income in respect of a
particular "foreign affiliate" of the Holding LP may be limited in certain specified circumstances, including where the direct or indirect share of the income allocated to any member of the
Holding LP (which is deemed for this purpose to include a Canadian Holder) that is a person resident in Canada or a "foreign affiliate" of such a person is, under a Relevant Foreign Tax Law,
less than such member's share of such income for purposes of the Tax Act. No assurance can be given that the Foreign Tax Credit Generator Rules will not apply to the Holding LP. For this
purpose, a Canadian Holder is not considered to have a lesser direct or indirect share of the income of the Holding LP under the Relevant Foreign Tax Law than for the purposes of the
Tax Act solely because, among other reasons, of a difference between the Relevant Foreign Tax Law and the Tax Act in the manner of computing the income of the Holding LP or in the
manner of allocating the income of the Holding LP because of the admission or withdrawal of a partner. If the Foreign Tax Credit Generator Rules apply, the "foreign accrual tax" applicable to a
particular amount of FAPI included in the Holding LP's income in respect of a particular "foreign affiliate" of the Holding LP will be limited.
Disposition of Units
The disposition (or deemed disposition) by a Canadian Holder of a unit of any class or series will result in the realization of
a capital gain (or capital loss) by such Canadian Holder in the amount, if any, by which the proceeds of disposition of the unit, less any reasonable costs of disposition, exceed (or are
exceeded by) the adjusted cost base of such unit.
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Subject
to the general rules on averaging of cost base, the adjusted cost base of each class or series of a Canadian Holder's units would generally be equal to: (i) the actual
cost of such class or series of units (excluding any portion thereof financed with limited recourse indebtedness); plus (ii) the share of the income of our partnership allocated to the Canadian
Holder for fiscal years of our partnership ending before the relevant time in respect of the particular class or series of units; less (iii) the aggregate of the share of losses of our
partnership allocated to the Canadian Holder (other than losses which cannot be deducted because they exceed the Canadian Holder's "at-risk" amount) for the fiscal years of our partnership ending
before the relevant time in respect of the particular class or series of units; and less (iv) the Canadian Holder's distributions from our partnership made before the relevant time in respect
of the particular class or series of units.
The
foregoing discussion of the calculation of the adjusted cost base assumes that each class or series of partnership interests in our partnership are treated as separate property for
purposes of the Tax Act. However, the CRA's position is to treat all the different types of interests in a partnership that a partner may hold as one capital property, including for purposes of
determining the adjusted cost base of all such partnership interests. As a result, on a disposition of a particular type of unit, a partner's total adjusted cost base is required to be allocated in a
reasonable manner to the particular type of unit being disposed of. As acknowledged by the CRA, there is no particular method for determining a reasonable allocation of the adjusted cost base of a
partnership interest to the part of the partnership interest that is disposed of. Furthermore, more than one method may be reasonable. If the CRA's position applies, on a disposition by a Canadian
Holder of a particular type of units of our partnership, the Canadian Holder should generally be able to allocate his or her adjusted cost base in a manner that treats the different classes and series
of units of our partnership as separate property. Accordingly, the General Partner intends to provide unitholders with partnership information returns using such allocation.
Where
a Canadian Holder disposes of all of its units in our partnership, it will no longer be a partner of our partnership. If, however, a Canadian Holder is entitled to receive a
distribution from our partnership after the disposition of all such units, then the Canadian Holder will be deemed to dispose of such units at the later of: (i) the end of the fiscal year of
our partnership during which the disposition occurred; and (ii) the date of the last distribution made by our partnership to which the Canadian Holder was entitled. The share of the income
(or loss) of our partnership for tax purposes for a particular fiscal year which is allocated to a Canadian Holder who has ceased to be a partner will generally be added (or deducted) in
the computation of the adjusted cost base of the Canadian Holder's units in our partnership immediately prior to the time of the disposition.
A
Canadian Holder will generally realize a deemed capital gain if, and to the extent that, the adjusted cost base of the Canadian Holder's units is negative at the end of any fiscal year
of our partnership. In such a case, the adjusted cost base of the Canadian Holder's units will be nil at the beginning of the next fiscal year of our partnership.
Canadian
Holders should consult their own tax advisors for advice with respect to the specific tax consequences to them of disposing of our units.
