No securities regulatory authority has expressed an opinion about any information contained herein and it is an offence to claim otherwise.

 

This is a preliminary prospectus, a copy of which has been filed with the securities regulatory authorities in each of the provinces and territories of Canada but which has not yet become final. Information contained in this preliminary prospectus may not be complete and may have to be amended.

 

PRELIMINARY PROSPECTUS

 

July 26, 2007

 

 

Brookfield Infrastructure Partners L.P.

 

Brookfield Infrastructure Partners L.P., or our partnership, and its related entities were established by Brookfield Asset Management Inc., or Brookfield Asset Management, as Brookfield’s primary vehicle to own and operate certain infrastructure assets on a global basis. We focus on high quality, long-life assets that generate stable cash flows, require relatively minimal maintenance capital expenditures and, by virtue of barriers to entry or other characteristics, tend to appreciate in value over time. Our current operations consist principally of the ownership and operation of electricity transmission systems and timberlands, but we intend to seek acquisition opportunities in other sectors with similar attributes and in which we can deploy our operations-oriented approach to create value.

 

Our partnership is filing this prospectus with the provincial and territorial securities regulatory authorities in Canada in order to qualify the special dividend of our limited partnership units, or our units, by Brookfield Asset Management. This prospectus is also being filed with the United States Securities and Exchange Commission as an exhibit to our partnership’s registration statement on Form 20-F under the U.S. Securities Exchange Act of 1934, as amended. Since no securities are being sold pursuant to this prospectus (other than the securities being distributed pursuant to the spin-off), no proceeds will be raised and all expenses in connection with the preparation and filing of this prospectus will be paid by our general partner’s parent company, Brookfield Asset Management, from its general funds.

 

Brookfield Asset Management intends to make a special dividend to holders of its Class A limited voting shares and Class B limited voting shares of approximately 24 million units in our partnership. As a result of the special dividend, holders of Brookfield Asset Management’s Class A limited voting shares and Class B limited voting shares will receive one of our units for every twenty-five Class A limited voting shares or Class B limited voting shares that they hold on the record date, provided that the special dividend will be subject to any applicable withholding tax and no holder will be entitled to receive any fractional interests in our units. Holders who would otherwise be entitled to a fractional unit will receive a cash payment. In this prospectus, we refer to the special dividend by Brookfield of our units as the “spin-off”. Brookfield Asset Management’s shareholders are not required to pay for our units to be received by them upon the spin-off or tender or surrender their Class A limited voting shares or Class B limited voting shares of Brookfield Asset Management or take any other action in connection with the spin-off.

 

Immediately following the spin-off, Brookfield will hold approximately 40% of the issued and outstanding interests in Brookfield Infrastructure L.P., or the Infrastructure Partnership, a related entity of which our partnership’s sole material asset is the remaining 60% interest in such partnership. Brookfield will also acquire a portion of our units in connection with the satisfaction of Canadian federal and U.S. “backup” withholding tax requirements upon the spin-off. See “The Spin-Off”.

 

There is currently no market through which our units may be sold and holders may not be able to sell their units.

 

There are risks inherent in our businesses and operations that may adversely affect the value of our units. See “Risk Factors” beginning on page 9.

 

 

About this Prospectus

 

We accept responsibility for the information contained in this prospectus. To the best of our knowledge, having taken all reasonable care to ensure that such is the case, the information contained in this prospectus is in accordance with the facts and does not omit anything likely to affect the import of such information.

 

You should rely only on the information contained in this prospectus. We have not authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus, regardless of the time of delivery of this prospectus. Our business, financial condition, results of operations and prospects could have changed since that date. We expressly disclaim any duty to update this prospectus, except as required by applicable law.

 

Forward-Looking Statements

 

This prospectus contains certain forward-looking statements based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations can change as a result of many possible events or factors, in which case our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. See “Special Note Regarding Forward-Looking Statements”.

 

Historical Performance and Market Data

 

This prospectus contains information relating to our current operations as well as historical performance and market data for Brookfield and certain of its operating platforms. When considering this data, you should bear in mind that historical results and market data may not be indicative of the future results that you should expect from us.

 

Financial Information

 

The financial information contained in this prospectus is presented in U.S. dollars and, unless otherwise indicated, has been prepared accordance with United States Generally Accepted Accounting Principles, or U.S. GAAP. All figures are unaudited unless otherwise indicated.

 

We have prepared this prospectus using a number of conventions, which you should consider when reading the information contained herein. Unless otherwise indicated or the context otherwise requires, the disclosure contained in this prospectus assumes that the spin-off as described under “The Spin-Off” has been completed. In this prospectus, references to “we”, “us” and “our” are to our partnership, the Infrastructure Partnership, the Holding Entities and the operating entities, each as defined below, taken together. In addition, unless the context suggests otherwise, references to:

 

 

 

Our partnership is organized under the laws of Bermuda. A substantial portion of our partnership’s assets are located outside of Canada and the United States and certain of our directors, as well as certain of the experts named in this prospectus, are residents of jurisdictions outside of Canada and the United States. We have expressly submitted to the jurisdiction of the Ontario courts and have appointed an attorney for service of process in Ontario and in the United States. However, it may be difficult for investors to effect service within Canada or the United States upon those directors and experts who are not residents of Canada or the United States. Furthermore, it may be difficult to realize upon or enforce in Canada or the United States any judgment of a court of Canada or the United States against us or our directors or experts since a substantial portion of our assets are located outside of Canada and the United States.

 

We have been advised by counsel that there is no treaty in force between Canada and Bermuda or the United States and Bermuda providing for the reciprocal recognition and enforcement of judgments in civil and commercial matters. As a result, whether a Canadian or U.S. judgment would be enforceable in Bermuda against us or our directors and experts depends on whether the Canadian or U.S. court that entered the judgment is recognized by a Bermuda court as having jurisdiction over us or our directors and experts, as determined by reference to Bermuda conflict of law rules. The courts of Bermuda would recognize as a valid judgment, a final and conclusive judgment in personam obtained in a Canadian or U.S. court pursuant to which a sum of money is payable (other than a sum of money payable in respect of multiple damages, taxes or other charges of a like nature or in respect of a fine or other penalty). The courts of Bermuda would give a judgment based on such a judgment as long as (1) the court had proper jurisdiction over the parties subject to the judgment; (2) the court did not contravene the rules of natural justice of Bermuda; (3) the judgment was not obtained by fraud; (4) the enforcement of the judgment would not be contrary to the public policy of Bermuda; (5) no new admissible evidence relevant to the action is submitted prior to the rendering of the judgment by the courts of Bermuda; and (6) there is due compliance with the correct procedures under the laws of Bermuda.

 

In addition to and irrespective of jurisdictional issues, Bermuda courts will not enforce a provision of Canadian or U.S. federal securities laws that is either penal in nature or contrary to public policy. It is the advice of our counsel that an action brought pursuant to a public or penal law, the purpose of which is the enforcement of a sanction, power or right at the instance of the state in its sovereign capacity, is unlikely to be entertained by Bermuda. Specified remedies available under the laws of Canadian or U.S. jurisdictions, including specified remedies under Canadian securities laws or U.S. federal securities laws, would not be available under Bermuda law or enforceable in a Bermuda court, as they are likely to be contrary to Bermuda public policy. Further, no claim may be brought in Bermuda against us or our directors and experts in the first instance for a violation of Canadian securities laws or U.S. federal securities laws because these laws have no extraterritorial application under Bermuda law and do not have force of law in Bermuda.

 

SUMMARY

	•	strong competitive positions with high barriers to entry;
	•	strong margins and stable cash flow; and
	•	upside from economic growth and/or inflation.

	•	8,279 kilometers, or km, of transmission lines in Chile that serve 98% of the population of the country which include 100% of Chile’s 500 kV transmission lines, the highest voltage lines in the country, and approximately 46% of the transmission lines between 110 kV and 500 kV in Chile;
	•	over 2,100 km of transmission lines in Brazil with one transmission line located in the south and the remaining four lines located in the northeast. Four of the lines are rated 500 kV or higher and one line is rated at 230 kV. The transmission lines began service between 2002 and 2005. Our Brazilian transmission investments will be transferred by Brookfield to us following closing of the spin-off upon receipt of required regulatory approvals; and
	•	approximately 550 km of 44 kV to 230 kV transmission lines in Canada that comprise an important component of Ontario’s transmission system that connects generation in Northern Ontario to electricity demand in Southern Ontario. Our Ontario operations will be transferred by Brookfield to us following closing of the spin-off upon receipt of required regulatory approvals.

	•	approximately 634,000 acres of freehold timberlands located principally on Vancouver Island with an estimated merchantable inventory of 58.0 million cubic meters, or m 3 , primarily comprised of high value Douglas-fir, Hemlock and Cedar with a long-run sustainable yield of 1.8 million m 3 , and approximately 33,625 acres of higher and better use properties, or HBU lands, which are properties that we believe will have greater value if used for a purpose other than as timberlands such as real estate development or conservation; and
	•	approximately 588,000 acres of freehold timberlands in Oregon and Washington with an estimated merchantable inventory of 37.5 million m 3 , primarily comprised of high value Douglas-fir and Hemlock with a long-run sustainable yield of 2.4 million m 3 .

	•	incorporate our technical insight into the evaluation and execution of acquisitions;
	•	maintain a disciplined approach to acquisitions;
	•	actively manage our assets to improve operating performance; and
	•	employ a hands-on approach to key value drivers such as capital investments, development projects, follow-on acquisitions and financings.

	•	Ability to leverage Brookfield’s transaction structuring expertise.   With its extensive background in the real estate, power generation and other hard asset industries, Brookfield has in depth experience acquiring hard assets and with securitization and other financing techniques which are prevalent in the real estate sector and are increasingly being utilized in infrastructure sectors where the underlying assets have similar characteristics. We will have an opportunity to benefit from this expertise.
	•	Ability to pursue acquisitions of businesses that own infrastructure assets together with other assets that have a riskier cash flow profile.   Such transactions may not be appropriate for us on a stand-alone basis. Brookfield has the skills and capital to acquire such companies and separate the infrastructure assets from the non-infrastructure assets. A good example of this is the acquisition of Longview, which had both a timber business and an integrated converting business that increased the overall risk profile of the company. Brookfield separated these two businesses and contributed an interest in the timber operations to us while retaining and restructuring the more volatile converting business. We believe that we will have an opportunity to acquire infrastructure assets through similar transactions in the future.
	•	Ability to acquire assets developed by Brookfield through its operating platforms.   Brookfield is well positioned to identify development opportunities. For example, Brookfield is actively pursuing greenfield development projects in the electricity transmission sector, and we expect that, if and when these development projects come to fruition, we will have an opportunity to acquire an interest in them from Brookfield.
	•	Ability to participate alongside Brookfield and in or alongside Brookfield sponsored or co-sponsored consortiums and partnerships.   Our acquisition strategy focuses on large scale transactions, for which we believe there is less competition and where Brookfield has sufficient influence or control so that our operations-oriented approach can be deployed to create value. Due to similar asset characteristics and capital requirements, we believe that the infrastructure industry will evolve like the real estate industry in which assets are commonly owned through consortiums and partnerships of institutional equity investors and owner/operators such as ourselves. Accordingly, 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. Brookfield has a strong track

		record of leading such consortiums and partnerships and actively managing underlying assets to improve performance. Brookfield has agreed that it will not sponsor such arrangements that are suitable for us in the infrastructure sector unless we are given an opportunity to participate. See “Relationship with Brookfield — Relationship Agreement”. Furthermore, Brookfield also has extensive financial resources including annual cash flow in excess of $1.0 billion and market capitalization of approximately $22 billion. Accordingly, Brookfield has the balance sheet to underwrite a significant portion of the required equity for these larger transactions and syndicate equity following completion, enabling us to act quickly and provide vendors with transaction certainty.

(1)	Brookfield will also acquire a portion of our units in connection with the satisfaction of Canadian federal and U.S. “backup” withholding tax requirements upon the spin-off. See “The Spin-Off”.
(2)	Brookfield’s limited partnership interest in the Infrastructure Partnership will be redeemable for cash or exchangeable for our units, in accordance with the Redemption-Exchange Mechanism, which could result in Brookfield Asset Management eventually owning approximately 40% of our issued and outstanding interests. See “Description of the Infrastructure Partnership Limited Partnership Agreement — Redemption-Exchange Mechanism”.

	•	our 30% interest in Longview, our U.S. timber operations, which was acquired by Brookfield in April 2007;
	•	our investments in TBE, our Brazilian transmission investments, which will be transferred to us in the fourth quarter of 2007 following receipt of regulatory approval;
	•	Great Lakes Power Limited Transmission Division, which holds our Ontario transmission operations, which will be transferred to us by Brookfield in the fourth quarter of 2007 following receipt of regulatory approval; and
	•	our increased investment in Transelec which will be made in the fourth quarter of 2007 as a result of a purchase price adjustment following finalization of Translec’s current transmission rate proceeding.

		As at and for the								As at and for the
		Three Months Ended								Year Ended
		March 31,								December 31,
		2007				2006				2006				2005
Revenue		$	110.8			$	37.1			$	310.1			$	104.5
Direct operating costs			(39.2	)			(24.1	)			(163.0	)			(77.9	)
			71.6				13.0				147.1				26.6
Net income		$	9.8			$	0.6			$	(4.9	)		$	1.0
Depreciation and amortization			20.6				5.0				49.7				12.7
Deferred income taxes and other provisions			3.1				—				37.7				—
Minority interests in the foregoing items			(15.6	)			(2.5	)			(49.6	)			(6.4	)
Operating cash flow		$	17.9			$	3.1			$	32.9			$	7.3
Total assets		$	4,623.1				—			$	4,627.8			$	973.4
Divisional equity		$	354.0				—			$	349.8			$	266.8

		As at and for the				For the
		Three Months Ended				Year Ended
		March 31,				December 31,
		2007				2006
Revenue		$	7.8			$	29.7
Direct operating costs			(1.1	)			(5.3	)
			6.7				24.4
Net income		$	10.5			$	17.9
Depreciation and amortization			7.0				26.9
Deferred income taxes and other provisions			1.4				13.2
Operating cash flow		$	18.9			$	58.0
Total assets		$	1,033.6				—
Divisional equity		$	874.9				—

(1)	Operating cash flow is defined as net income adding back depreciation and amortization and deferred income taxes and other provisions which are either directly on the statement of income or are a component of the equity earnings of an underlying investee company.

 

Your holding of units in our partnership will involve substantial risks. You should carefully consider the following factors in addition to the other information set forth in this prospectus. Additional risks and uncertainties that we do not presently know about or that we currently believe are immaterial may also adversely impact our business, financial condition, results of operations or the value of your units. If any of the following risks actually occur, our business, financial condition and results of operations and the value of your units would likely suffer.