Taxation of Capital Gains and Capital Losses
In general, one-half of a capital gain realized by a Canadian Holder must be included in computing such Canadian Holder's income as a
taxable capital gain. One-half of a capital loss is deducted as an allowable capital loss against taxable capital gains realized in the year and any remainder may be deducted against net taxable
capital gains in any of the three years preceding the year or any year following the year to the extent and under the circumstances described in the Tax Act.
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Special
rules in the Tax Act may apply to disallow the one-half treatment on all or a portion of a capital gain realized on a disposition of our units if a partnership interest is
acquired by a tax-exempt person or a non-resident person (or by a partnership or trust (other than certain trusts) of which a tax-exempt person or a non-resident person is a member or
beneficiary, directly or indirectly through one or more partnerships or trusts (other than certain trusts)). Our General Partner does not expect these rules to apply to any disposition of our units. A
Canadian Holder that is throughout the relevant taxation year a "Canadian
controlled private corporation" (as defined in the
Tax Act) may be liable to pay an additional refundable tax on its "aggregate investment income" (as defined in the Tax Act) for the year, which is defined to include taxable
capital gains.
Eligibility for Investment
Provided that our units are listed on a "designated stock exchange" (which currently includes the NYSE and the TSX), our units will be
"qualified investments" under the Tax Act for a trust governed by an RRSP, deferred profit sharing plan, RRIF, registered education savings plan, registered disability savings plan, and
a TFSA.
Notwithstanding
the foregoing, an annuitant under an RRSP or RRIF or a holder of a TFSA, as the case may be, may be subject to a penalty tax if our units held in the RRSP, RRIF or TFSA
are "prohibited investments" for the RRSP, RRIF or TFSA, as the case may be. Generally, our units will not be a "prohibited investment" for a trust governed by an RRSP, RRIF or TFSA, provided that the
annuitant under the RRSP or RRIF or the holder of the TFSA, as applicable, deals at arm's-length with our partnership for purposes of the Tax Act and does not have a "significant interest" in
our partnership. Unitholders who hold our units in an RRSP, RRIF or TFSA should consult with their own tax advisors regarding the application of the foregoing prohibited investment rules having regard
to their particular circumstances.
Alternative Minimum Tax
Canadian Holders that are individuals or trusts may be subject to the alternative minimum tax rules. Such Canadian Holders should
consult their own tax advisors.
Holders Not Resident in Canada
The following portion of the summary is generally applicable to a Holder who, for purposes of the Tax Act and at all relevant
times, is not, and is not deemed to be, resident in Canada and who does not use or hold and is not deemed to use or hold its units in connection with a business carried on in Canada
(a "Non-Canadian Holder").
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The
following portion of the summary assumes that (i) our units are not, and will not at any relevant time constitute, "taxable Canadian property" of any Non-Canadian Holder and
(ii) our partnership and the Holding LP will not dispose of property that is "taxable Canadian property". "Taxable Canadian property" includes, but is not limited to, property that is
used or held in a business carried on in Canada and shares of corporations that are not listed on a "designated stock exchange" if more than 50% of the fair market value of the shares is derived from
certain Canadian properties in the 60-month period immediately preceding the particular time. In general, our units will not constitute "taxable Canadian property" of any Non-Canadian Holder at the
time of disposition or deemed disposition, unless (a) at any time during the 60-month period immediately preceding the particular time, more than 50% of the fair market value of our units was
derived, directly or indirectly (excluding through a corporation, partnership or trust, the shares or interests in which were not themselves "taxable Canadian property"), from one or any combination
of (i) real or immovable property situated in Canada; (ii) "Canadian resource properties"; (iii) "timber resource properties"; and (iv) options in respect of, or interests
in, or for civil law rights in, such property, whether or not such property exists, or (b) our units are otherwise deemed to be "taxable Canadian property". Since our partnership's assets will
consist principally of units of the Holding LP, our units would generally be "taxable Canadian property" at a particular time if the units of the Holding LP held by our partnership
derived, directly or indirectly (excluding through a corporation, partnership or trust, the shares or interests in which were not themselves "taxable Canadian property") more than 50% of their fair
market value from properties described in (i) to (iv) above, at any time in the 60-month period preceding the particular time. Our General Partner does not expect our units to be
"taxable Canadian property" at any relevant time and does not expect our partnership or the Holding LP to dispose of "taxable Canadian property". However, no assurance can be given in these
regards. See Item 3.D "Risk FactorsRisks Related to TaxationCanada".
The
following portion of the summary also assumes that neither our partnership nor the Holding LP will be considered to carry on business in Canada. Our General Partner intends to
organize and conduct the affairs of each of these entities, to the extent possible, so that neither of these entities should be considered to carry on business in Canada for purposes of the
Tax Act. However, no assurance can be given in this regard. If our partnership or the Holding LP carry on business in Canada, the tax implications to our partnership or the
Holding LP and to Non-Canadian Holders may be materially and adversely different than as set out herein.
Special
rules, which are not discussed in this summary, may apply to a Non-Canadian Holder that is an insurer carrying on business in Canada and elsewhere.
Taxation of Income or Loss
A Non-Canadian Holder will not be subject to Canadian federal income tax under Part I of the Tax Act on its share of
income from a business carried on by our partnership (or the Holding LP) outside Canada or the non-business income earned by our partnership (or the Holding LP) from
sources in Canada. However, a Non-Canadian Holder may be subject to Canadian federal withholding tax under Part XIII of the Tax Act, as described below.
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Our
partnership and the Holding LP will be deemed to be a non-resident person in respect of certain amounts paid or credited or deemed to be paid or credited to them by a person
resident or deemed to be resident in Canada, including dividends or interest. Dividends or interest (other than interest not subject to Canadian federal withholding tax) paid or deemed to be paid by a
person resident or deemed to be resident in Canada to the Holding LP will be subject to withholding tax under Part XIII of the Tax Act at the rate of 25%. However, the CRA's
administrative practice in similar circumstances is to permit the rate of Canadian federal withholding tax applicable to such payments to be computed by looking through the partnership and taking into
account the residency of the partners (including partners who are resident in Canada) and any reduced rates of Canadian federal withholding tax that any non-resident partners may be entitled to under
an applicable income tax treaty or convention, provided that the residency status and entitlement to the treaty benefits can be established. In determining the rate of Canadian federal withholding tax
applicable to amounts paid by the Holding Entities to the Holding LP, our General Partner expects the Holding Entities to look-through the Holding LP and our partnership to the residency
of the partners of our partnership (including partners who are resident in Canada) and to take into account any reduced rates of Canadian federal withholding tax that non-resident partners may be
entitled to under an applicable income tax treaty or convention in order to determine the appropriate amount of Canadian federal withholding tax to withhold from dividends or interest paid to the
Holding LP. However, there can be no assurance that the CRA will apply its administrative practice in this context. Under the Treaty, a Canadian-resident payer is required in certain
circumstances to look-through fiscally transparent partnerships such as our partnership and the Holding LP to the residency and Treaty entitlements of their partners and take into account the
reduced rates of Canadian federal withholding tax that such partners may be entitled to under the Treaty.
AUSTRALIAN TAX CONSIDERATIONS
Set out below are general Australian income tax implications for Australian tax resident holders of units (Australian Holders).
This
is not tax advice an Australian Holder can rely on. The individual circumstances of each Australian Holder will affect the taxation implications of each Australian Holder's interest
in our partnership. Australian Holders should seek appropriate independent professional advice that considers the taxation implications in respect of their own specific circumstances.
The
discussion is primarily intended for Australian Holders who hold their interest in our partnership on capital account. Different outcomes will potentially arise for Australian
Holders who are investing on revenue account. Those Australian Holders should seek professional taxation advice in relation to their interest in our partnership.
The
summary of the Australian income tax implications set out below is based on established judicial and administrative interpretations of the
Income Tax
Assessment Act 1997
(Cth) ("ITAA 1997"), the
Income Tax Assessment Act 1936
(Cth) ("ITAA 1936") and the
Taxation Administration Act 1953
(Cth) ("Administration Act") as at the date of this annual report.
Summary
The key Australian income tax implications for Australian Holders of units are set out below:
Our
partnership should be classified as a "corporate limited partnership" for Australian income tax purposes as:
-
-
it satisfies the definition of "corporate limited partnership"; and
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-
-
it is not either a "venture capital limited partnership", an "early stage venture capital limited partnership", an
"Australian venture capital fund of funds" or a "venture capital management partnership"; and
-
-
it is not a "foreign hybrid limited partnership".
On
the basis that our partnership is a corporate limited partnership it should be treated as a company for Australian tax purposes.
Our
partnership is a non-resident of Australia for tax purposes and therefore, should not be subject to income tax in Australia except for any income sourced in Australia, or in respect
of certain capital gains that relate to "taxable Australian property" as detailed in the ITAA 1997.