 

Risks Relating to Us and Our Partnership

 

Our partnership is a newly formed partnership with no separate operating history and the historical and pro forma financial information included herein do not reflect the financial condition or operating results we would have achieved during the periods presented, and therefore may not be a reliable indicator of our future financial performance.

 

Our partnership was formed on May 21, 2007 and has not yet commenced its activities and has not generated any net income to date. Our lack of operating history will make it difficult to assess our ability to operate profitably and make distributions to unitholders. Although most of our current operations have been under Brookfield’s control prior to the formation of our partnership, their combined results have not previously been reported on a stand-alone basis and the historical financial statements included in this prospectus cover periods during which some of our current operations were not under Brookfield’s control or management and, therefore, may not be indicative of our future financial condition or operating results. In addition, the combined financial statements of Brookfield’s infrastructure division, discussed in the management’s discussion and analysis in this prospectus, are prepared on a different basis than the financial statements of our partnership and the Infrastructure Partnership that will be prepared in the future. We urge you to carefully consider the basis on which the historical and pro forma financial information included herein was prepared and presented.

 

Our partnership’s financial statements that will be provided to investors in the future may not present our partnership’s financial results in the most meaningful manner.

 

As most of our current operations will be accounted for using equity or cost accounting, our partnership’s financial statements will not include a detailed breakdown of the components of net income, cash flows or shareholders’ equity for most of our current operations. We expect that initially the only operations that will be consolidated into our partnership’s financial statements will be our Ontario transmission operations following their acquisition. Although we expect to provide certain income statement and balance sheet line items for our current operations on a segmented basis in a note to our partnership’s financial statements, such information will not include the level of detail and note discussion that would be provided if such operations were consolidated into our partnership’s financial statements. While separate audited financial statements for most of our current operations are included in this prospectus, we do not expect to continue to provide separate audited financial statements for each of our operations on an ongoing basis.

 

In addition, we do not expect to be able to provide investors with audited financial statements containing meaningful year-to-year comparisons of financial performance until two fiscal years following completion of the spin-off and the acquisition of our Brazilian transmission investments and our Ontario transmission operations. This is because our partnership’s results for 2007 will only reflect results for our current operations from and after the date we acquire them upon completion of the spin-off. Therefore, we do not expect that our partnership’s audited annual financial statements will contain full year results for our operations until we prepare financial statements for 2008.

 

Our assets are or may become highly leveraged and we may incur indebtedness in addition to asset-level indebtedness.

 

Our operating entities have a significant degree of leverage on their assets, including acquisition-related leverage, which is not reflected in our partnership’s historical financial statements. In addition, we may increase the leverage on our assets. 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 is generally greater than for companies with comparatively less debt.

 

We may also incur indebtedness under one or more credit facilities, in addition to any asset-level indebtedness. This indebtedness would give rise to additional servicing costs, and financial and operating covenants, which could affect our ability to engage in certain types of activities or to make distributions in respect of equity. If we are to incur such indebtedness in the future and fail to satisfy any debt service obligations or breach any related financial or operating

covenants, we could be prohibited from making any distributions until such breach is cured or the lender could declare the full amount of the indebtedness to be immediately due and payable and could foreclose on any assets pledged as collateral. In addition, the use of indebtedness in connection with an acquisition may give rise to negative tax consequences to certain investors, see “Certain Tax Considerations — United States Tax Considerations — U.S. Taxation of Tax Exempt U.S. Holders of Our Units” and “Certain Tax Considerations — United States Tax Considerations — Consequences to U.S. Holders — Holding of Our Units — Limitations on Interest Deductions”. Any of these factors could materially adversely affect the value of our units.

 

We are subject to foreign currency risk and our risk management activities may adversely affect the performance of our operations.

 

Some 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 than our expense structure, thus exposing us to currency risk. Fluctuations in currency exchange rates could make it more expensive for our customers to purchase our products and consequently reduce the demand for our products. In addition, a significant depreciation in the value of such foreign currencies may have a material adverse effect on our results of operations and financial position.

 

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 transaction had not been executed. Such transactions may also limit the opportunity for gain if the value of a hedged position increases.

 

Our partnership is not, and does not intend to become, regulated as an investment company under the U.S. Investment Company Act (and similar legislation in other jurisdictions) and if our partnership was deemed an “investment company” under the U.S. Investment Company Act, applicable restrictions could make it impractical for us to operate as contemplated.

 

The U.S. Investment Company Act and the rules thereunder (and similar legislation in other jurisdictions) provide certain protections to investors and impose certain restrictions on companies that are registered 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 U.S. 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 that we would not otherwise dispose of. Moreover, if anything were to happen which would potentially cause our partnership to be deemed an investment company under the U.S. Investment Company Act, it would be impractical for us to operate as intended. Agreements and arrangements between and among us and Brookfield would be impaired, the 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, restructuring our partnership and the Holding Entities, amendment of our limited partnership agreement or the termination of our partnership, any of which could materially adversely affect the value of our units. In addition, if our partnership were deemed to be an investment company under the U.S. 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, see “Certain Tax Considerations — United States Tax Considerations — Partnership Status of Our Partnership and the Infrastructure Partnership”.

 

Our partnership is 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 issuers listed on the NYSE.

 

Although our partnership is subject to the periodic reporting requirement of the U.S. Securities Exchange Act, as amended, or the Exchange Act, the periodic disclosure required of foreign private issuers under the Exchange Act is different from periodic disclosure required of U.S. domestic issuers. Therefore, there may be less publicly available information about our partnership than is regularly published by or about other public limited partnerships in the United

States and our partnership is exempt from certain other sections of the Exchange Act that U.S. domestic issuers would otherwise be subject to, 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 will not be obligated to file reports under Section 16 of the Exchange Act and certain of the governance rules imposed by the NYSE are inapplicable to our partnership.

 

Risks Relating to Our Operations and the Infrastructure Industry

 

Risks Relating to Our Current Operations and Infrastructure Generally

 

All of our operating entities are subject to general economic conditions and government regulation.

 

All of our operating entities depend on the financial health of their customers who may be sensitive to the overall performance of the economy. Adverse local, regional or worldwide economic trends that affect each respective economy could have a material adverse effect on our financial condition and results of operations. 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 and concession agreements; interest rates; currency fluctuations; exchange controls and restrictions; inflation; liquidity of domestic financial and capital markets; tax policies; and other political, social and economic developments that may occur in or affect the countries in which our operating entities operate or the countries in which the customers of our operating entities operate or both.

 

We may be exposed to uninsurable losses.

 

The assets of infrastructure businesses are exposed to unplanned interruptions caused by significant catastrophic events such as floods, earthquakes, fires, major plant breakdowns, pipeline or electricity line ruptures or other disasters. Operational disruption, as well as supply disruption, could adversely affect the cash flows available from these assets. In addition, the cost of repairing or replacing damaged assets could be considerable. Repeated or prolonged interruption may result in a permanent loss of customers, substantial litigation or penalties or regulatory or contractual non-compliance. Moreover, any loss from such events may not be recoverable under relevant insurance policies.

 

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, our timber operations are not insured against losses from fires and many components of our Chilean transmission operations are not insured against losses from earthquakes. Even if such insurance were available, the cost would be prohibitive. While not a risk borne directly by our partnership, 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 received by our partnership.

 

The acquisition of our current operations may give rise to contingent liabilities and the integration of our current operations may not be successful.

 

Most of our current operations were recently acquired from third parties and have only been operated by us and Brookfield for a short period of time. We will be subject to any contingent liabilities that are attached to our current operations, such as claims for failure to comply with government regulations or other past activities. Accordingly, there is risk regarding any undisclosed or unknown liabilities or issues concerning the current operations. The representations, warranties and indemnities of Brookfield to us in connection with our acquisition of the current operations are limited and for the most part do not protect us against these liabilities or guarantee the value of the current operations. Although the sellers of such operations made various representations to Brookfield in connection with the acquisitions, certain of the indemnification obligations are limited in duration and amount and may have already expired. In addition, even if we could make a claim against the seller of the interest for the amount that is required to be contributed, there can be no assurance that the seller would be willing or able to satisfy any claim that may be brought or that any claim would be successful. We also may not successfully integrate the business and operations of our current operations or realize any of the anticipated benefits of their acquisition and accordingly our results of operations and financial condition could be adversely affected.

 

Performance of our operating entities may be harmed by future labour disruptions and economically unfavourable collective bargaining agreements.

 

Several of our current operations have workforces that are unionized and, as a result, they 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 of its ability to maximize the efficiency of its operations, which could have a material adverse effect on its operations and financial results. Our Canadian timber operations are party to a collective agreement with the United Steelworkers of America which expired on June 15, 2007 and are currently in negotiations with the union. This negotiation has resulted in a work stoppage that may have an adverse effect on the financial results of our Canadian timber operations.

 

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, 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, our timber operations are subject to provincial, state and federal government regulations relating to forestry practices and the export of logs and our electricity transmission operations are subject to government regulation of their rates and revenues. 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.

 

In addition, our operating entities are subject to laws and regulations relating to pollution and the protection of the environment. They are also subject to laws and regulations governing health and safety matters, protecting both the public and their employees. Any breach of these obligations, or even incidents relating to the environment or health and safety 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. There is also the risk that our operating entities do not have, or might not obtain, permits necessary for their operations. Permits or special rulings may be required on taxation, financial and regulatory related issues. Even though most permits and licences are obtained before the commencement of operations, many of these licences and permits have to be renewed or maintained over the life of the business.

 

We will 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 expect that we will 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. 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 anti-trust 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 assure you that the competitive pressures we will 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 in the future 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 anti-trust 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.

 

Future acquisitions may subject us to additional risks.

 

Future acquisitions will likely involve some or all of the following risks, which could materially and adversely affect our business, results of operations or financial condition: the difficulty of integrating the acquired operations and personnel into our current operations; 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 labor, commercial or regulatory disputes or litigation related to the new enterprise; and the risk of environmental or other liabilities associated with the acquired business.

 

Brookfield has structured some of our current operations as joint ventures, partnerships and consortium arrangements, and we will do so in the future, which will reduce Brookfield’s and our control over our operations and may subject us to additional obligations.

 

Brookfield has structured some of our current operations as joint ventures, partnerships and consortium arrangements. An integral part of our strategy going forward 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.

 

Joint ventures, partnerships and consortium investments generally provide for a reduced level of control 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, are often made by a majority vote of the investors or by separate agreements that are reached with respect to individual decisions. 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 not have the ability to exercise control 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 financial condition and results of operations could suffer as a result.

 

In addition, because some of our current operations are structured as joint ventures, partnerships or consortium arrangements, the sale or transfer of interests in some of our operations are 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, our Chilean transmission operations are subject to a shareholders’ agreement which allows for an en bloc sale of the assets without our consent and our Brazilian transmission investments are subject to put/call agreements with third parties. 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.

 

Risks Relating to Our Electricity Transmission Operations

 

Our electricity transmission operations may require substantial capital expenditures in the future.

 

In some of the jurisdictions in which we have electricity transmission operations, such as Brazil and Chile, certain maintenance capital expenditures may not be covered by the regulatory framework. If our electricity transmission operations in these jurisdictions require significant capital expenditures to maintain our asset base, we will not be able to cover 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 costs are not fully recovered through the regulatory framework.

 

Our electricity transmission operations may engage in development projects which may expose us to various risks associated with construction.

 

Our electricity transmission operations may engage in development projects. If such development projects enter the construction phase, we are likely to retain some risk that the project will not be completed within budget, within the agreed timeframe and to the agreed specifications. During the construction phase, the major risks include a delay in the projected completion of the project and a resultant delay in the commencement of cash flows, an increase in the capital needed to complete construction and the insolvency of the head contractor, a major subcontractor and/or key equipment supplier. Although frequently the main risks of any delay in completion of the construction or any “overrun” in the costs of

construction will typically have been passed on by us contractually to a subcontractor, there is some risk that the anticipated returns of the relevant project may be adversely affected as a result. Unexpected increases in costs may also result in increased debt service costs and in funds being insufficient to complete construction. In addition, due to any of the aforementioned delays or cost overruns, regulatory changes or other external influences, we may decide to abandon construction or development of any given project resulting in a write-off of any cost recovery we may have received for costs to the point of abandonment. This would negatively impact our income and cash flow.

 

Clients of our electricity transmission operations may default on their obligations under the relevant contractual arrangements.

 

Some of our electricity transmission operations have customer contracts as well as concession agreements in place with public and private sector clients. On the public sector side this may include central government departments, local government bodies and quasi-government agencies. Since it cannot be assumed that a central government will in all cases assume liability for the obligation of quasi-government agencies or those central government departments will themselves not default on their obligations, the possibility of a default remains. Our electricity transmission operations also have contracts with private sector clients. There is an increased risk of default by private sector clients compared with public sector clients. For example, we have an agreement with a single customer which represented 72.6% of revenues of our Chilean transmission operations in 2006. As this agreement accounts for a majority of its cash flow, our Chilean transmission operations could be materially adversely affected by any material change in the assets, financial condition or results of operations of that customer.

 

Our electricity transmission operations may be adversely affected by changes in tolls or regulated rates.

 

Some of our electricity transmission operations are regulated with respect to revenues and they recover their investment in transmission assets through tolls or regulated rates which are charged to third parties (including generating companies). In general, our electricity transmission operations are entitled to earn revenue that represents a rate of return on the regulated investment value of assets and to collect provisions for operating, maintenance and administrative costs. If any of the respective regulators in the jurisdictions in which we operate decide to change the tolls or rates we are allowed to charge or the amounts of the provisions we are allowed to collect, we may not be able to earn a rate of return on our businesses that we had planned or we may not be able to recover our initial investment cost.

 

The lands used in our electricity transmission operations may be subject to adverse claims.

 

Although we believe that we have valid rights to all easements, licences and rights of way necessary for our electricity transmission operations, not all of our easements, licences and rights of way are registered against the lands to which they relate and may not bind subsequent owners. In addition, our rights may be adversely affected by rights of governments or aboriginal groups.

 

Risks Relating to Our Timber Operations

 

The financial performance of our timber operations may be affected by economic recessions or downturns.

 

The vast majority of the products from our timber operations are sensitive to macro-economic conditions in North America and Japan and are thus susceptible to economic recessions or downturns in these markets. Decreases in the level of residential construction, repair and remodeling activity generally reduce demand for logs and wood products, resulting in lower revenues, profits and cash flows for lumber mills who are important customers to our timber operations. Depressed commodity prices in lumber, pulp or paper may also cause mill operators to temporarily or permanently shut down their mills if their product prices fall to a level where mill operation would be uneconomic. Moreover, these operators may be required to temporarily suspend operations at one or more of their mills to bring production in line with market demand or in response to market irregularities. Any of these circumstances could significantly reduce the prices that we realize for our timber. In addition to impacting our timber operations’ sales, cash flows and earnings, weakness in the market prices of timber products will also have an effect on their ability to attract additional capital, the cost of that capital and the value of their timberland assets.