Distributions
made by our partnership to Australian Holders should be characterized as dividends for Australian income tax purposes and included in Australian Holders' assessable
unfranked dividend income.
Australian
Holders should not be subject to income tax on an accruals basis under the Controlled Foreign Company rules. This conclusion is dependent on the quantum and nature of the
interests held in our partnership.
The
disposal of units by Australian Holders should give rise to a capital gains tax ("CGT") event for the Australian Holders. Broadly, Australian Holders that hold their units on capital
account should realize a capital gain (or loss) equal to the difference between any capital proceeds received and the cost base (or reduced cost base) of the units.
Characterization of the Partnership
A limited partnership is defined in section 995-1 of the ITAA 1997 and means:
-
a.
-
an
association of persons (other than a company) carrying on business as partners or in receipt of ordinary income or statutory income jointly, where the
liability of at least one of those persons is limited; or
-
b.
-
an
association of persons (other than one referred to in paragraph (a)) with legal personality separate from those persons that was formed solely for
the purpose of becoming a "venture capital limited partnership" ("VCLP"), an "early stage venture capital limited partnership" ("ESVCLP"), an "Australian venture capital fund of funds" ("AFOF") or a
"venture capital management partnership" ("VCMP") and to carry on activities that are carried on by a body of that kind.
There
is no requirement as to where or under which law the liability is limited. For tax purposes, the liability is limited if it is effectively limited under the laws applying to the
partnership (as per the partnership agreement). Our partnership should be a limited partnership for Australian tax purposes.
Under subsection 94D(1)(a) of the ITAA 1936, a partnership will be a corporate limited partnership in relation to the year of
income of the partnership if the year of income is the 1995-96 year of income or a later year of income. Our partnership should be a corporate limited partnership under subsection 94D(1)
of the above definition.
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Subsection 94D(2) of the ITAA 1936 specifically excludes from a corporate limited partnership a VCLP, ESVCLP, or AFOF. A requirement for each of these
definitions is that the partnership be registered either in Australia or a country prescribed by relevant regulations or be an Australian resident. Our partnership is registered in Bermuda and is not
a resident of Australia. Bermuda is not a country prescribed by relevant regulations. Therefore our partnership will not be a VCLP, ESVCLP or AFOF. A VCLP is defined by reference to the
Venture Capital Act
2002.
Our partnership, as a Bermudian Exempted Limited Partnership, will not be excluded from the definition of a corporate limited
partnership as subsection 9-1(1) of the Venture Capital Act requires of a VCLP that:
-
(a)
-
the
partnership was established by or under a law in force in, or in any part of:
-
I.
-
Australia;
or
-
II.
-
a
foreign country in respect of which a double tax agreement (as defined in Part X of the ITAA 1936) is in force; and
-
(b)
-
all
of the partners who are general partners are residents of a country referred to in paragraph (a).
Pursuant to sub-section 94D(5) of the ITAA 1936, an exception to our partnership being a corporate limited partnership applies
if it is a "foreign hybrid limited partnership" ("FHLP"), as defined in section 830-10 of the ITAA 1997. A limited partnership will be a FHLP if:
-
a.
-
it
was formed in a foreign country (i.e. other than Australia); and
-
b.
-
foreign
income tax is imposed under the law of the foreign country on the partners, not the limited partnership, in respect of the income or profits of the
partnership for the income year; and
-
c.
-
at
no time during the income year is the limited partnership, for the purposes of a law of any foreign country that imposes foreign income tax on entities
because they are residents of the foreign country, a resident of that country; and
-
d.
-
disregarding
subsection 94D(5) of the ITAA 1936, at no time during the income year is it an Australian resident; and
-
e.
-
disregarding
that subsection, in relation to the same income year of another taxpayer:
-
I.
-
the
limited partnership is a Controlled Foreign Company at the end of a statutory accounting period that ends in the income year; and
-
II.
-
at
the end of the statutory accounting period, the taxpayer is an attributable taxpayer in relation to the Controlled Foreign Company with an attribution
percentage greater than nil.
Paragraph (a)
should be met on the basis that our partnership was formed in Bermuda. Paragraph (b) would not be met on the basis that Bermuda does not impose any tax on
income, profits, dividends or wealth. Therefore, there is no foreign tax imposed under the laws of Bermuda on the partners of our partnership and this paragraph will not be satisfied. This position is
confirmed by the Australia Taxation Office ("ATO") in ATO ID 2006/149. On the basis that paragraph (b) is not met, our partnership should not be a FHLP.
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Our partnership should be classified as a corporate limited partnership for Australian income tax purposes in accordance with
section 94D of the ITAA 1997. The consequences of that include that our partnership is treated as a company for the purposes of applying Australian domestic income tax law (sections 94J
and 94K of the ITAA 1936). Accordingly, Australian Holders' units in our partnership should be treated as shares in a company.
Partnership distributions to Australian Holders
Australian Holders will potentially receive distributions from our partnership. Distributions will be treated as dividends on the basis
that our partnership is a corporate limited partnership for Australian tax purposes. The distributions should be treated as unfranked dividends to Australian Holders.
Our
partnership will not provide information to enable Australian Holders to determine whether a return of capital has been made for Australian tax purposes. Therefore, Australian
Holders should treat all distributions as unfranked dividends.
The
taxation treatment of a partnership dividend received by Australian Holders will vary depending on the type of Australian Holder. Australian Holders should seek further independent
advice in relation to the nature of future distributions received from our partnership.
Set
out below is a summary of how different types of Australian Holders should treat a distribution received from our partnership.
Distributions received by Australian tax resident individuals should in most cases be included in their Australian assessable income.
Australian Holders should be entitled to an Australian foreign income tax offset which reduces the Australian tax payable on assessable dividends by up to an amount of any foreign income tax withheld
by our partnership.
Australian
Holders should seek independent advice in relation to their entitlement to Australian foreign income tax offsets to the extent foreign tax is withheld.
The taxation treatment of a dividend received by an Australian tax resident company is the same as that described above for an
Australian tax resident individual.
The comments below relate to Australian tax resident beneficiaries who are not under a legal disability where those beneficiaries are
presently entitled to income of an Australian resident trust. If the beneficiary is under a legal disability, we recommend those beneficiaries seek independent professional taxation advice.
Distributions
in the form of dividend income should either be included in the trustee's, or the beneficiary's, assessable income, as the case may be. The tax treatment of the dividend
then depends on the tax status of the Australian resident trust and the legal identity of the beneficiary as an individual, a company or a trust (refer to comments above).
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Dividends paid to an Australian tax resident superannuation fund should be included in the fund's Australian assessable income.
Superannuation funds should be entitled to an Australian foreign income tax offset against the Australian tax payable on assessable dividends of up to the amount of any foreign income tax withheld by
our partnership on the distribution.
Australian
Holders should seek further independent advice in relation to their entitlement to Australian foreign income tax offsets to the extent foreign tax is withheld on our
partnership distributions.
Australian Holders with income tax years that end on 30 June will not receive any documentation from our partnership that will
correlate directly to a 30 June income tax year end. Australian Holders will need to rely on distribution payment statements to support their Australian income tax disclosures.
Australian CGT implications for Australian Holders
The cost base of the units for Australian Holders who bought their units in our partnership directly should equal the money paid for
those units plus any incidental costs of acquisition and disposal of the units (e.g. broker's fees, borrowing expenses).
Where
an Australian Holder received the units as consideration for entering into the Merger Transaction, the cost base or reduced cost base of the units acquired is made up of a number
of elements including the money paid or market value of property given to acquire the units. That amount should be the market value of the Prime Infrastructure securities exchanged for the units under
the Merger Transaction plus the incidental costs of acquisition and disposal of the Prime Infrastructure securities (if any).
On
the basis that our partnership and the Prime Infrastructure security holders were acting at arm's length, the market value of the Prime Infrastructure securities disposed of under the
Merger Transaction should be the same as the market value of the units received in exchange.
The
acquisition date for the units for CGT purposes should be the date the units were allotted to the Prime Infrastructure security holders (8 December 2010 Australian
Eastern Standard Time).
The
market value of the units may be determined by reference to the NYSE/TSX VWAP of these units on 8 December 2010 (A$20.651 per unit).
In the event Australian Holders dispose of units, a capital gain should arise where the sale proceeds received exceed an Australian
Holders' cost base in the units. A capital loss should arise where the Australian Holders' reduced cost base exceeds the sale proceeds. The time that the CGT event occurs is when the contract is
entered into or, if there is no contract, when the change of ownership occurs.
Partnership
distributions should be treated as unfranked dividends and no CGT cost base reduction should be calculated as a result of the distributions.