 

A variety of factors may limit or prevent harvesting by our timber operations.

 

Weather conditions, industry practices and federal, state and provincial laws and regulations associated with forestry practices, sale of logs and environmental matters, including wildlife and water resources, may limit or prevent harvesting, road building and other activities on the timberlands owned by our timber operations. In the case of restrictions arising from regulatory requirements, the size of the area subject to restriction will vary depending on the protected species at

issue, the time of year and other factors. In addition, if regulations become more restrictive, the amount of the timberlands subject to harvest restrictions could increase. The timberlands owned by our timber operations may also suffer damage by fire, insect infestation, wind, disease, prolonged drought and other natural and man-made disasters. There can be no assurance that our timber operations will achieve harvest levels in the future necessary to maintain or increase revenues, earnings and cash flows. There can be no assurance that the forest management planning by our timber operations, including silviculture, will have the intended result of ensuring that their asset base appreciates over time.

 

Our timber operations operate in a highly competitive industry, subject to price fluctuations.

 

Timberland companies operate in a highly competitive business environment in which companies compete, to a large degree, on the basis of price and also on the basis of service and ability to provide a steady supply of products over the long-term. The prime competitors to our timber operations are governments, other large forestland owners and small private forestland owners. In addition, wood and paper products are subject to increasing competition from a variety of substitute products, including non-wood and engineered wood products and electronic media. The competitive position of our timber operations and the price realized for our products is also influenced by a number of other factors including: the ability to attract and maintain long-term customer relationships; the quality of our products; the health of the regional converting industry; the costs of timber production; the availability, quality and cost of labour; the cost of fuel; shipping and transportation costs; changes in global timber supply; technological advances that increase yield in other regions; and the price and availability of substitute wood and non-wood products.

 

Our ability to harvest timber may be adversely affected by aboriginal claims.

 

Aboriginal claims could adversely affect our ability to harvest timber in our Canadian (and to a lesser degree, U.S.) timber operations. Canadian courts have recognized that aboriginal 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 Canada, aboriginal groups have made claims in respect of land governed by Canadian authorities, which could affect a portion of our timber operations. Any settlements in respect of these claims could lower the volume of timber managed by our Canadian timber operations and could increase the cost to harvest timber on such lands.

 

Our Canadian timber operations are subject to federal restrictions which may require them to decrease their planned export of logs.

 

Currently, logs from most private timberlands in Canada are not subject to provincial export regulations, but are subject to federal export regulations. As a result, all export logs must be advertised for local consumption and may be exported only if there is a surplus of domestic supply as indicated by the absence of fair market value offers (based on current domestic prices) from domestic lumber mills. Accordingly, an increase in domestic demand could result in our Canadian timber operations being required to decrease their planned export of logs. The provincial government in British Columbia is currently reviewing its log export policy, and may recommend that the federal government impose a policy that may further restrict the export of logs from private lands in British Columbia. As export market pricing is generally at a premium to the domestic market pricing, any reduction in log exports could have an adverse effect on our Canadian timber operations.

 

Risks Relating to our Relationship with Brookfield

 

Brookfield will exercise substantial influence over our partnership and we are highly dependent on the Manager.

 

Brookfield is the sole shareholder of our Managing General Partner. As a result of its ownership of our Managing General Partner, Brookfield will be able to control the appointment and removal of our Managing General Partner’s directors and, accordingly, exercise substantial influence over our partnership. In addition, our partnership holds its interest in the operating entities indirectly and will hold any future acquisitions indirectly through the Infrastructure Partnership, the general partner of which is controlled by Brookfield. As our partnership’s only substantial asset is the limited partnership interests that it holds in the Infrastructure Partnership, our partnership will not have a right to participate directly in the management or activities of the Infrastructure Partnership or the Holding Entities, including with respect to the making of decisions.

 

Our partnership and the Infrastructure Partnership do not have any employees and will depend on the day-to-day management and administration services provided by the Manager. Brookfield personnel and support staff that provide services to us are not required to have as their primary responsibility the day-to-day management and administration of our partnership or the Infrastructure Partnership 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 will depend on Brookfield’s ability to identify and present us with acquisition opportunities. Brookfield has stated that we will be its primary vehicle 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:

 

 

In making these determinations, Brookfield may be influenced by factors that result in a mis-alignment or conflict of interest. See “Relationship with Brookfield — Conflicts of Interest and Fiduciary Duties.”

 

The departure of some or all of Brookfield’s professionals could prevent us from achieving our objectives.

 

We will 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 Managing General Partner may be transferred to a third party without unitholder consent.

 

Our Managing General Partner may transfer its general partner 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. Furthermore, at any time, the shareholder of our Managing General Partner may sell or transfer all or part of its shares in our Managing General Partner without the approval of our unitholders. If a new owner were to acquire ownership of our Managing 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 Managing General Partner would have on the trading price of our 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 financial condition and results of operations may suffer.

 

Brookfield may increase its ownership of our partnership and the Infrastructure Partnership relative to other unitholders.

 

Immediately following the spin-off, Brookfield will hold approximately 40% of the issued and outstanding interests in the Infrastructure Partnership. The limited partnership interests held by Brookfield will be redeemable for cash or exchangeable for our units in accordance with the Redemption-Exchange Mechanism, which could result in Brookfield eventually owning approximately 39% of our issued and outstanding units. See “Description of the Infrastructure Partnership Limited Partnership Agreement — Redemption-Exchange Mechanism”. Brookfield will also acquire a portion of our units in connection with the satisfaction of Canadian federal and U.S. “backup” withholding tax requirements upon the spin-off. Based on the current residency of the shareholders of Brookfield Asset Management, we estimate that the satisfaction of the Canadian federal and U.S. “backup” withholding tax obligations will result in Brookfield acquiring approximately six per cent of our outstanding units. See “The Spin-Off”. Brookfield may also acquire additional units of the Infrastructure Partnership pursuant to an equity commitment provided by Brookfield. See “Relationship with Brookfield — Equity Commitment and Other Financing”. Infrastructure GP LP may also receive incentive distributions in units of the Infrastructure Partnership. See “Relationship with Brookfield — Incentive Distributions”. In addition, Brookfield has advised our partnership that it may from time-to-time reinvest distributions it receives from the Infrastructure Partnership in the Infrastructure Partnership’s distribution reinvestment plan, with the result that Brookfield will indirectly receive additional units of the Infrastructure Partnership. Additional units of the Infrastructure Partnership acquired, directly or indirectly, by Brookfield will be redeemable for cash or exchangeable for our units in accordance with the Redemption-Exchange Mechanism. See “Description of the Infrastructure Partnership Limited Partnership Agreement — Redemption-Exchange Mechanism”. Brookfield may also purchase additional units of our partnership in the market. Any of these events may result in Brookfield increasing its ownership of our partnership and the Infrastructure Partnership relative to other unitholders above 50%.

 

Brookfield will not owe our unitholders any fiduciary duties under the Master Services Agreement or our other arrangements with Brookfield.

 

The obligations of Brookfield under the Master Services Agreement and our other arrangements with them will be contractual rather than fiduciary in nature. As a result, our Managing General Partner which is an affiliate of Brookfield, in its capacity as our partnership’s general partner, will have sole authority and discretion to enforce the terms of such agreements and to consent to any waiver, modification or amendment of their provisions.

 

Our limited partnership agreement and the Infrastructure Partnership’s limited partnership agreement contain various provisions that modify the fiduciary duties that might otherwise be owed to our partnership and our unitholders, including when such conflicts of interest arise. These modifications may be important to our unitholders because they restrict the remedies available for actions that might otherwise constitute a breach of fiduciary duty and permit our Managing General Partner and the Infrastructure General Partner to take into account the interests of third parties, including Brookfield, when resolving conflicts of interest. It is possible that conflicts of interest may be resolved in a manner that is not in the best interests of our partnership or the best interests of our unitholders.

 

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.

 

Our organizational and ownership structure involves a number of relationships that may give rise to conflicts of interest between our partnership and our 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 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 “Relationship with Brookfield”.

 

Our arrangements with Brookfield were negotiated in the context of an affiliated relationship and may contain terms that are less favorable 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 Managing 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 favorable than otherwise might have resulted if the negotiations had involved unrelated parties. Under our limited partnership agreement, persons who acquire our 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 Managing General Partner may be unable or unwilling to terminate the Master Services Agreement.

 

The Master Services Agreement provides that our Managing General Partner may terminate the agreement only if the Manager 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 Manager; the Manager engages in any act of fraud, misappropriation of funds or embezzlement against any Service Recipient; the Manager 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 Manager. Our Managing General Partner cannot terminate the agreement for any other reason, including if the Manager or Brookfield experiences a change of control, and there is no fixed term to the agreement. In addition, because our Managing 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 Manager’s performance does not meet the expectations of investors, and our Managing General Partner is unable or unwilling to terminate the Master Services Agreement, the market price of our units could suffer. Furthermore, the termination of the Master Services Agreement would terminate our partnership’s rights under the Relationship Agreement and the licensing agreement. See “Relationship with Brookfield — Relationship Agreement” and “Relationship with Brookfield — Licensing Agreement.”

 

The liability of the Manager is limited under our arrangements with it and we have agreed to indemnify the Manager 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 Manager 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 Managing General Partner takes in following or declining to follow its advice or recommendations. In addition, under our limited partnership agreement, the liability of the Managing General Partner and its affiliates, including the Manager, 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 Manager under the Master Services Agreement is similarly limited, except that the Manager is also liable for liabilities arising from gross negligence. In addition, our partnership has agreed to indemnify the Manager 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 Manager, 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 Manager 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 Manager is a party may also give rise to legal claims for indemnification that are adverse to our partnership and our unitholders.

 

Risks Relating to our Units

 

The price of our units may fluctuate significantly and you could lose all or part of the value of your units.

 

The market price of our units may fluctuate significantly and you could lose all or part of the value of your units. Factors that may cause the price of our units to vary include:

 

 

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.

 

Our units have never been publicly traded and an active and liquid trading market for our units may not develop.

 

Prior to the spin-off, there has not been a market for our units. After the spin-off, our partnership expects that the principal trading market for our units will be the NYSE. Our partnership cannot predict the extent to which investor interest will lead to the development of an active and liquid trading market for our units or, if such a market develops, whether it will be maintained. Our partnership cannot predict the effects on the price of our units if a liquid and active trading market for our units does not develop. In addition, if such a market does not develop, relatively small sales of our units may have a significant negative impact on the price of our units.

 

We may need additional funds in the future and our partnership may issue additional units in lieu of incurring indebtedness which may dilute existing holders of our units or our partnership may issue securities that have rights and privileges that are more favorable than the rights and privileges accorded to holders of our units.

 

Under our limited partnership agreement, our partnership may issue additional partnership securities, including 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 Managing General Partner may determine. Our Managing 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 partnership’s profits, losses and distributions, any rights to receive partnership assets upon a dissolution or liquidation of our partnership and any redemption, conversion and exchange rights. Our Managing General Partner may use such authority to issue additional units, which could dilute existing holders of our units, or to issue securities with rights and privileges that are more favorable than those of our units. You will not have 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.

 

Our 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 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 do not have the right to cause our Managing 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 Managing General Partner’s board of directors, to remove existing directors from our Managing General Partner’s board of directors

or to prevent a change of control of our Managing General Partner. In addition, except as prescribed by applicable laws, our 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 will not be 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.

 

Risks Relating to Taxation

 

General

 

Changes in tax law and practice may have a material adverse effect on our operations 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 such company or entity, as well as the net amount of distributions payable to our unitholders. Furthermore, the manner in which we seek to structure acquisitions is dependent on the tax legislation and practice applicable at that time in the relevant jurisdiction. This may mean that we find it difficult to carry out acquisitions in a particular territory or in certain asset classes in any such territory for a period of time. Taxes and other constraints that would be applicable to us in such jurisdictions may not be applicable 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.

 

Our partnership’s ability to make distributions will depend on us receiving sufficient cash distributions from our underlying operations and we cannot assure you that our partnership will be able to make cash distributions to you in amounts that are sufficient to fund your tax liabilities.

 

We are subject to local taxes in each of the relevant territories and jurisdictions (such as Canada, the United States, Brazil and Chile) in which we have operations, including taxes on our income, profits or gains and withholding taxes. As a result, our partnership’s cash available for distribution is reduced by such taxes and the post-tax return to investors is similarly reduced by such taxes. We intend that future acquisitions be assessed on a case-by-case basis and, where possible and commercially viable, structured so as to minimize any adverse tax consequences for us as a result of making such acquisitions.

 

You will be required to include in your income your allocable share of our partnership’s items of income, gain, loss, deduction and credit (including, so long as it is treated as a partnership for tax purposes, our partnership’s allocable share of those items of the Infrastructure Partnership) for each of our taxable years ending with or within your taxable year. See “Certain Tax Considerations”. The cash distributed to you may not be sufficient to fund the payment of the full amount of your tax liability in respect of your investment in our partnership because your tax liability is dependent on your particular tax situation and we will make simplifying tax assumptions in determining the amount of the distribution. In addition, the actual amount and timing of distributions will always be subject to the discretion of our Managing General Partner’s board of directors and we cannot assure you that our partnership will in fact make cash distributions as intended. See “Distribution Policy”. Even if our partnership is unable to distribute cash in an amount that is sufficient to fund your tax liabilities, you will still be required to pay income taxes on your share of our partnership’s taxable income.

 

Our unitholders may be subject to taxes and tax filing obligations in jurisdictions in which they are not resident for tax purposes or are not otherwise subject to tax.

 

Because of your holdings in our partnership, you may be subject to taxes and tax return filing obligations in jurisdictions other than the jurisdiction in which you are a resident for tax purposes or are not otherwise subject to tax. Although we will attempt, to the extent reasonably practicable, to structure our operations and investments so as to avoid income tax filing obligations by holders of our units in such jurisdictions, there may be circumstances in which we are unable to do so. Income or gains from our holdings may be subject to withholding or other taxes in jurisdictions outside your jurisdiction of residence for tax purposes or in which you are not otherwise subject to tax. If you wish to claim the benefit of an applicable income tax treaty, you may be required to submit information to our partnership and/or the tax authorities in such jurisdictions.

 

You may be exposed to transfer pricing risks.

 

To the extent that our partnership, the Infrastructure Partnership, 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 received or paid 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 being paid by such entities and therefore the return to investors could be reduced.