Where
the proceeds received are in foreign currency (e.g. US$ or C$), these should be converted into A$ at the daily average exchange rate for the day of the sale (the date
the sale contract is entered into). The ATO publish daily average exchange rates on their website (www.ato.gov.au). This may be a different amount than the A$ cash an Australian Holder ultimately
receives.
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Accordingly,
there may a foreign exchange gain or loss if there are any fluctuations in the exchange rate between the date of the sale contract and the date payment is received by the
Australian Holders. To the extent payment is received within 12 months of the date of disposal (the date the sale contract is entered into) of the units any such foreign exchange
realization gains or losses will be capital in nature and subject to the CGT provisions (i.e. included in the overall gain or loss on the disposal of the units).
If
payment is received more than 12 months after the contract date, the foreign exchange gain or loss provisions of the ITAA 1997 apply. Australian Holders should seek specific
advice in this circumstance.
Provided the units that gave rise to the capital gain were held for at least 12 months prior to the occurrence of the CGT event
(excluding the date of acquisition), any net capital gain realized by an Australian Holder on those units (e.g. if a sale were to occur) may qualify for discount capital gains
tax treatment.
The
discount is taken into account after applying any available capital losses against the capital gain eligible for the discount.
This
treatment broadly only applies in respect of units held by Australian Holders that are individuals, trustees of trusts, and trustees of superannuation funds. No such discount is
available for corporate Australian Holders.
Where
the CGT discount is available, individual Australian Holders (either holding their units directly or indirectly through a trust) may reduce their net capital gain by 50%. For
trustees (responsible entities) of superannuation funds, the net capital gain may be reduced by 33
1
/
3
%.
In Bermuda there are no taxes on profits, income or dividends, nor is there any capital gains tax, estate duty or death duty. Profits
can be accumulated and it is not obligatory to pay dividends. As "exempted undertakings", exempted partnerships and overseas partnerships are entitled to apply for (and will ordinarily receive)
an assurance pursuant to the
Exempted Undertakings Tax Protection Act 1966
that, in the event that legislation introducing taxes computed on profits or
income, or computed on any capital asset, gain or appreciation, is enacted, such taxes shall not be applicable to the partnership or any of its operations until March 31, 2035. Such an
assurance may include the assurance that any tax in the nature of estate duty or inheritance tax shall not be applicable to the units, debentures or other obligations of the partnership.
Exempted
partnerships and overseas partnerships fall within the definition of "international businesses" for the purposes of the
Stamp Duties (International
Businesses Relief) Act 1990
, which means that instruments executed by or in relation to an exempted partnership or an overseas partnership are exempt from stamp duties (such
duties were formerly applicable under the Stamp Duties Act 1976). Thus, stamp duties are not payable upon, for example, an instrument which effects the transfer or assignment of a unit in an exempted
partnership or an overseas partnership, or the sale or mortgage of partnership assets; nor are they payable upon the partnership capital.
10.F DIVIDENDS AND PAYING AGENTS
Not applicable.
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10.G STATEMENT BY EXPERTS
Not applicable.
10.H DOCUMENTS ON DISPLAY
Our partnership is subject to the information filing requirements of the Exchange Act, and accordingly we are required to file periodic
reports and other information with the SEC. As a foreign private issuer under the SEC's regulations, we file annual reports on Form 20-F and other reports on Form 6-K. The
information disclosed in our reports may be less extensive than that required to be disclosed in annual and quarterly reports on Forms 10-K and 10-Q required to be filed with the SEC by
U.S. issuers.
Moreover,
as a foreign private issuer, we are not subject to the proxy requirements under Section 14 of the Exchange Act, and our directors and principal shareholders are not
subject to the insider short swing profit reporting and recovery rules under Section 16 of the Exchange Act. Our SEC filings are available at the SEC's website at www.sec.gov. You may also read
and copy any document we file with the SEC at the public reference facilities maintained by the SEC at SEC Headquarters, Public Reference Section, 100 F Street, N.E., Washington D.C.
20549. You may obtain information on the operation of the SEC's public reference facilities by calling the SEC at 1-800-SEC-0330.
In
addition, our partnership is required to file documents required by Canadian securities laws electronically with Canadian securities regulatory authorities and these filings are
available on our SEDAR profile at www.sedar.com. Written requests for such documents should be directed to our Corporate Secretary at 73 Front Street, Hamilton HM 12, Bermuda.
10.I SUBSIDIARY INFORMATION
Not applicable.