 

Our Managing General Partner and the Infrastructure General Partner believe that the base management fee and any other amount that will be paid to the Manager will be commensurate with the value of the services being provided by the Manager and are comparable to the fees or other amounts that would be agreed to in an arm’s length arrangement. The Managing General Partner and the Infrastructure General Partner therefore do not anticipate that the amounts of income (or loss) allocated to you will be adjusted. 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 (most likely, an expense) that is relevant to the computation of the income of the Infrastructure Partnership or our partnership, such assertion could result in adjustments to amounts of income (or loss) allocated to you by our partnership for tax purposes. In addition, you may 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. Our Managing General Partner and the Infrastructure General Partner advise that satisfactory contemporaneous documentation for these purposes will be prepared in respect of all transactions or arrangements with Brookfield, and in particular with respect to the Master Services Agreement. Accordingly, our Managing General Partner and the Infrastructure General Partner do not anticipate that the amounts of income (or loss) allocated to you for tax purposes will be required to be adjusted or that you will be subject to transfer pricing penalties described above. However, no assurance can be given in this regard.

 

United States

 

The Internal Revenue Service may disagree with our valuation of the spin-off dividend.

 

Our U.S. unitholders will be considered to receive a dividend as a result of the spin-off equal to the fair market value of the units of our partnership received by them in the spin-off plus the amount of cash received in lieu of fractional units. We will use the volume weighted average trading price of our units on the NYSE for the five trading days immediately following the spin-off as the fair market value of our units for these purposes but this amount is not binding on the Internal Revenue Service, or IRS. The IRS may disagree with this valuation and this could result in increased tax liability to you.

 

If either our partnership or the Infrastructure Partnership were to be treated as a corporation for U.S. federal income tax purposes, the value of your units may be adversely affected.

 

The value of your units will depend in part on our partnership and the Infrastructure Partnership being treated as partnerships for U.S. federal income tax purposes. Our partnership and the Infrastructure Partnership will each make an election to be treated as a partnership for U.S. federal income tax purposes. However, in order to be considered 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, or the 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 U.S. Investment Company Act and related rules. Although we intend to manage our affairs so that our partnership would 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 were treated as a corporation for U.S. federal income tax purposes, (i) the conversion to corporate status would generally result in recognition of gain (but not loss) to U.S. unitholders; (ii) our partnership would likely be subject to U.S. corporate income tax and branch profits tax with respect to income, if any, that is effectively connected to a U.S. trade or business; (iii) distributions to our U.S. unitholders would be taxable as dividends to the extent of our partnership’s earnings and profits; (iv) dividends, interest, and certain other passive income our partnership receives from U.S. entities would, in most instances, be subject to U.S. withholding tax at a rate of 30% (although non-U.S. holders of our units nevertheless may be entitled to certain treaty benefits in respect of their allocable share of such income), and U.S. unitholders (other than certain U.S. corporate unitholders who own 10% or more of our

units) would not be allowed a tax credit with respect to any such tax withheld; (v) the “portfolio interest” exemption would not apply to interest income of our partnership (although non-U.S. holders of our units nevertheless may be entitled to certain treaty benefits in respect of their allocable share of such income) and (vi) our partnership could be classified as a “passive foreign investment company” (as defined in the U.S. Internal Revenue Code), and such classification would have adverse tax consequences to U.S. unitholders with respect to distributions and gain recognized on the sale of our units. If the Infrastructure Partnership were to be treated as a corporation for U.S. federal income tax purposes, consequences similar to those described above would apply.

 

Neither our partnership nor the Infrastructure Partnership has requested, and they do not plan to request, a ruling from the IRS on their tax status for U.S. federal income tax purposes or as to any other matter affecting us.

 

A non-U.S. person who holds more than 5% of our units may be subject to special rules under the Foreign Investment Real Property Tax Act of 1980, which may have a material adverse effect on the return from an investment in our units.

 

A non-U.S. person who holds more than 5% of our units may be subject to special rules under the Foreign Investment Real Property Tax Act of 1980, or FIRPTA. For purposes of determining whether a non-U.S. person holds more than 5% of our units, special attribution rules apply. The application of the FIRPTA rules to a non-U.S. person who holds (or is deemed to hold) more than 5% of our units could have a material adverse effect on such non-U.S. person. Accordingly, our partnership does not believe that it is advisable for a non-U.S. person to own more than 5% of our units. If you are a non-U.S. person and anticipate owning more than 5% of our units, you should consult your tax advisors. See “Certain Tax Considerations — United States Tax Considerations — Consequences to Non-U.S. Holders of Our Units”.

 

We may be subject to U.S. “backup” withholding tax or other U.S. withholding taxes if our unitholders fail to comply with U.S. tax reporting rules or if the IRS or other applicable state and local taxing authorities do not accept our withholding methodology, and such excess withholding tax cost will be an expense borne by our partnership, and, therefore, all of our unitholders on a pro rata basis.

 

We may become subject to U.S. “backup” withholding tax at the applicable rate (currently 28%) or other U.S. withholding taxes if our U.S. or foreign unitholders fail to timely provide our partnership (or the clearing agent or other intermediary) with 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 applicable state and local taxing authorities. See “Certain Tax Considerations — United States Tax Considerations — Administrative Matters — Backup and Other Administrative Withholding Issues”. Accordingly, it is important that each of our unitholders timely provides our partnership (or the clearing agent or other intermediary) with IRS Form W-9 or IRS Form W-8, as applicable. To the extent that any unitholder fails to timely provide the applicable forms (or such form is not properly completed), or should the IRS or other applicable state and local taxing authorities not accept our withholding methodology, our partnership may treat such U.S. “backup” withholding taxes or other U.S. withholding taxes as an expense, which will be borne by all 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 entities face unique U.S. tax issues from owning units that may result in adverse U.S. tax consequences to them.

 

Our partnership and the Infrastructure Partnership are not prohibited from incurring indebtedness, and at times either or both may do so. If any such indebtedness were used to acquire property by our partnership or by the Infrastructure Partnership, such property generally would constitute “debt-financed property,” and any income or gain realized on such property and allocated to a tax-exempt entity generally would constitute “unrelated business taxable income” to such tax-exempt entity. In addition, even if such indebtedness were not used either by our partnership or by the Infrastructure Partnership to acquire property but were instead used to fund distributions to our unitholders, if a tax-exempt U.S. unitholder used such proceeds to make an investment outside our partnership, the IRS could assert that such investment constitutes “debt-financed property” to such unitholder with the consequences noted above. A tax-exempt entity is subject to U.S. federal income tax at regular graduated rates on the net amount of its unrelated business taxable income. In addition, a tax-exempt entity is required to file a U.S. federal income tax return for any taxable year that the tax-exempt entity derives gross income characterized as unrelated business taxable income in excess of $1,000. The potential for having income characterized as unrelated business taxable income may make our units an unsuitable investment for a tax-exempt entity.

 

There may be limitations on the deductibility of our partnership’s interest expense.

 

If you are a U.S. person (or otherwise taxable in the United States) and for so long as our partnership is treated as a partnership for U.S. federal income tax purposes, you will be taxed on your share of our partnership’s net taxable income. However, U.S. federal income tax law may limit the deductibility of your share of our partnership’s interest expense. In addition, deductions for your share of our partnership’s interest expense may be limited or disallowed for U.S. state and local tax purposes. Therefore, you may be taxed on amounts in excess of your net income of our partnership. This could adversely impact the value of your units if our partnership was to incur (either directly or indirectly) a significant amount of indebtedness. See “Certain Tax Considerations — United States Tax Considerations — Consequences to U.S. Holders — Holding of Our Units”.

 

Non-U.S. persons face unique U.S. tax issues from owning our units that may result in adverse tax consequences to them.

 

Our partnership believes that it is not engaged in a U.S. trade or business for U.S. federal income tax purposes, and intends to use commercially reasonable efforts to structure its activities 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. Accordingly our partnership’s non-U.S. unitholders will generally not be subject to U.S. federal income tax on interest, dividends and gains derived from non-U.S. sources. It is possible, however, that the IRS could disagree or that the U.S. federal tax laws and Treasury regulations could change and our partnership could be deemed to be engaged in a U.S. trade or business, which would have a material adverse effect on non-U.S. unitholders. If, contrary to our partnership’s expectations, our partnership is considered to be engaged in a U.S. trade or business or realizes gain from the sale or other disposition of a United States Real Property Interest, non-U.S. unitholders would be required to file U.S. federal income tax returns and would be subject to U.S. federal income tax at the regular graduated rates.

 

To meet U.S. federal income tax and other objectives, our partnership and the Infrastructure Partnership will invest through foreign and domestic 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 Infrastructure Partnership will invest through foreign and domestic 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 and credit realized in the first instance by our operating entities will not flow, for U.S. federal income tax purposes, directly to the Infrastructure Partnership, our partnership, or our unitholders, and any such items may be subject to a corporate income tax, in the United States and other jurisdictions, at the level of the Holding Entities. Any such additional taxes may adversely affect our ability to operate solely to maximize our cash flow.

 

Certain of our Holding Entities or operating entities may be, or may be acquired through, an entity classified as a “passive foreign investment company” for U.S. federal income tax purposes.

 

Some of our Holding Entities or operating entities are likely to be classified as “passive foreign investment companies” for U.S. federal income tax purposes. In addition, we may in the future acquire certain investments or operating entities through one or more Holding Entities which may be 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 passive foreign investment companies. U.S. unitholders face unique U.S. tax issues from indirectly owing interests in a passive foreign investment company that may result in adverse U.S. tax consequences to them. See “Certain Tax Considerations — United States Tax Considerations — Consequences to U.S. Holders — Passive Foreign Investment Companies”.

 

Tax gain or loss on disposition of our units could be more or less than expected.

 

If you sell your units and are taxable in the United States, you will recognize a gain or loss for U.S. federal income tax purposes equal to the difference between the amount realized and the adjusted tax basis in those units. Prior distributions to you in excess of the total net taxable income allocated to you, which decreased the tax basis in your units, will in effect become taxable income to you for U.S. federal income tax purposes if the units are sold at a price greater than your tax basis in those units, even if the price is less than the original cost. A portion of the amount realized, whether or not representing gain, may be ordinary income to you.

 

Our structure involves complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available. Our structure also is 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. 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 adversely affect the U.S. federal income tax treatment of publicly traded partnerships, including changes that make it more difficult or impossible to meet the “qualifying income” exception for our partnership (and the Infrastructure Partnership) to be treated as a partnership for U.S. federal income tax purposes that is not taxable as a corporation and changes that reduce the net amount of distributions available to our unitholders. Such changes could also affect or cause us to change the way we conduct our activities, affect the tax considerations of an investment in our partnership, change the character or treatment of portions of our partnership’s income (including changes that recharacterize certain allocations as potentially non-deductible fees) and adversely affect an investment in our units.

 

Our partnership’s organizational documents and agreements permit our Managing General Partner to modify our limited partnership agreement from time-to-time, without the consent of our unitholders, 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 IRS may not agree with certain assumptions and conventions that we use in attempting to comply with applicable U.S. federal income tax laws or that we use to report income, gain, loss, deduction and credit to our unitholders.

 

Our partnership will apply certain assumptions and conventions in an attempt to comply with applicable rules and to report income, gain, deduction, loss and credit to our unitholders in a manner that reflects such unitholders’ beneficial ownership of partnership items, taking into account variation in ownership interests during each taxable year because of trading activity. Because our partnership cannot match transferors and transferees of our units, our partnership will adopt depreciation, amortization and other tax accounting conventions that may not conform with all aspects of existing Treasury regulations. In order to maintain the fungibility of all of our units at all times, we 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 the units or the time when the units are issued by our partnership) through the application of certain accounting principles that we believe are reasonable for our partnership. A successful IRS challenge to any of the foregoing assumptions or conventions could adversely affect the amount of tax benefits available to our unitholders and could require that items of income, gain, deductions, loss or credit, including interest deductions, be adjusted, reallocated or disallowed in a manner that adversely affects our unitholders. It also could affect the timing of these tax benefits or the amount of gain on the sale of our units and could have a negative impact on the value of our units or result in audits of and adjustments to our unitholders’ tax returns.

 

Unitholders may be subject to state, local and non-U.S. taxes and return filing requirements as a result of holding our units.

 

Our unitholders may be subject to 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 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 those requirements. It is the responsibility of each of our unitholders to file all United States federal, state, local and non-U.S. tax returns that may be required of such unitholder.

 

Our partnership may not be able to furnish to each unitholder specific tax information within 90 days after the close of each calendar year, which means that holders of our units who are U.S. taxpayers should anticipate the need to file annually a request for an extension of the due date of their income tax return.

 

It may require longer than 90 days after the end of our partnership’s fiscal year to obtain the requisite information from all lower-tier entities so that Schedule K-1s may be prepared for our partnership. For this reason, holders of our units who are U.S. taxpayers should anticipate the need to file annually with the IRS (and certain states) a request for an extension past April 15 or the otherwise applicable due date of their income tax return for the taxable year. See “Certain Tax Considerations — United States Tax Considerations — Administrative Matters — Information Returns”.

 

The sale or exchange of 50% or more of our units will result in the 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 termination of our partnership would, among other things, result in the closing of our taxable year for U.S. federal income tax purposes for all our unitholders and could result in possible acceleration of income to certain of our unitholders and certain other consequences that may adversely affect the value of our units. See “Certain Tax Considerations — United States Tax Considerations — Administrative Matters — Constructive Termination”.

 

Canada

 

Canada Revenue Agency may disagree with our valuation of the spin-off dividend.

 

Our unitholders will be considered to receive a dividend upon the spin-off equal to the fair market value of the units of our partnership received upon the spin-off plus the amount of any cash received in lieu of fractional units. We will use the volume weighted average trading price of our units on the NYSE for the five trading days immediately following the spin-off as the fair market value of our units for these purposes but this amount is not binding on the Canada Revenue Agency, or CRA. CRA may disagree with this valuation and this could result in increased tax liability to you.

 

Tax proposals may deny the deductibility of losses arising from your units in our partnership in computing your income for Canadian federal income tax purposes.

 

On October 31, 2003, the Department of Finance released for public comment tax proposals, or the REOP Proposals, regarding the deductibility of interest and other expenses for purposes of the Income Tax Act (Canada), or the Tax Act. Under the REOP Proposals, a taxpayer would be considered to have a loss from a source that is a business or property for a taxation year only if, in that year, it is reasonable to assume that the taxpayer will realize a cumulative profit (excluding capital gains or losses) from the business or property during the period that the business is carried on or that the property is held. In general, these proposals may deny the deduction of losses arising from your units in our partnership in computing your income for Canadian federal income tax purposes in a particular taxation year, if, in the year the loss is claimed, it is not reasonable to expect that an overall cumulative profit would be earned from the investment in our partnership for the period in which you held and can reasonably be expected to hold the investment. Our Managing General Partner and the Infrastructure General Partner do not anticipate that the activities of our partnership and the Infrastructure Partnership will, in and of themselves, generate losses. However, investors may incur expenses in connection with an acquisition of units in our partnership that could result in a loss that would be affected by the REOP Proposals. The REOP Proposals have been the subject of a number of submissions to the Minister of Finance (Canada). As part of the 2005 federal budget, the Minister of Finance (Canada) announced that an alternative proposal to reflect the REOP Proposals would be released for comment at an early opportunity. No such alternative proposal has been released to date. There can be no assurance that such alternative proposal will not adversely affect you or that it may not differ significantly from the REOP Proposals described above and in “Certain Tax Considerations — Canadian Federal Income Tax Considerations”.

 

If the non-Canadian subsidiaries in which the Infrastructure Partnership directly invests earn income that is foreign accrual property income you may be required to include amounts allocated from our partnership in computing your income for Canadian federal income tax purposes even though there may be no corresponding cash distribution.

 

Each of the non-Canadian subsidiaries in which the Infrastructure Partnership will directly invest is expected to be a “controlled foreign affiliate”, as defined in the Tax Act, of the Infrastructure Partnership. If any of such non-Canadian subsidiaries earns income that is “foreign accrual property income”, or FAPI, as defined in the Tax Act, in a taxation year,

the Infrastructure Partnership’s proportionate share of such FAPI must be included in computing the income of the Infrastructure Partnership for Canadian federal income tax purposes for the fiscal period of the Infrastructure Partnership in which the taxation year of such controlled foreign affiliate that earned the FAPI ends, whether or not the Infrastructure Partnership actually receives a distribution of such income. Our partnership will include its share of such FAPI of the Infrastructure Partnership in computing its income for Canadian federal income tax purposes and you will be required to include your proportionate share of such FAPI allocated from our partnership in computing your income for Canadian federal income tax purposes. As a result, you may be required to include amounts in your income even though you have not and may not receive an actual cash distribution of such amount.

 

If any of the non-Canadian subsidiaries in which the Infrastructure Partnership directly invests were not considered to be a controlled foreign affiliate of the Infrastructure Partnership or is a tracked interest, the interest in the non-Canadian subsidiary would be subject to the proposals regarding the taxation of investments in foreign investment entities contained in Bill C-33, unless another exemption is available.

 

Each of the non-Canadian subsidiaries in which the Infrastructure Partnership will directly invest is expected to be a controlled foreign affiliate and not a tracked interest of the Infrastructure Partnership. On that basis, the Infrastructure Partnership’s interest in such non-Canadian subsidiaries will be exempt from the legislative proposals regarding the taxation of investments in foreign investment entities contained in Bill C-33, or the FIE Proposals. However, if any of such non-Canadian subsidiaries becomes a tracked interest or ceases to be a controlled foreign affiliate of the Infrastructure Partnership or if interests in subsequently acquired non-Canadian subsidiaries are tracked interests or such subsequently acquired non-Canadian subsidiaries are not controlled foreign affiliates of the Infrastructure Partnership, the Infrastructure Partnership’s interest in such non-Canadian subsidiary would be subject to the FIE Proposals, unless another exemption from the FIE Proposals is available. If the FIE Proposals were to apply, the income tax consequences of an investment in our partnership could be materially different in certain respects from those described in “Certain Tax Considerations — Canadian Federal Income Tax Considerations”; and you may be required to include amounts in your income even though you have not and may not receive an actual cash distribution of such amount.

 

Unitholders who are not resident in Canada may be subject to Canadian federal income tax with respect to any Canadian source business income earned by our partnership or the Infrastructure Partnership if our partnership or the Infrastructure Partnership were considered to carry on business in Canada.

 

If our partnership or the Infrastructure Partnership were considered to carry on a business in Canada for purposes of the Tax Act, unitholders who are not resident in Canada or deemed to be resident in Canada for purposes of the Tax Act, or 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 Managing General Partner and the Infrastructure General Partner intend to manage the affairs of our partnership and the Infrastructure Partnership, 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 Infrastructure Partnership 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, CRA might contend successfully that either or both of our partnership and the Infrastructure Partnership carries on business in Canada for purposes of the Tax Act.

 

If our partnership or the Infrastructure Partnership 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 of the taxation years in which they were 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.

 

Non-Canadian limited partners may be subject to Canadian federal income tax on capital gains realized by our partnership or the Infrastructure Partnership on dispositions of “taxable Canadian property”.

 

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 Infrastructure Partnership on the disposition of “taxable Canadian property” as defined in the Tax Act (which includes, but is not limited to, property that is used or held in a business carried on in Canada, shares of corporations resident in Canada that are not listed on a designated stock exchange, and listed shares where the number of shares owned exceeds prescribed amounts) other than “treaty-protected property” as defined in the Tax Act. Property of our partnership and the Infrastructure Partnership 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 Managing General Partner and the Infrastructure General Partner advise that our partnership and the Infrastructure Partnership are not expected 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 for any taxation year in which our partnership or the Infrastructure Partnership disposes of taxable Canadian property even if any gain arising therefrom is exempt from Canadian federal income tax under an applicable income tax treaty or convention.

 

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, the units are taxable Canadian property, unless the units are treaty-protected property to such non-Canadian limited partner. In general, our units will be taxable Canadian property at the time of disposition or deemed disposition if, at any time within the 60-month period ending at the time of disposition or deemed disposition, the fair market value of all of the properties of our partnership that were taxable Canadian property, certain types of resource properties, income interests in trusts resident in Canada or interests in or options in respect thereof, was greater than 50% of the fair market value of all of its properties. Since our partnership’s assets will consist principally of units of the Infrastructure Partnership, our units would generally be taxable Canadian property if the units of the Infrastructure Partnership held by us were considered to be used or held by us in a business carried on in Canada or if applying the greater than 50% test to the Infrastructure Partnership, its units were taxable Canadian property at any time during the relevant 60-month period. Units of our partnership will be treaty protected property if the gain on the disposition of the units is exempt from tax under the Tax Act under the terms of an applicable income tax treaty or convention. Our Managing General Partner advises that our units are not expected to be taxable Canadian property but no assurance can be given in this regard. See “Certain Tax Considerations — Canadian Federal Income Tax Considerations — Taxation of Non-Canadian Limited Partners.” If our units constitute taxable Canadian property, non-Canadian limited partners will be required to file a Canadian federal income tax return for any taxation year in which the non-Canadian limited partner disposes of our units even if any gain arising therefrom is exempt from Canadian federal income tax under an applicable income tax treaty or convention.

 

Non-Canadian limited partners may be subject to Canadian federal 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” as defined in the Tax Act (or who are considered to have disposed of such property on the disposition of such property by our partnership or the Infrastructure Partnership), are obligated to comply with the procedures set out in section 116 of the Tax Act and obtain a certificate thereunder. In order to obtain such certificate, the non-Canadian limited partner is required to report certain particulars relating to the transaction to CRA either prior to the transaction or not later than 10 days after the disposition occurs. Our Managing General Partner advises that our units are not expected to be taxable Canadian property and our Managing General Partner and the Infrastructure General Partner advise that our partnership and the Infrastructure Partnership are not expected to dispose of property that is taxable Canadian property but no assurance can be given in these regards.

 

Payments of dividends or interest (other than interest exempt from Canadian federal withholding taxes) by residents of Canada to the Infrastructure Partnership will be subject to Canadian federal withholding tax and the rate of such withholding tax may not be reduced to take into account the residency or entitlement to relief under an applicable income tax treaty or convention of our unitholders.

 

Payments of dividends or interest (other than interest exempt from Canadian federal withholding taxes) made by persons resident or deemed to be resident in Canada, such as the Holding Entity for our Canadian operations, to the

Infrastructure Partnership are subject to Canadian federal withholding tax under the Tax Act at the rate of 25%. It is not clear whether the CRA’s policies will permit a Canadian resident person that pays dividends or interest to the Infrastructure Partnership to look through the Infrastructure Partnership and our partnership to the residency of the partners of our partnership (including partners who are residents of 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 Infrastructure Partnership. We are seeking guidance from the CRA as to whether the rate of Canadian federal withholding tax on dividends or interest paid by a Canadian resident person to the Infrastructure Partnership can be reduced to take into account the residency of the partners of our partnership and the reduced rates of withholding tax that non-Canadian limited partners may be entitled to under an applicable income tax treaty or convention. However, no assurance can be given that the CRA will provide favourable guidance in this regard. We will withhold Canadian federal withholding tax at the rate of 25% from all payments to the Infrastructure Partnership that are subject to Canadian federal withholding tax unless favourable guidance is provided from the CRA that permits us to withhold at a lower rate. Canadian resident unitholders will be entitled to claim a credit for such taxes against their Canadian federal income tax liability. Based on CRA’s administrative policy, non-Canadian limited partners will be able to claim 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. Non-Canadian limited partners will need to take certain steps to claim any such refund or credit.

 

Even if the CRA does provide such favourable guidance, 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 apply to some or all of our unitholders. In such a case, we will withhold Canadian federal withholding tax from all payments made to the Infrastructure Partnership 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 “Certain Tax Considerations — Canadian Federal Income Tax Considerations” for further detail. Investors should consult their own tax advisors concerning all aspects of Canadian federal withholding taxes.

 

We may not be able to provide unitholders with specific information required to file their Canadian federal income tax returns by the time such tax returns are due.

 

We may not be able to provide unitholders with specific information required to file their Canadian federal income tax returns by the time such tax returns are due. In such cases, our unitholders who are required to file Canadian federal income tax returns will be required to estimate the income or loss arising in respect of their investment in our partnership for the relevant year. This could result in liability for additional taxes, interest and possibly penalties if the actual amount of income allocable from the investment in our partnership for such year turns out to be higher.

 

Our partnership or the Infrastructure Partnership may be required to deduct and remit Canadian federal withholding tax on interest payments in respect of indebtedness owing to non-residents of Canada, which would reduce investors’ returns from investments in our partnership.

 

If our partnership or the Infrastructure Partnership borrows money or incurs indebtedness from a non-resident of Canada, our partnership or the Infrastructure Partnership may be required to withhold and remit Canadian federal withholding tax on any interest payments made to the non-resident, to the extent that the interest is deductible in computing our partnership’s or the Infrastructure Partnership’s income from a source in Canada. This would reduce our partnership’s cash available for distribution and would thereby reduce the investors’ returns from investments in our partnership.

 

Our units may not or may not continue to be “qualified investments” under the Tax Act for registered plans.

 

Units of our partnership will be “qualified investments” under the Tax Act for trusts governed by registered retirement savings plans, deferred profit sharing plans, registered retirement income funds or registered education savings plans, collectively registered plans, provided that our units are listed on a designated stock exchange inside or outside Canada (which would include the NYSE). There can be no assurance that our units will be listed or 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 registered plans and certain other taxpayers.

 

The Canadian federal income tax consequences to you could be materially different in certain respects from those described in this prospectus if our partnership or the Infrastructure Partnership is a “specified investment flow-through” partnership.

 

On October 31, 2006, the Minister of Finance (Canada) announced tax proposals to significantly change the taxation of most publicly traded trusts and partnerships and distributions or allocations, as the case may be, from these entities to their investors. Legislation to implement these proposals was contained in Bill C-52 which received Royal Assent on June 22, 2007, referred to herein as the SIFT Rules. Under the SIFT Rules, certain income and gains earned by a “specified investment flow-through” partnership, or SIFT Partnership, will be subject to income tax 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. 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 SIFT Rules (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, 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 with such entity, an aggregate fair market value that is greater than 50% of the equity value of the SIFT Partnership. The tax rate applied to the above mentioned sources of income and gains is set at a rate equal to the federal corporate tax rate, plus 13% on account of provincial tax.

 

Under the SIFT Rules, our partnership and the Infrastructure Partnership could each be a SIFT Partnership if it is a “Canadian resident partnership”. Our partnership and the Infrastructure Partnership 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 Managing General Partner and the Infrastructure General Partner are located and exercise central management and control of the respective partnerships. Our Managing General Partner and the Infrastructure General Partner advise that they will each 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 and the Infrastructure Partnership at any relevant time. However, no assurance can be given in this regard. If our partnership or the Infrastructure Partnership are SIFT Partnerships under the SIFT Rules, the Canadian income tax consequences to you could be materially different in certain respects from those described in “Certain Tax Considerations — Canadian Federal Income Tax Considerations”. In addition, even if the SIFT Rules do not apply to our partnership or the Infrastructure Partnership at any relevant time, 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.

 

This prospectus contains certain forward-looking statements. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,” “will” and “would” or the negative of those terms or other comparable terminology.

 

The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us or are within our control. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. The following factors, among others, that could cause our actual results to vary from our forward-looking statements:

 

 

Except as required by applicable law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the events described by our forward-looking statements might not occur. We qualify any and all of our forward-looking statements by these cautionary factors. Please keep this cautionary note in mind as you read this prospectus.

 

Organizational Chart

 

The chart below presents the simplified ownership and organizational structure that we expect to have after we complete the spin-off as described under “The Spin-Off”. Please note that on this chart all interests are 100% unless otherwise indicated and “GP Interest” denotes a general partnership interest and “LP Interest” denotes a limited partnership interest. This chart should be read in conjunction with the explanation of our ownership and organizational structure below and the information included under “Business,” “Governance” and “Relationship with Brookfield”.

 

 

 

Our Partnership

 

Our partnership, Brookfield Infrastructure Partners L.P., is a newly formed Bermuda exempted limited partnership that was established on May 21, 2007. Our partnership’s head office is 7 Reid Street, 4th Floor, Hamilton HM 11, Bermuda, and our registered office is Cannon’s Court, 22 Victoria Street, Hamilton HM 12, Bermuda. Our partnership and its related entities were established by Brookfield as its primary vehicle to own and operate certain infrastructure assets on a global basis.

 

Our partnership’s sole material asset is its approximate 60% limited partnership interest in the Infrastructure Partnership. Our partnership anticipates that the only distributions that it will receive in respect of our partnership’s limited partnership interests in the Infrastructure Partnership 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. The declaration and payment of cash distributions by our partnership is at the discretion of our Managing General Partner which is not required to make such distributions and our partnership cannot assure you that it will make such distributions as intended. See “Distribution Policy”.

 

Our Manager and Brookfield

 

The Service Recipients have engaged the Manager, an affiliate of Brookfield, to provide them with day-to-day management and administration services pursuant to the Master Services Agreement.

 

Brookfield is a global asset management company focused on property, power and other infrastructure assets with approximately $70 billion of assets under management. Brookfield Asset Management is co-listed on the New York and Toronto stock exchanges, under the ticker symbol “BAM” and “BAM.A”, respectively, and has a market capitalization of approximately $22 billion. See “Management and Our Master Services Agreement — About Brookfield”.

 

Our Managing General Partner

 

Our Managing General Partner serves as our partnership’s general partner and has sole authority for the management and control of our partnership which is exercised exclusively by its board of directors in Bermuda. Because our partnership’s only interest in the Infrastructure Partnership consists of limited partnership interests in the Infrastructure Partnership, which by law do not entitle the holders thereof to participate in partnership decisions, our Managing General Partner’s directors are not entitled to participate in the management or activities of the Infrastructure Partnership or the Holding Entities, including with respect to any acquisition decisions that they may make. See “— Infrastructure Partnership” below and “Description of the Infrastructure Partnership’s Limited Partnership Agreement — Units”.

 

Infrastructure Partnership and Holding Entities

 

Our partnership indirectly holds its interests in operating entities through the Holding Entities, which are newly formed entities. The Infrastructure Partnership owns all of the common shares of the Holding Entities. Brookfield has provided an aggregate of $20 million of working capital to the Holding Entities through a subscription for preferred shares of such Holding Entities.

 

Infrastructure GP LP and Infrastructure General Partner

 

The Infrastructure GP LP serves as the general partner of the Infrastructure Partnership and has sole authority for the management and control of the Infrastructure Partnership. The general partner of Infrastructure GP LP is the Infrastructure General Partner, a corporation owned indirectly by Brookfield Asset Management. Infrastructure GP LP will be entitled to receive incentive distributions from the Infrastructure Partnership as a result of its ownership of the general partnership interest of the Infrastructure Partnership. See “Relationship with Brookfield — Incentive Distributions”.

 

All of the interests in our partnership, since its formation, have been held by Brookfield. Prior to the spin-off, Brookfield intends to effectuate a reorganization so that the current operations are acquired by the Holding Entities and Brookfield Asset Management will hold an approximate 60% limited partnership interest in the Infrastructure Partnership and one or more wholly-owned subsidiaries of Brookfield Asset Management will hold an approximate 39% limited partnership interest in the Infrastructure Partnership. Infrastructure GP LP will hold the remaining 1% interest in the Infrastructure Partnership. Brookfield Asset Management will transfer the approximate 60% limited partnership interest in the Infrastructure Partnership that it holds to our partnership in consideration for our units. These units will then be distributed by Brookfield Asset Management to holders of its Class A limited voting shares and Class B limited voting shares as a special dividend. The remaining limited partnership interest in the Infrastructure Partnership held by one or more wholly-owned subsidiaries of Brookfield Asset Management is subject to the Redemption-Exchange Mechanism. See “Description of the Infrastructure Partnership Limited Partnership Agreement — Redemption-Exchange Mechanism” for a description of this mechanism. Following completion of the spin-off, we will have the simplified corporate structure under the heading “Ownership and Organizational Structure — Organizational Chart”.

 

Non-Canadian limited partners who acquire our units pursuant to the spin-off will be considered to have received a taxable dividend for Canadian federal income tax purposes equal to the fair market value of our units so received plus the amount of any cash received in lieu of fractional units and will be subject to Canadian federal withholding tax at the rate of 25% on the amount of the special dividend, subject to reduction under terms of an applicable income tax treaty or convention. See “Certain Tax Considerations — Canadian Federal Income Tax Considerations — Taxation of Non-Canadian Limited Partners — Spin-Off” for a more detailed discussion of this withholding tax. Similarly, limited partners who are U.S. tax residents and who acquire our units pursuant to the spin-off will be considered to have received a taxable dividend for U.S. federal income tax purposes equal to the fair market value of our units so received plus the amount of any cash received in lieu of fractional units and may be subject to U.S. “backup” withholding tax at the rate of 28% of the amount of the special dividend if such limited partners fail to timely provide Brookfield Asset Management with a properly completed IRS Form W-9. U.S. “backup” withholding tax is not an additional tax, and any amounts withheld under the backup withholding rules will be allowed as a credit against a limited partner’s U.S. federal income tax liability (or as a refund if in excess of such liability) provided the required information is timely furnished to the IRS. See “Certain Tax Considerations — U.S. Federal Income Tax Considerations — Consequences to U.S. Holders — Spin-Off” for a more detailed discussion of U.S. “backup” withholding. To satisfy these withholding tax liabilities, Brookfield will withhold a portion of our units otherwise distributable equal to the Canadian federal and U.S. “backup” withholding tax rates applicable to the distribution. Brookfield will also withhold a portion of any cash distribution in lieu of fractional units otherwise distributable equal to the Canadian federal and U.S. “backup” withholding tax rate applicable to the cash distribution. Brookfield will purchase these withheld units at a price equal to the fair market value of our units based on the volume-weighted average trading price for the five trading days following the date of closing of the spin-off. The proceeds of this sale of the withheld units together with the amount of any cash withheld from any cash distribution in lieu of fractional units will be remitted to the Canadian federal government or the U.S. federal government (as applicable) in satisfaction of the withholding tax liabilities described above. Based on the residency of the current shareholders of Brookfield Asset Management, we estimate that the satisfaction of the Canadian federal and U.S. “backup” withholding tax obligations will result in Brookfield acquiring approximately six per cent of our outstanding units.

 

Our partnership and Brookfield Asset Management entered into a master purchase agreement which evidences the intent of Brookfield Asset Management to create the Infrastructure Partnership and to cause the Infrastructure Partnership to indirectly acquire the current operations through the Holding Entities and our intention to acquire an approximate 60% interest in the Infrastructure Partnership from Brookfield Asset Management in exchange for our units.

 

Our current operations will be acquired from Brookfield pursuant to separate securities purchase agreements (and, in the case of our Ontario transmission operations, an asset purchase agreement), which are collectively referred to as the Acquisition Agreements. The following is a summary of certain provisions of the Acquisition Agreements and is qualified in its entirety by reference to all of the provisions of such agreements. Copies of the master purchase agreement and the Acquisition Agreements will be available electronically on the website of the Securities and Exchange Commission at www.sec.gov and our SEDAR profile at www.sedar.com and will be made available to our unitholders as described under “Material Contracts” and “Additional Information”.

 

The Acquisition Agreements each contain representations and warranties and related indemnities to us from Brookfield, including representations and warranties concerning (i) organization and good standing, (ii) the authorization, execution, delivery and enforceability of the agreement and all agreements executed in connection therewith, and (iii) title to the securities being transferred to us. The agreements do not contain representations relating to the underlying assets and operations. The aggregate maximum liability of Brookfield under its representations, warranties and indemnities is limited, without duplication, to the purchase price for the applicable interest. The representations and warranties of Brookfield will survive for a period of 18 months from the closing of the spin-off.

 

The Acquisition Agreements do not require Brookfield to provide any security for its indemnification obligations under the Acquisition Agreements or to otherwise take any steps to ensure that it will be in a position to satisfy such obligations. Accordingly, there can be no assurance of recovery by us from breaches of representations and warranties by Brookfield.

 

There is currently no public trading market for our units. However, we intend to apply to have our units listed for trading on the NYSE.

 

Our partnership may from time-to-time, subject to applicable law, purchase our units for cancellation in the open market, provided that any necessary approval has been obtained.

 

Brookfield has also advised our partnership that it may from time-to-time, subject to applicable law, purchase our units in the market without making an offer to all unitholders.

 

 

Under our limited partnership agreement, distributions to our unitholders will be made only as determined by our Managing General Partner in its sole discretion. Our Managing General Partner expects to adopt a distribution policy for our partnership pursuant to which our partnership will make quarterly cash distributions in an initial amount of $      per unit. This distribution policy will target a distribution level that is sustainable on a long-term basis while retaining sufficient liquidity to carry out necessary maintenance capital expenditures and for general purposes. We believe that a distribution of 65% to 75% of operating cash flow will allow us to meet these objectives. From time-to-time our distributions may exceed these percentages as a result of acquisitions that are attractive on a long-term cash flow and/or total return basis but are not immediately accretive to operating cash flow.

 

Our partnership’s ability to make distributions will depend on our partnership receiving sufficient distributions from the Infrastructure Partnership which in turn depend on the Infrastructure Partnership receiving sufficient distributions from our holdings and we cannot assure you that our partnership will in fact make cash distributions as intended. In particular, the amount and timing of distributions will depend upon a number of factors, including, among others, our actual results of operations and financial condition, the amount of cash that is generated by our operations and investments, restrictions imposed by the terms of any indebtedness that is incurred to leverage our operations and investments or to fund liquidity needs, levels of operating and other expenses, contingent liabilities and other factors that our Managing General Partner deems relevant. Distributions made by the Infrastructure Partnership will be made in equal amounts on the Infrastructure Partnership’s limited partnership interests owned by us, which represent approximately 60% of the interests of the Infrastructure Partnership, and those limited partnership interests owned by Brookfield. Our partnership’s ability to make distributions will also be subject to additional risks and uncertainties, including those set forth in this prospectus under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. In addition, our Managing General Partner will not be permitted to cause our partnership to make a distribution if our partnership does not have sufficient cash on hand to make the distribution, if the distribution would render our partnership insolvent or if, in the opinion of our Managing General Partner, the distribution would leave our partnership with insufficient funds to meet any future contingent obligations.

 

When distributions are paid by the Holding Entities to the Infrastructure Partnership or by the Infrastructure Partnership to our partnership (as applicable), we will withhold taxes in compliance with applicable laws. We will endeavor to withhold taxes at rates that take into account the residency of our unitholders and any income tax treaty or convention that is applicable to them. For these purposes, unitholders will be requested and expected to provide to our

partnership such forms as may be required by different jurisdictions in compliance with local tax rules and requirements applicable with respect to payments made by the Holding Entities. However, we may be unable to accurately or timely determine the residency of our unitholders for purposes of establishing the extent to which withholding taxes apply or whether reduced rates of withholding taxes apply to some or all of our unitholders. This may also occur because unitholders may fail to provide our partnership with the required withholding tax compliance forms referred to above. If we are unable to accurately or timely determine the residency of our unitholders or if the relevant tax authority does not permit us to withhold taxes at a lower rate, we will withhold the maximum amount of taxes required and unitholders of our partnership will need to take certain steps to receive a credit or refund of any excess withholding tax paid. For Canadian federal withholding tax purposes, we will only withhold at a lower rate if we receive guidance from the CRA that it is permissible to do so. See “Certain Tax Considerations”. Investors should consult their tax advisors concerning all aspects of withholding taxes.

 

Following closing of the spin-off and subject to regulatory approval and U.S. securities law registration requirements, our partnership intends to adopt a distribution reinvestment plan. We do not expect to adopt the plan any earlier than one year following the closing of the spin-off when the plan will first be able to meet U.S. securities law registration requirements. The following is a summary description of the principal terms of the plan our partnership intends to adopt.

 

Pursuant to the distribution reinvestment plan, holders of our units in certain jurisdictions will be able to elect to have all distributions paid on our units held by them automatically reinvested in additional units in accordance with the terms of the distribution reinvestment plan. Distributions to be reinvested in our units under the distribution reinvestment plan will be reduced by the amount of any applicable withholding tax.

 

Distributions due to plan participants will be paid to the plan agent, for the benefit of the plan participants and, if a plan participant has elected to have his or her distributions automatically reinvested, applied, on behalf of such plan participant, to the purchase of additional units. Such purchases will be made either (a) on the stock exchange on which our units are listed on the date the relevant distribution is paid by our partnership or (b) from our partnership on the distribution date at a price per unit calculated by reference to the volume weighted average of the trading price for our units on a stock exchange on which our units are listed for the five trading days immediately preceding the date the relevant distribution is paid by our partnership.

 

The units so purchased will be allocated on a pro rata basis to plan participants. The plan agent will furnish to each plan participant a report of the units purchased for the distribution reinvestment plan participant’s account in respect of each distribution and the cumulative total purchased for that account. While our partnership will not issue fractional units, a plan participant’s pro rata entitlement to units purchased under the distribution reinvestment plan may include a fraction of a unit and such fractional units shall accumulate. A cash adjustment for any fractional units will be paid by the plan agent upon the withdrawal from or termination by a plan participant of his or her participation in the distribution reinvestment plan or upon termination of the distribution reinvestment plan at price per unit calculated by reference to the volume weighted average of the trading price for our units on a stock exchange on which our units are listed for the five trading days immediately preceding such withdrawal or termination. No certificates representing units issued or purchased pursuant to the distribution reinvestment plan will be issued, other than upon a plan participant’s termination of participation in the distribution reinvestment plan. The automatic reinvestment of distributions under the distribution reinvestment plan will not relieve participants of any income tax obligations applicable to such distributions.

 

If our units are thinly traded, purchases in the market under the distribution reinvestment plan may significantly affect the market price. Depending on market conditions, direct reinvestment of cash distributions by unitholders in the market may be more, or less, advantageous than the reinvestment arrangements under the distribution reinvestment plan. No brokerage commissions will be payable in connection with the purchase of our units under the distribution reinvestment plan and all administrative costs will be borne by our partnership.

 

Unitholders will be able to terminate their participation in the distribution reinvestment plan by providing, or by causing to be provided, at least 10 business days’ prior written notice to our partnership. Such notice, if actually received by our partnership no later than 10 business days prior to a record date, will have effect in respect of the distribution to be made as of such date. Thereafter, distributions to such unitholders will be in cash. Our partnership will be able to terminate the distribution reinvestment plan, in its sole discretion, upon not less than 30 days’ notice to the plan participants and the plan agent. Our partnership will also be able to amend, modify or suspend the distribution reinvestment plan at any time in its sole discretion, provided that it gives notice of that amendment, modification or suspension to our unitholders, which notice may be given by our partnership issuing a press release or by publishing an advertisement containing a summary

description of the amendment in at least one major daily newspaper of general and regular paid circulation in Canada and the United States or in any other manner our partnership determines to be appropriate.

 

The Infrastructure Partnership will have a corresponding distribution reinvestment plan in respect of distributions made to our partnership and Brookfield. The Infrastructure Partnership’s distribution reinvestment plan may be implemented prior to our partnership adopting its distribution reinvestment plan. Our partnership does not intend to reinvest distributions it receives from the Infrastructure Partnership in the Infrastructure Partnership’s distribution reinvestment plan. Brookfield has advised our partnership that it may from time-to-time reinvest distributions it receives from the Infrastructure Partnership pursuant to the Infrastructure Partnership’s distribution reinvestment plan. The units of the Infrastructure Partnership to be issued to Brookfield under the distribution reinvestment plan will become subject to the Redemption-Exchange Mechanism and may therefore result in Brookfield acquiring additional units of our partnership. See “Description of the Infrastructure Partnership Limited Partnership Agreement — Redemption-Exchange Mechanism”.

 

The following table sets forth our partnership’s total assets and our partnership’s total net assets as at May 21, 2007 on an actual basis and as adjusted to give effect to the spin-off as well as the transfer by Brookfield to us of our Brazilian transmission investments and our Ontario transmission operations, and the other transactions referred to in the Infrastructure Partnership’s pro forma financial statements (see “Unaudited Pro Forma Financial Statements”), as though they had each occurred on May 21, 2007.

 

This information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Infrastructure Partnership’s unaudited pro forma financial statements, including the respective notes thereto, contained elsewhere in this prospectus.

 

 

 

 

Introduction

 

Our partnership and its related entities were established by Brookfield as its primary vehicle to own and operate certain infrastructure assets on a global basis. We focus on high quality, long-life assets that generate stable cash flows, require relatively minimal maintenance capital expenditures and, by virtue of barriers to entry and other characteristics, tend to appreciate in value over time. See “Management and Our Master Services Agreement — About Brookfield” for more details regarding Brookfield.

 

Our vision is to be a leading owner and operator of high quality infrastructure assets. We will seek to grow by deploying our operations-oriented approach to enhance value and by leveraging our relationship with Brookfield to pursue acquisitions. Our acquisition strategy focuses on large scale transactions, for which we believe there is less competition and where Brookfield has sufficient influence or control to deploy our operations-oriented approach. Due to similar asset characteristics and capital requirements, we believe that the infrastructure industry will evolve like the real estate industry in which assets are commonly owned through consortiums and partnerships of institutional equity investors and owner/operators such as ourselves. Accordingly, 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. Brookfield has a strong track record of leading such consortiums and partnerships and actively managing underlying assets to improve performance. Brookfield has agreed that it will not sponsor such arrangements that are suitable for us in the infrastructure sector unless we are given an opportunity to participate.

 

This section contains management’s discussion and analysis, or management’s discussion, of the financial results of a portion of the infrastructure division of Brookfield Asset Management, or the infrastructure division, as at March 31, 2007 and for the three months ended March 31, 2007 and 2006 and as at and for the years ended December 31, 2006 and 2005 and includes a discussion of business developments and outlook for its two major business segments. The financial statements of the infrastructure division include certain of the infrastructure operations owned by Brookfield during such periods as discussed below under “—Basis of Presentation.” The information in this section is derived from and should be read in conjunction with the audited combined financial statements for the infrastructure division as at and for the years ended December 31, 2006 and 2005, and the notes thereto, and the unaudited combined financial statements for the infrastructure division as at March 31, 2007 and for the three months ended March 31, 2007 and 2006, and the notes thereto, each of which his included in this prospectus. The information in this section should also be read in conjunction with the unaudited pro forma consolidated financial statements for the Infrastructure Partnership as at and for the three months ended March 31, 2007 and for the year ended December 31, 2006. See “Unaudited Pro Forma Financial Statements”.

 

All financial data is presented in U.S. dollars and, unless otherwise indicated, has been prepared in accordance with U. S. GAAP.

 

Basis of Presentation

 

Following the spin-off, our partnership’s sole material asset will be its 60% limited partnership interest in the Infrastructure Partnership, which we account for using the equity method. However, we believe the financial statements of the Infrastructure Partnership itself will be more relevant to the reader than our financial statements because these statements present the financial position and results of our underlying operations in greater detail. For accounting purposes, the historical financial statements of the Infrastructure Partnership are the combined financial statements of its predecessor, which consists of Brookfield’s interests in electricity transmission and timber operations in North and South America that have historically been held as part of Brookfield’s infrastructure division. These financial statements include Brookfield’s interests in the current operations that are being transferred to the Infrastructure Partnership, other than interests that were not owned during the period covered by the financial statements or interests that cannot be transferred without regulatory approval and such approval has not been received as of the date of this prospectus. Specifically, the infrastructure division’s financial statements include the financial results of Brookfield’s 27.8% interest in Transelec Chile S.A., or Transelec, our Chilean transmission operations, which Brookfield acquired in June 2006 and Brookfield’s 50% interest in Island Timberlands Limited Partnership, or Island Timberlands, our Canadian timber operations, which Brookfield acquired in 2005, on a combined basis.

It is important to note that Brookfield is retaining an interest in each of Transelec and Island Timberlands, and therefore the infrastructure division’s ownership interests in these operations is different than the ownership interests of the Infrastructure Partnership upon completion of the spin-off, which will be 10.7% of Transelec and 37.5% of Island Timberlands. Thus, the infrastructure division’s financial results are not representative of the Infrastructure Partnership’s for the historical periods.

 

These combined financial statements do not reflect the remainder of our current operations which include the following:

 

 

The unaudited pro forma financial statements reflect the financial position and results of operations of all of our current operations, including those that are not reflected in the combined financial statements of the infrastructure division, as though they had been acquired on March 31, 2007 for purposes of the unaudited pro forma balance sheet and January 1, 2006 for purposes of the unaudited pro forma statements of income, based upon the Infrastructure Partnership’s ownership interests upon completion of the spin-off.

 

The infrastructure division’s combined financial statements use the consolidation method of accounting for all of its operations with a minority interest to reflect ownership interests of parties other than Brookfield. The infrastructure division’s balance sheet records the carrying value of all assets and liabilities based upon Brookfield’s book value as reflected in its financial statements.

 

We discuss the results of operations of the infrastructure division on a segmented basis, which is consistent with how we manage our business. Our segments are electricity transmission and timber, each of which have their own management teams responsible for their operations and investments. Certain items, such as corporate administration costs, are not included in these segments. For each of our segments, we also include the Infrastructure Partnership’s proportionate share of results in order to demonstrate the impact of each of these segments on the Infrastructure Partnership’s overall performance.

 

To measure performance, we focus on net income as well as operating cash flow. We define operating cash flow as net income excluding the impact of depreciation and amortization, deferred taxes and other non-cash items that in our view are not reflective of the performance of the actual underlying operations. For example, depreciation and amortization expense is a non-cash charge that implies our assets decline in value over time whereas we believe that the value of most of our assets will typically increase over time provided that we make all necessary maintenance capital expenditures. Furthermore, changes in asset values typically do not follow a pre-determined schedule, as suggested by accounting depreciation, but instead will inevitably vary upwards and downwards based on a number of market and other conditions that cannot be determined in advance.

 

Operating cash flow is a non-GAAP financial measure and should not be considered in isolation as a measure of our profitability or liquidity. It should be considered in addition to, rather than as a substitute for, net income prepared in accordance with GAAP. Non-GAAP financial measures presented may differ from, and may not be comparable to, similarly-titled measures used by other companies. We provide reconciliations of this non-GAAP financial measure to the most directly comparable GAAP financial measure, which is net income, in this management’s discussion.

 

Performance Targets and Key Measures

 

Our objective is to earn a total return of 10% to 15% per annum from the infrastructure assets that we acquire, including our current operations, when measured over the long-term. This return will be generated from the initial operating cash flow of our operations plus growth in operating cash flow and asset values. We endeavour to manage our operations to generate increasing operating cash flow per unit over a very long period of time. If we are successful in doing so, we will be able to increase distributions to unitholders. Furthermore, the increase in our operating cash flow should

result in capital appreciation of our operations. Thus, our key performance measure is the growth of operating cash flow per unit. We also measure our cash return on equity, which demonstrates how effectively we deploy the capital which we have been entrusted by our unitholders. It is important to note, however, that a certain amount of the capital appreciation of our operations may not be reflected in our financial results for many years, if ever, until a realization event which usually takes the form of gains on a direct or indirect disposition of the assets.

 

Based on the foregoing, our intention is to provide unitholders with an attractive total return on their investment, consisting of both cash distributions as well as increased unit value.

 

Although these are our long-term objectives, we cannot assure you that we will achieve them in any particular reporting period or year. We intend to pursue acquisitions that we believe are attractive on a long-term cash flow or total return basis, but may not be accretive on a short-term cash flow basis. Such acquisitions may adversely impact our operating cash flow per unit on a near-term basis following the acquisition.

 

 

The increase in revenue, operating cash flow and net income between the three months ended March 31, 2006 and the three months ended March 31, 2007 is primarily due to the acquisition of our Chilean transmission operations in June 2006 as well as improved performance from our timber operations. Revenue and operating cash flow for the 12 months ended December 31, 2006 were higher than the corresponding result in 2005 due to the acquisition of the transmission operations, the improved performance in our timber operations and also because the 2005 results only reflect the timber operations for seven months following their acquisition in May of the year.

 

The decline in net income between the year ended December 31, 2005 and the year ended December 31, 2006 is primarily due to the expensing of an accrued performance fee payable by our Canadian timber operations to Brookfield, as manager of these operations, offset by the impact of the infrastructure division’s acquisitions since the beginning of 2005. The increase in total assets and divisional equity between the year ended December 31, 2005 and the year ended December 31, 2006 reflects the acquisition of our Chilean transmission operations. Net income and divisional equity are net of minority interest and reflect Brookfield’s 50.0% ownership of our Canadian timber operations and its 27.8% ownership of our Chilean transmission operations during the applicable periods.

 

The following table reconciles net income to operating cash flow. In doing so, we add back to net income the amounts recorded in respect of depreciation and amortization, deferred taxes and other provisions, as well as minority interest related to those items such that, similar to net income, operating cash flow reflects Brookfield’s ownership interest:

 

 

The primary differences between net income and operating cash flow for these periods are depreciation and amortization, which increased substantially between the respective reporting periods due to the acquisition of our Chilean transmission operations in 2006 and other provisions, which reflect the accrued performance fee in respect of the appreciation in the value of our Canadian timber operations. This increase in value is not included in our operating results as the timberlands and HBU lands are recorded at historical cost.

 

The following table presents both combined net income and combined operating cash flow on a segmented basis:

 

 

The results for each segment are discussed further in the following sections.

 

Electricity Transmission Operations

 

Results of Operations

 

Our transmission segment generates stable revenue that is governed by regulated frameworks and long-term contracts. Accordingly, we expect this segment to produce consistent revenue and margins that should increase with inflation and other factors such as operational improvements. We also expect to achieve continued growth by investing additional capital in our existing operations and through acquisitions.

 

The results for our transmission segment reflect our Chilean transmission operations, which were acquired by a Brookfield-led consortium in June 2006.

 

Our Ontario transmission operations and our Brazilian transmission investments are not reflected in these segment results. Both are currently owned by Brookfield, but we do not anticipate receiving regulatory approval to acquire them from Brookfield until the fourth quarter of 2007.

 

The following table presents the transmission segment’s combined financial results (which reflect Brookfield’s ownership interest) as well as our proportionate share of results (which reflect the Infrastructure Partnership’s ownership interest upon completion of the spin-off) for the three months ended March 31, 2007 and the year ended December 31, 2006. No income or loss was recorded in the comparative periods as no operations in this segment were owned by the infrastructure division during these periods.

 

 

 

 

On a combined basis, our transmission operations earned $48.4 million of net operating income, $9.3 million of operating cash flow and $4.6 million of net income during the three months ended March 31, 2007 and $85.7 million of net operating income, $13.5 million of operating cash flow and $5.9 million of net income for the year ended December 31, 2006. The operating results during these periods were consistent with our expectations. Net income during both periods on a combined basis was significantly lower than operating cash flow due to $13.7 million and $29.3 million, respectively, of GAAP prescribed depreciation and amortization charged to the underlying results of operations. Cash expenditures incurred for maintenance capital expenditures on a combined basis are estimated to be in a range of $7 million to $10 million per annum, which is significantly below the annualized depreciation and amortization charges.

 

Our transmission segment’s proportionate share of net operating income, operating cash flow and net income for the three months ended March 31, 2007 was $5.2 million, $3.6 million and $1.8 million, respectively, which were consistent with our expectations. Our transmission segment’s share of net operating income, operating cash flow and net income for the year ended December 31, 2006 were $9.2 million, $4.9 million and $2.1 million, respectively, which were also consistent with our expectations and reflect six months of ownership of our Chilean transmission operations during the year. Operating margins increased to 82.5% for the three months ended March 31, 2007 in comparison with 78.0% for the year ended December 31, 2006 as a result of the inflation-based escalation of a portion of our revenue and integration costs incurred during 2006.

 

Investment and other income reflects interest on cash deposits and foreign exchange gains and losses in our Chilean transmission operations. Our transmission segment’s share of investment and other income decreased to $1.0 million from $1.2 million for the periods ending March 31, 2007 and December 31, 2006, respectively. Our transmission segment’s share of 2006 results included a gain of $1.0 million due to unrealized foreign exchange revaluations within our Chilean transmission operations.

 

Our transmission segment’s share of total non-cash expenses were $1.8 million and $2.8 million during the three months ended March 31, 2007 and the year ended December 31, 2006, respectively. The largest component was depreciation and amortization charges which were consistent between the two periods on an annualized basis.

 

As discussed further under “Business — Current Operations — Electricity Transmission — Revenue Framework”, our transmission segment is subject to various regulatory regimes that govern revenues. In some cases, the regulatory regime provides for revenue to escalate, based on inflation. In addition, a significant proportion of our non-regulated revenue is derived from contracts which provide for escalation. We have summarized our transmission segment’s share of revenue subject to these various arrangements in the following table:

 

 

Our revenues with escalation increased by 2.2% in 2006 over 2005.

 

Business Developments

 

Upon the finalization of its current transmission rate proceeding, Transelec estimates an increase of its regulated asset base by $111.6 million to a total of $495.1 million for the regulated component of its business. The terms of our stock purchase agreement require that our consortium pay a purchase price adjustment to the seller, expected to be $161.8 million, in the fourth quarter of 2007 in respect of this increase. The terms of our consortium arrangements also require that we invest a disproportionate share of the equity to fund the additional purchase price, expected to be $120.7 million, which will increase our ownership in our Chilean transmission operations to 18.4% from 10.7%. Our equity investment will be funded out of our cash resources.

 

We expect to acquire our Brazilian transmission investments and our Ontario transmission operations from Brookfield in the fourth quarter of 2007, following the receipt of regulatory approvals. As reflected in our acquisition agreements, the cost of our Brazilian transmission investments will be $163.2 million and the cost of our Ontario transmission operations will be $78.0 million plus the assumption of $104.0 million in long-term debt. Both of these acquisitions will be funded out of our cash resources.

 

Outlook

 

We believe our transmission segment will achieve increases in operating cash flow and net income for the following three reasons, all of which are reflected in our pro forma financial statements:

 

 

We also expect to realize increases in operating cash flow in our transmission segment generally because, in many instances, our regulatory frameworks and contracts have automatic inflation escalators. In addition, we believe our Chilean and Ontario systems have significant revenue generating capital investment opportunities. Both Chile and Canada

have economic generation that is many miles away from customers. Upgrades and expansions of the electricity transmission system will be required to satisfy increased electricity demand resulting from economic growth.

 

Our Brazilian transmission investments are subject to put/call agreements with third parties whereby we have the right to sell and the third parties have the right to buy our investments at a price that will yield a real, compounded annual return equal to 14.8% paid in Brazilian reis, including all distributions received to that date. We have the right to exercise our put between September 16, 2008 and November 15, 2008. For two months following the expiration of our put option, the third parties have a corresponding right to call our investment at a price calculated with the same formula. If either one of these options is exercised, we may record a gain equal to the amount by which the distributions received to that date represent less than the prescribed return.

 

Timber Operations

 

Results of Operations

 

Our timber operations consist of high quality timberlands located in the coastal region of British Columbia, Canada and the Pacific Northwest region of the United States. These timberlands are characterized by their ability to generate high operating margins due to the premium prices that can be earned for many of their species. These operations are expected to provide an attractive and relatively consistent return on capital employed over the long-term.

 

The revenue framework for the timber operations is a combination of log sales and, to a lesser degree, the sale of HBU lands, which are lands that we believe could be opportunistically sold for greater value if used for a purpose, such as real estate development or conservation. Long-term sales agreements account for less than 10% of the value of annual log sales. All logs are sold at market prices with payments received in advance of delivery.

 

The segment results include our Canadian timber operations from the date of acquisition in May 2005. Our U.S. timber operations are not reflected in our segment results as they were acquired after March 31, 2007.

 

The following table presents our timber segment’s combined financial results for the three months ended March 31, 2007 and the year ended December 31, 2006:

 

 

 

 

On a combined basis, our timber operations earned $23.2 million of net operating income, $8.6 million of operating cash flow and $5.2 million of net income during the three months ended March 31, 2007 compared to $13.0 million of net operating income, $3.1 million of operating cash flow and $0.6 million of net income for the three months ended March 31, 2006. The increase in operating results during the most recent quarter was due to increased log sales, which were favourably impacted by improved weather conditions and higher prices for logs during the first quarter of 2007. For the full year, net operating income was $61.4 million, operating cash flow was $19.4 million and net loss was $10.8 million in 2006 compared to $26.6 million, $7.3 million and net income of $1.0 million, respectively, for the seven months following acquisition, in 2005. Other provisions reflect a non-operating charge of $20 million, net to the infrastructure division, in respect of a performance fee payable to Brookfield relating to the increased appraised value of our timber and HBU land assets. The amount of the performance fee will be finalized in 2011 based upon a percentage of the cumulative

increase in the value of our Canadian timber operations during the preceding five year period. For accounting purposes, the increased appraised value of our assets that gave rise to the performance fee was not reflected in our results. For further details see “— Outlook”. GAAP prescribed depreciation and amortization for year ended December 31, 2006 and 2005 was $20.4 million and $12.7 million, respectively. Cash expenditures incurred for maintenance capital expenditures on a combined basis are estimated at approximately $5.7 million per year.

 

The following table presents our timber segment’s proportionate share of underlying results based upon the Infrastructure Partnership’s ownership interest upon completion of the spin-off:

 

 

 

 

Our timber segment’s proportionate share of net income for the three months ended March 31, 2007 was $3.9 million compared to $0.5 million for the three months ended March 31, 2006. The increase is due to increased log sales volume and pricing. Our timber segment’s share of net income for the year ended December 31, 2006 was a loss of $8.1 million as compared to $0.8 million of net income for the year ended December 31, 2005. Net income in 2006 was negatively impacted by our proportionate share of a non-operating charge in respect of a performance fee relating to the increased appraised value of our assets, which increased value was not recorded in our results, partially offset by a full year of operations, as well as increased sales of HBU lands.

 

Our timber segment’s share of net operating income was $8.7 million for the three months ended March 31, 2007 compared to $4.9 million for the three months ended March 31, 2006. This represented an increase of 77.6% due to increased log sales and improved pricing. For the year ended December 31, 2006, our timber segment’s share of net operating income was $23.0 million compared to $10.0 million for the year ended December 31, 2005. The increase was mostly attributable to results being recorded for a full year of operations in 2006 compared to seven months in 2005.

 

Operating margin for the timber segment for the three months ended March 31, 2007 was 44.8% as compared to 35.3% for the three months ended March 31, 2006, principally due to changes in species mix and log pricing. For the year ended December 31, 2006, operating margin was 30.7% as compared to 25.5% for the year ended December 31, 2005, which again largely reflects changes in species mix and log pricing. On a normalized basis, our margins are expected to be approximately 25-30% based on species mix and market pricing.

 

Our timber segment’s share of operating cash flow for the three months ended March 31, 2007 was $6.5 million as compared to $2.4 million for the three months ended March 31, 2006, due to increased log sales and improved pricing. Our share of operating cash flow for the year ended December 31, 2006 was $14.6 million as compared to $5.6 million of operating cash flow for the year ended December 31, 2005, with lower levels in 2005 primarily reflecting the shorter period of operations.

 

The following table summarizes our proportionate share of the operating results from timber operations:

 

 

Our timber segment produced strong operating results for the year ended December 31, 2006. Our share of Douglas-fir and Whitewood shipments of 440.4 thousand m ³ and 244.2 thousand m ³ were 85.5% and 34.9%, respectively, higher for the year ended December 31, 2006 than for the seven month period ended December 31, 2005 as a result of a longer period of operations in 2006 partially offset by difficult weather-related operating conditions in 2006. Douglas-fir and Whitewood prices were 5.1% and 15.1% higher during the twelve-month period ended December 31, 2006 compared to the year ended December 31, 2005, respectively, as a result of improving market conditions in Japan and Asia. Sales volume differs from harvest volume owing to a combination of timing of sales and sale of purchased logs.

 

HBU and other sales resulted in proceeds of dispositions totalling $8.5 million and a net realization gain to our timber segment of $3.2 million for the year ended December 31, 2006, as compared to $9.2 million and $3.5 million for the year ended December 31, 2005, respectively.

 

Business Developments

 

Brookfield completed the acquisition of Longview in April 2007. We acquired a 30% interest in the timberland operations of Longview at a cost of $152.9 million. During 2006, on a 100% basis, Longview sold 1.9 million m ³ of timber, generating $193.0 million of revenues and $100.3 million of net operating income.

 

Outlook

 

The operating results from this segment are highly dependent on harvest levels, log prices and harvesting costs, which may vary from period to period, although we believe they are relatively consistent over the long-term. Although it is difficult to predict the impact of variances in these factors, we believe that we will achieve increases in operating cash flows and net income from this segment of our business for the following four reasons:

 

 

In addition to the foregoing, the Western Canadian mountain pine beetle infestation has had a significant impact on the supply of Canadian timber from the interior of British Columbia and Alberta, but has had no impact on our Canadian operations, due to their coastal locations as well as our minimal amounts of pine species within our timberlands. In addition, the Russian timber supply to the Asian markets that we serve is expected to be constrained as a result of Russia’s

newly implemented log export restrictions. We believe these factors will reduce increase the cost of competing logs and should lead to higher prices for our products. Furthermore, several new sawmills have been constructed in the Pacific Northwest in the last few years and numerous expansion efforts at other sawmills have added additional lumber capacity. Due to their high fixed cost structure, these mills are expected to generate demand for timber even in soft primary markets for lumber. Notwithstanding the impact of these factors, continued softness in the U.S. housing markets will likely put downward pressure on log prices. This will likely mitigate some of the expected timber price increases due to the factors described above.

 

Expenses

 

Our historical financial statements do not reflect any general and administrative costs related to the infrastructure division as opposed to its operating units, as it is difficult to allocate these costs since the infrastructure division was not a true stand-alone operating entity. Furthermore, the financial statements of the infrastructure division do not reflect the management fee or the public company costs our partnership will incur following completion of the spin-off. Prospectively, any base fees and/or performance fees paid by our operations to Brookfield will be net against the base fees and/or incentive distributions payable to Brookfield under the Master Services Agreement in order to avoid double payment of incentive fees. See “Relationship with Brookfield”. See the section entitled “Unaudited Pro Forma Financial Statements” for estimates of our future general and administrative costs.

 

Capital Expenditures

 

Maintenance capital expenditures are expenditures that are required to maintain the current revenue generating capability of our asset base; these expenditures do not increase our revenues. Growth capital investments are investments on which we expect to earn a return on capital; as these investments are typically discretionary, we invest this capital if we believe we can make attractive risk adjusted returns.

 

During the year ended December 31, 2006, our share of the infrastructure division’s capital expenditures was $5.0 million as compared to $1.2 million for the year ended December 31, 2005. Of the total expenditures, approximately $4.5 million (2005 — $1.2 million) were maintenance capital expenditures. In the year ended December 31, 2006, approximately $0.9 million of maintenance capital expenditures were related to our transmission segment and approximately $3.6 million of maintenance capital expenditures were related to our timber segment.

 

In the year ended December 31, 2006, our share of the infrastructure division’s growth capital investments was $0.5 million, comprised almost exclusively of regulated transmission projects, which increased our regulated asset base and accordingly resulted in additional operating cash flow.

 

Capital Resources and Liquidity

 

The nature of our asset base, and the quality of associated cash flows, enable us to maintain a stable and low cost capitalization. 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 operating cash flow to unitholders.

 

Our principal sources of liquidity are financial assets, undrawn credit and equity facilities, cash flow from our operations 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. Upon closing of the spin-off, we expect to have approximately $250 million of cash, which we intend to use to principally fund the acquisitions of our Brazilian transmission investments and Ontario transmission operations. Furthermore, we will seek to establish a credit facility with one or more financial institutions. Additionally, concurrent with the closing of the spin-off, Brookfield will provide our partnership and the Infrastructure Partnership with an equity commitment in the amount of $200 million. The equity commitment may be called by our partnership and/or the Infrastructure Partnership in exchange for the issuance of a number of units of our partnership or of the Infrastructure Partnership, as the case may be, to Brookfield, corresponding to the amount of the equity commitment called divided by the five day volume weighted average of the trading price for our units. Furthermore, Brookfield has informed us that it will also consider providing bridge financing to us for the purposes of funding acquisitions. This additional liquidity will be used for general corporate and working capital purposes as well as to fund growth capital investments and acquisitions.

 

Operating cash flow represents the funds that are available to pay distributions to unitholders and fund maintenance capital expenditures. Our Managing General Partner expects to adopt a distribution policy for our partnership pursuant to which our partnership will make quarterly cash distributions in an initial amount of $      per unit. This distribution

policy will target a distribution level that is sustainable on a long-term basis while retaining sufficient liquidity to carry out necessary maintenance capital expenditures and for general purposes. We believe that a distribution of 65% to 75% of operating cash flow will allow us to meet these objectives. From time-to-time our distributions may exceed these percentages as a result of acquisitions that are attractive on a long-term cash flow and/or total return basis but are not immediately accretive to operating cash flow. Based on our current operations, we expect our share of maintenance capital expenditures will represent between $12 million to $15 million per year.

 

We finance our assets principally at the operating entity level through the use of long-term debt that has recourse only to the underlying operations. The infrastructure assets that we own and intend to acquire are typically long-life assets that increase in value over time due to inflation and barriers to entry. Accordingly, we believe it is appropriate to structure our non-recourse financings with the following features:

 

 

In addition, we seek to structure our non-recourse financings with flexibility to make current distributions to equity.

 

On a combined basis, our operations had non-recourse borrowings totaling $1,836.3 million at March 31, 2007 ($1,712.9 million at December 31, 2006).

 

Our proportionate share of non-recourse debt associated with our operations as at March 31, 2007 and as at December 31, 2006 were $306.4 million and $293.3 million, respectively. Our proportionate share of other liabilities associated with our operations was $27.4 million and $46.1 million at March 31, 2007 and December 31, 2006, respectively.

 

We endeavor to finance our long-term assets with long-term financing and diversify our principal repayments over a number of years. Scheduled principal repayments as at March 31, 2007 on a combined and proportionate basis on our non-recourse borrowings over the next five years are as follows:

 

 

Financial Risk Management

 

Our business is impacted by changes in currency rates, interest rates and other financial exposures. As a general policy, we endeavour to maintain balanced positions where practical or economical to do so, although unmatched positions may be taken from time-to-time on a closely monitored basis. Our principal financial risks are foreign currency and interest rate fluctuations.

 

We prefer to hedge financial risks with offsetting items such as debt denominated in local currencies that match the profile of the operations being financed. We also make selective use of financial instruments, known as derivatives, to hedge financial positions from time-to-time when natural hedges are not available or when derivatives are more cost effective. The use of derivatives will be governed by carefully prescribed policies, and we evaluate and monitor the credit risk of derivative financial instruments to minimize counterparty risk through collateral and other credit mitigation techniques.

 

Foreign Currency

 

A number of our operations are conducted in currencies other than the U.S. dollar. Our policy is to hedge foreign currency denominated book values and/or operating cash flow where economical to do so, using foreign currency denominated debt as well as financial contracts. It is not, however, always possible or economically feasible to hedge certain exposures with the result that a portion of our cash flows and equity is exposed to foreign currency fluctuations. Even if we do so, the economic value of our foreign currency assets may differ from their book values, with the result that any difference may not be hedged. We may also enter into financial contracts to further hedge assets recognizing that in some cases changes to the value of these contracts may be reflected in net income even though the offsetting impact on the value of the assets being hedged may not. We have economic currency exposure to Chilean pesos, Brazilian reis, and Canadian dollars.

 

Interest Rate

 

We believe that the value of the vast majority of our assets will vary in part with changes in long-term interest rates due to the nature of their revenue streams. Accordingly, we endeavour to finance these assets with long-term fixed rate borrowings. We intend to match fund floating rate assets with floating rate debt and will otherwise minimize the use of floating rate liabilities other than in carefully monitored circumstances that are intended to lower our overall cost of capital on an appropriate risk adjusted basis.

 

Contractual Obligations

 

Pursuant to the Master Service Agreement, on a quarterly basis, we pay a base management fee to the Manager equal to 0.3125% (1.25% annually) of the market value of our partnership plus recourse borrowings. Based on the book value of the Infrastructure Partnership, we estimate this fee will initially be approximately $11 million per annum.

 

Related Party Transactions

 

We will enter into a number of related party transactions with Brookfield. See “Relationship with Brookfield.”

 

Critical Accounting Policies and Estimates